Weekly Indicators for May 27 - 31 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

None of the high frequency indicators made any meaningful change this week. The short term outlook continues to be positive. As I wrote yesterday in my summation of the personal income and spending report, the leading goods-producing sectors of manufacturing and construction are most important to my analysis of where the economy goes from here.

As usual, clicking over and reading will bring you up to the virtual moment in re the state of the economy, and bring me a little pocket change in reward for my efforts organizing the material for you.

April personal income and spending: a flat report consistent with either a temporary pause or weakness ahead

 

 - by New Deal democrat

Personal income and spending has become one of the two most important monthly reports I follow. This is in large part because the big question this year is whether the contractionary effects of Fed tightening have just been delayed until this year, or whether the fact that there have been no rate hikes since last summer mean that the expansion will strengthen.

Because real personal spending on services for the past 50 years has generally risen even during recessions, the more leading components of this report have to do with spending on goods. Additionally, there are several components that form part of the NBER’s “official” toolkit for determining when and whether a recession has begun, including real spending minus government transfers, and real total business sales. 

Let’s look at each of them in turn. Note that in all graphs below except for YoY comparisons, and the personal saving rate, is normed to 100 as of just before the pandemic.

Real income and spending

In April, nominally income rose 0.3%, while nominal spending rose 0.2%. Since prices as measured by the PCE deflator increased 0.3% for the month, in real terms income was unchanged and spending declined -0.1%. Since the pandemic recession, real spending is up 10.9% and real income is up 6.9%:

On a YoY basis, the PCE price index is up 2.7%, the third month in a row higher than January’s three year low of 2.4%. While n the previous 16 months, the YoY measure had been declining at the rate of 0.25%/month, suggesting that it would hit the Fed’s 2.0% target this spring, that trend has stopped, there is no indication at this point that the inflation rate is actually increasing either:

As I have been noting for the past few months, for the past 50+ years, real spending on services has generally increased even during recessions. It is real spending on goods which declines. Last month real services spending rose 0.1%, while real goods spending declined -0.4% (black in the graph below), only partly reversing March’s revised 0.9% gain.

Breaking goods spending down further, in April spending on consumer durables (red) declined -0.1%, vs. a larger -0.5% decline in real spending on non-durables (blue). In the past, spending on durables has tended to turn down before spending on non-durables. Here’s the current update:

On a YoY basis, all three series are running close to 2% higher, which has been typical since the turn of the Millennium, as shown prior to the pandemic:

As you can see, spending on durable goods is particularly volatile. So the stall in that spending, while not good, is not particularly foreboding either.

Savings

Another important metric for the near future of the economy is the personal savings rate. The sharp declines of a combined -0.9% In February and March were revised to only -0.5%, and in April it remained unchanged at 3.6% (vs. the original 3.2% last month). This longer term look shows how the present compares with the all time low rate of 1.4% in 2005:

Historically this is nevertheless a very low rate, only exceeded to the downside by 2005-07 and 2022, indicating continued vulnerability to an adverse shock. One of my forecasting models uses such a shock as a recession warning indicator. In any event, there is no such shock indicated at the moment.

Important coincident measures for the NBER

Also as indicated above, the NBER pays particular attention to several other aspects of this release. Real income excluding government transfers (like the 2020 and 2021 stimulus payments) was unchanged for the month. This metric had been in a rising trend since November 2022, but has stalled since January. Before 1990 a pause such as this over at least three months had almost always been associated with recessions. Since then, as shown in the above graph, they have been much more frequent. So at the moment, this is not significant:

Finally, the deflator in this morning’s report is used to calculate, with a one month delay,  real manufacturing and trade sales. This declined -0.1% in March, and for the third month in a row is below its November and December 2023 readings:

Like real personal income ex-government transfers, before 1990 a decline like this typically was associated with recessions or within a year before. Since then, there have been many such pauses without it being significant in the longer term.

Still, let me update the graph I ran on Wednesday showing 5 important producer and consumer series:

With today’s data, 4 of the 5 series are either flat or down significantly. The 5th, real aggregate payrolls for nonsupervisory workers, will be updated in next week’s jobs report.

Summary

This was not a good report. But to repeat a theme noted several times above, it wasn’t a bad report either. Basically a flat report. The pause of the past several months is consistent with both a renewed upturn, or a turn to the downside.

Especially with the downturn in the past several months of the leading sector of housing under construction, what it does do is give a higher level of importance to next week’s ISM manufacturing and services reports.  I will be looking to see if the weighted average of the two is trending higher, lower, or flat. Since the ISM manufacturing report in particular has a long history of leading the economy, should that weighted average decrease below its equipoise point of 50, that would mean that both leading sectors of the goods producing economy are forecasting further weakness ahead.

Slight increasing trend in initial jobles claims, but continuing claims continue slightly lower

 

 - by New Deal democrat

Initial jobless claims rose 3,000 last week to 219,000. More importantly, the 4 week moving average rose another 2,500 to 222,500, the highest level in 9 months. With the usual one week lag, continuing claims rose 4,000 to 1.791 million:

On the one hand, it does appear that claims have been in a small uptrend for the last four weeks. But on the other hand, recall that there was a similar increase last May into summer, so there could be some unresolved post-pandemic seasonality in play.

As usual, though, the YoY% changes are more important for forecasting purposes. Here, initial claims were down -5.2%, and the four week average down -2.0%. Continuing claims remained higher by 3.6%, but aside from two weeks in April, this is the best YoY comparison in 15 months:

This does not suggest any significant weakening of the jobs market. It also does not suggest any upward pressure on the unemployment rate for May, which will be reported next week:

Since the unemployment rate lags initial claims by several months, they are supplying downward pressure on unemployment. Meanwhile continuing claims having been in a flat to slightly declining trend for over half a year, suggests no further upward pressure and some slight downward pressure on unemployment as well. As a result, next week I anticipate we will see an unemployment rate of between 3.7%-3.9%.

The good news, bad news economy

 

 - by New Deal democrat

We’ll get weekly unemployment claims tomorrow, and the very important personal income and spending report Friday, before we begin the slew of reports for the beginning of June next week. But since there’s a slow news day today, let’s take a bigger picture look at the state of the economy.

As always, you can find optimistic data if you look for it, and DOOOMish data as well. Usually - and right now is one of those usual periods - you can find a mix of both.

So let me begin with some large-scale data on the producer and consumer sides of the economy all together. That’s what this first graph below does. It includes manufacturing production (light blue) and real manufacturing and trade sales (dark blue) from the producer side of the economy, real aggregate payrolls (dark red)and real spending (light red) on goods from the consumer side, and building units under construction (gold) from housing, which straddles the middle. All are normed to 100 as of just before the pandemic, and also I’ve cut volatility on the housing construction metric by half so that it doesn’t reduce all the other data to squiggles:

Immediately we see that the producer side is not doing so well. Production is down, and real sales may still be rising slightly, or may have stalled. Meanwhile housing under construction, which rose 40% in the first two years of the pandemic (remember I cut the volatility by half), stalled out and has now turned down.

But the consumer side is a different story entirely. Real aggregate payrolls have continued to rise strongly, and real consumer spending on goods has risen even more strongly.

It’s also worth re-upping my “quick and dirty” economic indicator of stock prices and (inverted) initial jobless claims, both of which are still positive:

Because real aggregate payrolls has had a perfect record of leading the economy as a whole by at least several months for the entire past half century, and because real spending on goods also has generally peaked before a recession begins, here are the YoY% changes in both of them, first historically before the pandemic:

And here since the onset of the pandemic:

Both of these are currently running in the 2%-2.5% YoY growth range, typically the sign of continued economic growth in the near term, unless there is sharp deceleration, which there has not been.

On Friday we’ll get updates on two of the five data series in the first graph - real spending on goods and real manufacturing and trade sales. Next Friday, of course, will be the jobs report. Additionally, next week I’ll be paying close attention to the ISM reports, to see if the weighted average of manufacturing (25%) and services (75%) are above or below their “50” level tipping point, and what the trend is. Since the turn of the Millennium, it has only been when this weighted average has declined below 50 that a recession has been in the offing.

Repeat home sales indexes renew favorable YoY comparisons, suggest slow deceleration in shelter CPI to continue

 

 - by New Deal democrat

The FHFA and Case Shiller repeat sales indexes are the last home sales and price data for the month.

Two months ago I wrote that “for the next seven months the comparisons will be against an average 0.7% increase per month in 2023. Because house price indexes have shown a demonstrated lead over shelter costs as measured in the CPI, if present trends continue, as these YoY comparisons drop out, the YoY deceleration in OER in the CPI index should continue towards its more typical rate of between 2.5% to 4% YoY in the ten years before the pandemic.” Last month I reiterated that “I continue to believe that CPI for shelter will continue to decelerate on a YoY basis, but more slowly than before.”

Both of those trends were burne out with this month’s release for repeat sales through March. The FHFA purchase only price index, after a sharp 1.2% increase in February, only increased 0.1% in March. Meanwhile the Case Shiller National index rose 0.3%, down from its 0.5% increase in February. Keeping in mind that mortgage rates lead sales, which in turn lead prices, here’s what the monthly numbers look like for the past five years, compared with mortgage rates (red, right scale) averaged monthly:

The relatively big decrease in mortgage rates between last November and this January led to a big increase in sales with an increase in prices as well. As mortgage rates have climbed in the past few months since then, sales have declined somewhat, and prices have started to follow suit.

Next, here is the long term YoY graph of both of them below, compared with the CPI for owners’ equivalent rend (red, *2.5 for scale) which continues to show that the YoY gains are actually not out of line compared with gains during the majority of the past 25 years outside of recessions:

Here’s the close-up view of the last five years, better to show the current trend in both prices and shelter inflation for owners:

On a YoY basis, the FHFA index decelerated from a 7.0% increase to 6.7%. The Case Shiller Index declined by less than -0.1% so rounded to an unchanged 6.5% YoY increase. Since the FHFA has had a historical tendency to lead the Case Shiller data by one month, I generally pt a little more weight on that index.

The bottom line remains that there has been no significant YoY acceleration in the FHFA repeat sales index for the past six months, and appreciation in the Case Shiller Index has likely halted, with a lag, as well. Because, as I wrote at the outset, the next five months data will be compared with 0.7% average monthly gains last year (as you can see from the first graph above), I expect the YoY comparisons to show renewed deceleration, which will ultimately - with a decided lag - show up in the shelter component of CPI as well.

Finally, remember that these are all existing home sales, which have been severely constrained by homeowners being locked into the golden handcuffs of 3% mortgages. With limited inventory on the market, there is more compateition among potential buyers moving up from rentals, and thus there is more price appreciation than would normally be the case.