Real income and spending in May a nice rebound, but watch the caution flags in manufacturing sales and goods spending

 

 - by New Deal democrat

Personal income and spending, in addition to the jobs report, has become one of the most important monthly reports I follow, mainly because I am looking for signs that the contractionary effects of Fed tightening are finally taking effect. To cut to the chase, this month’s report was mainly positive, but had a few cautionary signs. 

To reiterate from last month: 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 most of the graphs below except for YoY comparisons are normed to 100 as of just before the pandemic.

Real income and spending

In May, nominally income rose 0.5%, while nominal spending rose 0.2%. Since prices as measured by the PCE deflator rounded to unchanged for the month, in real terms income was unchanged and spending rounded to 0.3%. Since the pandemic recession, real spending is up 10.9% and real income is up 7.4%:

On a YoY basis, the PCE price index is up 2.6%, the fourth month in a row higher than January’s three year revised low of 2.5%. While in 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 may have ended. On the other hand, 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 (right scale) rose 0.1%, while real goods spending (left scale) rose 0.6%:

Breaking goods spending down further, in May spending on consumer durables (dark blue) rose 1.1%, while real spending on non-durables rose 0.3%(light blue). In the past, spending on durables has tended to turn down before spending on non-durables. Here’s the current update, also including real spending on goods as a whole, as per the previous graph. Note that I normed this graph to 100 as of last July:

While on a YoY basis, all three series are running about 1.7% higher, which is within the range of normalcy since the turn of the Millennium, note that since last July real spending on goods is only higher by 0.6%, on durables by 0.4%, and on non-durables by 0.7%. While spending on durable goods is particularly volatile, so the near-stall in that spending is not particularly foreboding, it is increasingly a yellow flag caution for the economy going forward.

Savings

Another important metric for the near future of the economy is the personal savings rate. In May it rose to 3.9%. This remains in the range it has been in since last September. This longer term look shows how the present compares with the all time low rate of 1.4% in 2005:

While historically this is a very low rate, with only 2005-07 and 2022 significantly lower, indicating consumers are vulnerable to a financial shock, 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) rose 0.5% in May to yet another new record high. Needless to say, this is good, especially since it had stalled for three months previously:

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

It remains higher by 2% YoY. As the historical graph below shows, before 1990 a deceleration 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:

Summary

After April’s basically flat report, this was generally a good rebound. But the comparisons with last year are going to become much more challenging for goods spending, as well as for real manufacturing and trade sales beginning in a couple of months. 

To reiterate my concluding comments from last month: “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.”

Last month the weighted average of the ISM reports remained positive, while housing under construction declined further. 

So: positive for now, watching the yellow caution flags.

House prices - especially for existing homes - compared with wages remain near or at all-time highs, so existing homes make up less of the market

 

 - by New Deal democrat

One item I meant to address with this week’s existing and new home sales data was the relative difference in price in the two, and the effect on the relative share of the market. 

I am following up now because yesterday Keven Drum put up a post yesterday in which he concluded that “ The price of a new house is now below its pre-pandemic trendline and heading toward its 2020 level…. When the Fed finally gets around to lowering interest rates, the real cost of buying a home will be back to normal.“

Not exactly. The graph Kevin puts up only goes back to 2013. Let’s take a longer-term look.

The first graph below divides the median price of a new home by the average weekly earnings on nonsupervisory workers (blue), and all workers including supervisors (red), both adjusted to zero at their current readings:

The current levels for both are in the upper reaches of their readings since the turn of the Millennium, and only about 10% lower than at the peak of the housing bubble. The latter metric only goes back to 2008, but here is the former one extended all the way back to its inception in the 1960s:

You can see that it took about 200 weeks’ pay to buy the median new single family home in the 1960s, rising to about 350 by 2000. So the current level of 411 remains historically very high.

Now here is the same metric applied to repeat existing home sales as measured by both Case-Shiller (light blue) and the FHFA (dark blue) compared with the median price of a new home for nonsupervisory workers (red) as in the graph above (all metrics normed to 100 as of 2001):

Both new and existing homes went up about 20% immediately after the pandemic. Since then new homes have given back about half of that increase, while existing homes have given back none of it.

Finally, here is a series of graphs I cribbed from Ben Casselman of The Economist. Note in particular the “Share of New Homes” graph:

showing a sharp increase in the percentage of the housing market taken by new homes vs. existing homes (since Realtors do not allow FRED to post multi-year data on existing home sales, it’s not available there).

Initial claims remain positive, while continuing claims break out negatively from 12 month range

 

 - by New Deal democrat

Initial claims declined -6,000 last week to 233,000. The four week moving average increased, however, by 3,000 to 236,000, the highest since last September. Continuing claims, with the usual one week delay, increased 18,000 to 1.839 million, breaking out of their 12 month range to the highest level (by 10,000) since November 2021:

On the YoY% basis which is more useful for forecasting, the news is still pretty good. Initial claims remain down -2.1%, and the four week average down -6.9%. Continuing claims are higher by 5.1%, still at the lower end of that range:

Last week in discussing possible unresolved post-pandemic seasonality, I noted that beginning this week last year there was a significant decline in new claims. As data will do, this week’s numbers were ambiguous, as in down, but not by as much as last year. So we will have to wait at least one more week to see if the hypothesis pans out or not.

Finally, here’s the updated look at the “Sahm rule” as forecast by initial and continuing claims averaged monthly:

The upturn in the two former metrics in June suggests the the unemployment rate may trend slightly higher in the coming months. At the same time, recall that it is *extremely* unusual for the unemployment rate to have risen in the face of the downturn in jobless claims earlier this year, which I suspect has been caused by the surge in new immigrants failing to find employment as easily as they did in 2021-23.

The bottom line is that the “Sahm Rule” is unlikely to be triggered in next week’s jobs report, but will probably remain at elevated risk.

New home sales and prices continue range-bound in May, while new homes *for sale* make a 15 year high (and that’s good!)

 

 - by New Deal democrat

We finished housing data for the month with this morning’s report on new single family home sales and prices. As I usually point out, new home sales are the most leading of the housing construction metrics, but they are noisy and heavily revised. 

That was true again in May. Sales (blue in the second graph below) declined -11.3% m/m to 619,000 annualized, after April was revised sharply higher by +64,000 to 698,000. As usual: very noisy, big revision. 

Two months ago I wrote that “because mortgage rates have risen somewhat in the past few months (from 6.67% to 7.10%, I expect this range in new home sales to continue, with a slight downward bias in the immediate months ahead.” That is what happened in both April a May. Mortgage rates (red in the graph below, right scale) remain elevated compared with earlier this year, so downward pressure will continue to be placed on new home sales and construction:

As the five year graph below shows, beginning in 2023 sales have stabilized in the 650,000 +/-50,000 range, but with a slight downward bias. For comparison I also include the much less noisy, but slightly less leading single family housing permits (red), which as anticipated have started to follow sales down from their peak, and the last year of existing home sales (light blue; all that FRED is allowed to reference), which have followed a similar trajectory:

As I always point out, prices follow sales, and that has continued to be the case as well. The median price of a new home in May was $417,400, near the bottom end the range it has established since at least February 2023:

For the past half year, YoY prices have been within unchanged +/-1.0%. Taking into account inflation, this is about what we would expect from the downward YoY sales record of 2022. If anything, I would expect YoY prices to increase over the next few months.

Finally, let’s wrap this into my overall worldview of the US economy in 2023, in which I am watching for signs of any simultaneous downturn in manufacturing and construction, which would be the short term harbinger that a recession rather than a soft landing is in the works.

Although I’ll spare your the graph this month, in addition to new home *sales*, this report also includes the metric of “new homes for sale;” and the former has always led the latter. Further, last month I noted that, with only one exception (the 1981 “double-dip” recession), housing units under construction have always led new homes for sale, by varying time frames but most usually the peak in the former has led the peak in the latter by about 6 months. And new homes for sale have *always* also turned down before a recession, at least by 3 months (1970 and 1973) but usually by a significantly longer period of time.

In fact, with the exception of the 1970 recession, they have always turned negative YoY shortly before a recession has begun (again, I’ll spare you the graph).

Well, in May, new homes for sale (blue in the graph below) increased to a new 15 year high of 481,000:

While building units under construction (red) have turned down decisively, new homes for sale most definitely have not. This is evidence that no recession is in the offing in the immediate future.

FHFA and Case Shiller repeat sales indexes show YoY price growth has peaked; slow deceleration in shelter CPI should continue

 

 - by New Deal democrat

This week’s data focuses on house prices and new home sales, and the more important personal income and spending report on Friday.

In the housing data I am looking at any movement towards rebalancing between new and existing home sales. To recapitulate, the big increase in mortgage rates has locked up the existing home market, increasing the share of new houses as to total sales.  With existing homes, we saw inventory increasing. In the repeat sales index, I am looking for signs that price increases might be abating.

This morning both the FHFA and Case Shiller repeat home sales indexes were released through April. Three 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.” Tow months ago 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.” Then last month I concluded, “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…. 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.”

And that’s what has happened.

To start with, Keeping in mind that mortgage rates lead sales, which in turn lead prices, here’s what the monthly average in mortgage rates (red, right scale) look like compared with the monthly % change in house prices for the past five years:

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 generally increased since then, sales have declined somewhat, and prices have started to follow suit. In this morning’s report, prices increased a seasonally adjusted 0.3% in the Case Shiller index, and 0.2% in the FHFA Index. Here’s what each index looks like normed to 100 as of just before the pandemic:

I’ll dispense with the long term graph this time, but instead here is the last seven years of the YoY% changes in the FHFA and Case Shiller national indexes (/2.5 for scale) compared with the CPI for owners’ equivalent rent which continues to show that the YoY gains in house prices are actually not out of line compared with prior to the pandemic:

On a YoY basis, the Case Shiller index is up 6.3%, down from its February peak of 6.6%. The FHFA Index is also up 6.3% YoY, down from its February peak of 7.2%. In other words, as anticipated the YoY increase in house prices has peaked, as monthly comparisons continue to be slightly below the equivalent gain 12 months previously, just as I first wrote would happen three months ago.

More importantly, in the next few months this trend should continue. The latest mortgage and price data continue to indicate that the shelter CPI for “owners equivalent rent” should continue to “aim” for a landing at 3.0-3.5% in roughly 12 months, or a deceleration on average of about 0.2% YoY per month.

Travelin’ man

 

 - by New Deal democrat

On the road again. . .  

Fortunately there’s no significant economic news today, so a perfect day to play hooky. See you tomorrow.