Weekly Indicators for June 10 - 14 at Seeking Alpha

 

 - by New Deal democrat

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

Ever so slowly, the “long leading” data has been improving. Credit conditions were the metric that had an improvement this past week. Slowly everything except for the inverted yield curve is moving towards at least neutrality, if not positivity.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me a little bit for organizing and presenting it to you.

Post-pandemic Latin American immigration and the unemployment rate (and it’s implications for the economy)

 

 - by New Deal democrat

One week ago, in analyzing the jobs report, I noted the continuing severe disconnect between the Establishment Survey, which continues to show strong growth, and the Household Survey, which has been downright recessionary.

I expanded on that analysis Monday and Tuesday, noting that “ At the end of Q4 2022, the Establishment Survey showed gains of 3.0% YoY. By the end of 2023, that had declined to 2.0%. Meanwhile, over the same period the YoY gains in the Household Survey had declined from 2.0% to 1.2%.” Meanwhile, the comprehensive QCEW, showed a YoY deceleration from 2.8% in Q4 2022 to 1.5% at the end of Q4 2023.

In other words, the Establishment Survey may have been overstating growth, while the Household Survey was likely understating it.

The cause of the underestimate of growth in the Household Survey seems most likely to be a big undercount of post-pandemic immigration. Here’s the math I wrote up on Tuesday: “ In the past two years through May, according to the Census Bureau, the US population has grown by a little over 1%. But according to the Congressional Budget Office, it has grown slightly over 2%. That’s over a 3,000,000 difference!”

If we make the reasonable assumptions that this big surge of immigrants has been from Latin America, and much more closely resembles the prime working age demographic of 25-54 years than the native population, applying those adjustments yields an estimate of an additional 2,000,000 employed through May 2024 vs. official Household Survey numbers.

That left one important caveat, namely: “if the Household Survey has been underestimating prime working age population growth, adjusting for that solves most of the discrepancy with the Establishment Survey. But note that the above analysis only addresses *employment,* and not the unemployment rate.” That’s what I want to take a look at now.

Let me start by reiterating that initial jobless claims have had a 60 year history of leading the unemployment rate. Here’s the historical look from the 1960s until just before the pandemic:

In the first several years after the pandemic, that relationship held true. But over the past six months or so, the unemployment rate has continued to drift up even as initial claims declined from last summer through April, and continuing claims stabilized:

It is interesting that something similar happened during the two “jobless” recoveries following the 1991 and 2001 recessions. The unemployment rate continued to rise for an extended period after both initial and continuing jobless claims declined.

The most likely explanation for an increasing number of unemployed is that their jobless benefits expired. Thus they were no longer counted as “continuing claims” but continued to be jobless. No such lackluster recovery has been in evidence post-pandemic.

But a similar dynamic may be in play. That’s because *new* entrants to the labor force who fail to find their first job will not show up in unemployment claims; but they will show up in the unemployment rate. There is a big historical precedent for this involving the Baby Boom which I’ll save for another day. 

But for now, consider that if, properly adjusted, the unemployment rate has not risen, because Latin American immigrants are filling all the jobs that native born workers are not, then we should see that their unemployment rate will remain constant, vs. that for White or Black native born populations.

But that’s not what we see. The unemployment rates for Whites, Blacks, and Latin Americans have all risen. For Whites it has risen from 3.1% to 3.5%, for Blacks from 4.8% to 6.1%, and for Latin Americans from 3.9% to 5.0%:

Indeed the decline in the unemployment rate for Latin Americans was especially sharp in 2021 and 2022, suggesting that they were filling a disproportionate number of the openings advertised by the ubiquitous “help wanted” signs during that time.

That the unemployment rate for this ethnic group, which presumably includes the vast majority of recent immigrants, has risen much more sharply than for Whites, and almost as sharply as for Blacks, implies that a small but increasing percentage of these new immigrants are not finding employment. These unemployed recent immigrants did not previously hold a job in the US, and so do not show up in jobless claims - but do show up in the Household Survey’s unemployment rate.

This in turn has implications for whether the economy is as close as the Household Survey suggests to recession or not. Because the picture it paints is that of an economy that is still growing, perhaps even strongly, but not quite as strongly as before, and so not as able to absorb the full influx of 6,000,000 (!) immigrants in two years.

For that reason, I think it is fair to continue to put more weight on the Establishment Survey’s showing of continued growth in the economy.

Finally, here is the graph of the long term growth in the Hispanic or Latino population:

Notice the big bumps after the 1990 and 2000 Censuses? That corrected for a chronic undercount during both of those decades. Indeed it was the subject of a Fed white paper about an undercount in the Household Survey in 1999. But there was no such bump in the immediate aftermath of the “Great Recession,” which put a damper on immigration. Similarly, the post-pandemic increase in immigration did not occur until after the 2020 Census took place. In other words, the chronic undercount of recent Latin American immigrants in the workforce may continue all the way up until the 2030 Census.

Initial jobless claims now in a clear uptrend - but is it unresolved post-pandemic seasonality?

 

 - by New Deal democrat

Initial jobless claims rose significantly last week, up 13,000 to 242,000, the highest level since last August. The four week moving average rose 4,750 to 227,000, the highest level since last September. And with the usual one week delay, continuing claims rose 30,000 to 1.820 million, the highest since this January:

There is no doubt at this point that jobless claims are in a significant uptrend. But note from the graph that there was a very similar increase last spring and summer, which is why as I have been reporting on these numbers for the past month that I have cautioned that there may be some unresolved post-pandemic seasonality in play.

This shows up even more clearly when we look at the YoY% changes, those most important for forecasting purposes. YoY initial claims are nevertheless *down* -10.2%, and the four week average down -6.7%. Both of these comparisons are the lowest in 16 months except for a few weeks in February and March in the case of the former, and only one week in March in the case of the latter. And while continuing claims remain higher YoY by 4.4%, that comparison remains lower than at any point in the past 15 months except this April and May:

So the bottom line is, claims are clearly in an uptrend, but it is less of an uptrend than occurred at this very same time last year - an indication that unresolved seasonality may be at work. And because initial claims are down YoY, they are not recessionary but rather consistent with a continuing expansion.

Finally, here is the update on initial and continuing claims vs. the Sahm Rule:

As I have noted many times, there is nearly a 60 year history of the former leading the latter. There have been only a few other occasions during that history when the unemployment rate drifted higher in similar circumstances. Because that is best examined in the course of the discussion I started in Monday and Tuesday’s posts about a likely large population undercount in the Household Survey having to do with immigration, I will look at this issue in more detail in that context, hopefully (if I am industrious) tomorrow.

May CPI continued to be all about shelter

 

 - by New Deal democrat

Consumer prices in May showed no inflation at all, as a decline in gas prices helped the headline number come in unchanged. YoY inflation decelerated -0.1% to 3.3% - continuing in the narrow 3.0%-3.4% range it has been in for the last year.

The bottom line remains that almost the entire inflation “problem” is with shelter, which increased 0.4% again, while the YoY rate continued its snail pace of deceleration, down -0.1% to 5.4% - still the lowest increase in 2 years. 

For the record, here is the month over month change in headline inflation (blue) vs. “core” inflation less food and energy:

More importantly, all items except shelter were unchanged for the month, and are only up 2.1% YoY - the 13th month in a row they have been up less than 2.5% YoY. Meanwhile, with the -2.0% decline in energy costs in May, CPI less energy was up less than 0.2% for the month - the lowest increase in over 3 years - and up 3.2% YoY:

Focusing on shelter, it has continued to behave as I expected. Here is an update to the 12-18 month leading relationship between house prices (as measured by the FHFA) and Owners’ Equivalent Rent in the CPI:

House prices are currently increasing a little higher than their average pre-pandemic rate (because, ironically, the Fed’s rate hikes have exacerbated a shortage in housing supply, thereby driving up its price), which has translated to OER and the other measures of shelter inflation to continue to decelerate YoY, but at a much slower pace than their initial rapid decline. I expect this trend to continue in the coming months.

Turning to our recent and former problem children; first, although I won’t bother with a graph, new and used vehicle prices continued to indicate that they have reached a new equilibrium. Used car prices rose 0.6% in May, but have declined -9.3%YoY. New car prices declined -0.5% in May, and are down -0.8% YoY.

Here’s what happened with the remaining problem areas of inflation:

  (1) food away from home (fading), which peaked at 8.8% YoY over one year ago, increased 0.4% in May, but decelerated -0.1% ona YoY basis to a 4.0% increase, gradually getting closer to its pre-pandemic average of 2.5%-3.0%;

 

 (2) electricity, which has followed gas prices higher, was unchanged for the month, but has risen from 2.2% YoY last August to an 11 month high of 5.9% in May; and 

 (3) transportation services - mainly car repairs (up 0.3% for the month, but down from 7.6% YoY in April to 7.2%) and insurance (down -0.1% for the month and up 20.3% YoY - still down from last month’s 22.6% YoY gain) - declined -0.5% for the month. It had rocketed from its pre-pandemic range of 2.5%-5.0% to as high as 15.2% in October 2022, and is now still up 10.5% YoY, a -0.7% deceleration from April.

Based on the past inflationary period of 1966-82, it is clear that transportation services lags increases in vehicle prices by 1-2 years and even more, sometimes increasing right through recessions

Finally, the CPI report enables us to update real aggregate nonsupervisory payrolls. Last Friday we saw that nominally they rose 0.9%, which with today’s unchanged prices, is their “real” gain as well:

This made a new high, showing that average American working families had significantly more to spend in May, and negativing any recession for the next few months.

To summarize: if we exclude the well-documented historically lagging sectors of shelter prices (and motor vehicle insurance), consumer inflation continues to be well behaved, up only 2.1% YoY. If gas prices continue to be well-behaved, headline inflation should go below 3%

What would adjusting the Household jobs Survey for immigration driven population growth do?

 

 - by New Deal democrat

This is a continuation of my post from yesterday discussing the large divergences between the Household and Establishment jobs surveys.

A big current issue with the Household Survey is whether, by relying on Census estimates, it has substantially underestimated population growth, and in particular immigration-driven growth, in the past two years. Here’s a graph from Wolf Street, the source material of which I have verified, that sums it up:

In the past two years through May, according to the Census Bureau, the US population has grown by a little over 1%. But according to the Congressional Budget Office, it has grown slightly over 2%. That’s over a 3,000,000 difference!

If the Household Survey data were normed to the CBO estimates, what would it look like? A couple of basic assumptions should give us a good back-of-the-envelope estimate. Those two assumptions are; (1) the immigration is from Latin America; and (2) it is younger, in the prime working age demographic, plus their children, vs. the native born population.

Here’s the difference those two assumptions make. First, here is the difference between growth in the native-born population vs. foreign born population:

The total US population is about 336,000,000. Since the beginning of 2022, the native born population has only grown by less than 1.4 million, or only 0.6%; while the foreign born population has grown by 3.7 million, or 8.3% - and remember, these are the Census Bureau numbers, which the CBO data indicates sharply underestimate immigration during that time.

Now, here’s the employment/population ratio for the US population as a whole, vs. the Hispanic or Latino segment (gold), as well as the prime working age component (red) in the past 2+ years:

Now let’s crunch some numbers based on the CBO estimates, and making use of the assumptions above.

Cumulatively since March 2022 the CBO estimates show an additional 1% growth in population, or roughly 3.36 million, vs. the Census Bureau.

Further, the overall employment/population ratio over the past two years is roughly 60%, vs. 64% for the Latin American ethnic group. (I’m being conservative here, assuming working age immigrants have been bringing their children, who obviously are not in the 25-54 demographic).

A 64% employment ratio for an additional 3.36 million people generates an additional 2 million+ employees vs. using the Census Bureau estimates.

Now let’s show that in graphs. Through the magic of algebra, here is what the adjusted Household Survey would look like if an additional 2 million jobs were gradually added over the past two years (blue) vs. the Establishment Survey (red):

And here is what the YoY% growth would look like:

There is, as per usual, additional noise, but the adjusted Household Survey would show almost as many jobs as the Establishment Survey through the end of last year, before performing poorly (so far!) this year - but still within the range of noise.

Additionally, with the adjusted Household Survey growing 1.8% YoY in 2023 (vs. 2.0% for the Establishment Survey, it is closer to the QCEW census of 1.5% growth as of its last update.

In short, if the Household Survey has been underestimating prime working age population growth, adjusting for that solves most of the discrepancy with the Establishment Survey. But note that the above analysis only addresses *employment,* and not the unemployment rate. That analysis will be the basis of yet another post. 

The recessionary Household Jobs Survey is not confirmed by other comprehensive hard data

 

 - by New Deal democrat

As per usual, the Monday after jobs report Friday does not update any significant data.

So let me return to the deep divergence between the Household and Establishment Surveys in the jobs report. With Friday’s data for May, the two have now diverged 1.9% over the past year, adjusted for the size of the prime working age population:

This big a divergence has only happened previously twice in the 1960s, and one month each during the pandemic and the 1980s. There is clearly a big issue going on. Either the data in one or both series is simply wrong, or the implications of the data in one or both series is incorrect. I spent a fair amount of time during the weekend poking around all sorts of data, and I think I can shed some light on that, but it will take much more than one post.

Let me just begin by restating that the Household Survey for May was simply recessionary. The “real time” Sahm Rule as of May is at .37. The below graph subtracts that amount and shows the entire historical record before the pandemic:

The only times this reading has not meant recession was twice in the 1960s, once in the 1970s, and for several months in 2003.

I’ll spare you the additional graphs, but the same is apparent with the YoY changes in the unemployment and underemployment rates.

And total employment is only up 0.2% YoY. Here’s what a historical graph of that looks like pre-pandemic:

With the exception of two solitary months in 2003 and 2013, there has never been a time since the 1960s when such a paltry YoY increase has not meant recession.

But the Household and Establishment Surveys are not the only official data of employment. The Quarterly Census of Employment and Wages (QCEW) is a comprehensive accounting of the same, covering over 95% of all businesses. It’s one big drawback is that there is no seasonal adjustment, so we have to look at it YoY. It also lags badly, so the most recent update is for Q4 of last year, and further, all of last year’s data is still preliminary and subject to revision.

Nevertheless, let’s compare that with the YoY% changes in employment in the two jobs surveys, through the end of last year:

At the end of Q4 2022, the Establishment Survey showed gains of 3.0% YoY. By the end of 2023, that had declined to 2.0%. Meanwhile, over the same period the YoY gains in the Household Survey had declined from 2.0% to 1.2%.

Although FRED doesn’t have graphs for the QCEW, here are the YoY% gains shown in that Census as of the end of each quarter from Q4 2022 through Q4 2023:

2.8%, 2.5%, 2.5%, 1.7%, 1.5%

Through the end of Q2, the QCEW is in good agreement with the updated Establishment Survey. But in Q3 and Q4, there is a subtantial (as, 0.3% and 0.5%) variance, suggesting that upcoming benchmark revisions to the Establishment Survey will reduce those levels by about 700,000.

For 2024, we can’t rely on the QCEW. But we do have the comprehensive daily update of all withholding taxes paid to the government. The one caution here is that such taxes are paid on things like the vesting of stock options, and not just wages. This is important, because a huge amount of stock options vested and were cashed in at the end of 2022.

With that caveat, here is what the 1 month and 3 month moving average of the YoY% change in withholding taxes paid look like beginning last December through the end of May:

DEC 23. -11.2%. -0.8%

JAN 24. +5.7%. -0.8%

FEB 24.  +8.3%. +0.1%

MAR 24. +2.2%. +5.3%

APR 24. +17.1%. +9.0%

MAY 24. +2.5%. +6.7%

The monthly totals are somewhat volatile, as you can see. But once we smooth the data out over three months, and once the December 2022 stock options drop out of the picture, all of the comparisons are positive. 

The bottom line is that neither of our two comprehensive comparative data - the QCEW and withholding taxes paid - look recessionary at all. In other words, while the unrevised Establishment Survey readings might be too high, the Household Survey readings on the change in employment look much too low.

But is there reason to believe that the Sahm rule might not be flashing recessionary warnings after all? More on that in another post.