Weekly Indicators for August 26 - 30 at Seeking Alpha

 

 - by New Deal democrat

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

There were two noteworthy events this past week. First, the 10 year minus 2 year Treasury spread briefly normalized during the week, on Wednesday, and ended the week only inverted by 1 basis point  (.01%). Second, almost *all* of the coincident indicators are now positive.

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 the information for you.

July personal income and spending: an excellent report, with only one fly in the ointment

 

 - by New Deal democrat

The monthly personal income and spending report is now the most important report of all, except for jobs. That’s becuase it tells us so much about the state of the consumer economy. It is the raw material for several important coincident indicators that the NBER looks at, as well as several leading indicators on the spending side.

To the numbers: in July nominal personal income rose 0.3%, and spending rose 0.5%. Since PCE inflation rose 0.2%, real income rounded to an increase of 0.2% and real spending to 0.4%:

Since spending on services tends to rise even during recessions, the more important component to focus on is real spending on goods. This rose 0.7% to a new all-time high. Real spending on services also increased 0.2% to an all-time high as well:

Prof. Edward Leamer’s business cycle model indicates that spending on durable goods tends to peak first, before nondurable or consumer goods. In fact both rose in real terms, by 1.7% and 0.2% for the month, respectively:

As indicated above, PCE inflation was relatively tame, at +0.2%. On a YoY basis, PCE inflation is 2.5%:

While this measure appears to have stopped declining YoY, it has been stable only slightly higher than the Fed’s target.

If there is a fly in the ointment, it is that the personal saving rate declined another 0.2%, to 2.9%. This is the lowest post-pandemic rate of saving except for the month of June 2022, and is lower than at any other point since the turn of the Millennium except for the 2005-07 timeframe, as shown in the below graph which norms the current rate to zero:

The positive of this number is that it indicates increasing consumer confidence. The negative of this number is that consumers are very vulnerable to any adverse shock.

Finally, as indicated above this report goes into the calculation of two important coincident indicators. The first is real personal income less government transfer payments. This rose 0.2% to another all-time record:

Second, with the usual one month delay, real manufacturing and trade sales rose sharply, by 0.4%, also to their highest level ever excluding last December:

In short, this was an excellent report, with all of the important leading and coincident metrics increasing to records or near-records. It is indicative of a healthy economy both now and for the immediate future. As indicated above, the only fly in the ointment is that the very low savings rate is leaving consumers vulnerable to any future financial shock (of which there is no present sign).

Jobless claims: almost all good

 

 - by New Deal democrat

The news about initial and continuing jobless claims was almost all good this week.

Initial claims declined -2,000 to 231,000, and the four week moving average declined -4,750 to 231,500, the lowest since early June. Continuing claims increased by 13,000 to 1.868 million:

As usual, more important for forecasting purposes are the YoY% changes. In that regard, initial claims were down -1.3%, and the four week moving average down -5.6%. While continuing claims remained higher by 2.7%, this is the lowest YoY% increase in 18 months:

All of these forecast continued economic growth. Additionally, the hypothesis that the increase in late spring and early summer was due to unresolved post-pandemic seasonality appears firmly confirmed; as is the fact that the temporary increase to 250,000 in late July was due to Hurricane Beryl’s affect on Texas claims. I won’t bother with the graph, but initial claims in Texas have returned to normal levels. The only negative in this entire report is that continuing claims in Texas remain elevated by about 20,000 YoY, or 14.5%.

That continuing claims in Texas remain elevated is likely to show up in next week’s employment report, as to which here is the latest updated forecast:

On a monthly basis, initial claims have continuously remained lower than they were a year ago. For almost all of the past 60 years, this would reliably forecast that the unemployment rate would not rise higher than it was last autumn, i.e., roughly 3.8%. It is almost certain that the additional increase in the unemployment rate is related to diminished employment prospects for recently arrived immigrants. Because of the continued Beryl effect in Texas, the increase in continuing claims there is likely to be reflected in an increase in the number of total unemployed in the August jobs report next week.

Finally, in review of the near new record highs in the stock market this week, here is my updated “quick and dirty” short leading forecast for the economy, which relies upon stock prices and jobless claims (YoY, inverted in the graph below):

The quick and dirty model indicates not a hint of recession.

Domestic factory orders and production vs. real imports as economic forecasting tools

 

 - by New Deal democrat

Over the past year, I have downgraded the importance of manufacturing indicators as a forecasting tool for the economy as a whole. This post explores why, and suggests a revised tool that may be a helpful short leading indicator.

On Monday, durable goods orders rebounded sharply in July from their abrupt June decline. Still, as shown in the graph below, growth in both new factory orders and core capital goods orders has stalled in the past year:

In the past 30 years, such as stall has not been unusual, as shown by the YoY% changes in each:

New factory orders and core capital goods orders similarly stalled - or even declined YoY - in 1998, and most of the entire period from 2013-19, including what I called the “shallow industrial recession” of 2015-16. And yet in none of those periods did a wider economic downturn happen.

This quite simply has to do with the rise of imports in the US economy. Below is a graph of domestic manufacturing production (blue) vs. the real value of imports in GDP (red), both normed to 100 as of Q1 of 1972 (log scale to better show trends over time):

We can see that imports took off in the 1980s and never looked back, even as domestic manufacturing production made its all time peak over 15 years ago in 2007. In fact in this post-pandemic expansion, production has not even equaled its peaks during the 2010s.

Here’s a close-up of the last ten years normed to 100 as of Q1 of 2017:

Even though domestic manufacturing has stalled in the past year, real imports have grown by 5.4% during that time.

This suggests that real imports might be more important than domestic production is signaling broad economic weakness, because they are so attuned to consumer spending.

And here is the historical look at the quarterly change in both domestic manufacturing production and real imports, first from 1972 through the 2001 recession:

And this is from just before the 2001 recession through 2019:

On most of the occasions before a recession occurred, real imports turned down one Quarter before domestic manufacturing production. In one instance it was simultaneous, and only before the 2001 recession did domestic production turn down first. At the same time, note that there are several false positives, such as 1984 and 2016, where there were brief and shallow declines in both metrics without a recession occurring.

Now here is the post-pandemic close-up:

There was another false positive in late 2022, but as of the end of Q2 this year, both metrics are positive, with domestic production up 0.6%, and exports up 1.9%. 

Along with economically weighting the two monthly ISM reports to better capture any flagging in services, keeping track of whether imports are signaling weakness along with domestic production appears a useful addition to the forecasting arsenal.

Repeat home sale indexes show continued decelation in house price inflation, more comfort room for Fed to cut rates

 

 - by New Deal democrat

This morning we got the repeat home sales price data from the FHFA and Case Shiller. And the news was good, especially in the slightly leading FHFA Index.

This is of heightened importance compared with normal historical times. That’s because to reiterate, my focus is looking for any movement towards rebalancing between new and existing home sales. As to existing home sales, this means increasing inventories and more stable or even slightly declining prices, and we did see another increase in inventory earlier this week. In the repeat sales index, I am looking for signs that price increases might be abating. 

And abating they are - slowly. On a monthly basis, the FHFA showed prices *declilning* -0.1% in the three month average through June after being unchanged in May. In the Case Shiller national index, which tends to lag by a month or so, prices increased 0.2% during the same period. Outside of late 2022, these are the lowest monthly  price changes since the pandemic lockdown months:

On a YoY basis, both indexes are up 5.4%. This is the lowest reading since December in the Case Shiller index, and the lowest since last July in the more leading FHFA index:

For the entire first half of this year, both indexes are up only 2.3%, for a 4.6% annual rate. As you can see from the above graph, that rate would be absolutely typical for an annual increase before the pandemic.

Becase the house price indexes lead the shelter component of the CPI (Owners Equivalent Rent, black in the graph below) by 12-18 months, this also means we can expect continued (if slow) deceleration in that very important component of consumer prices as well:

Specifically Owners Equivalent Rent, which is 25% of the entire CPI, should continue to trend towards 3% YoY increases in the months ahead.

Most people expect the Fed to cut rates by at least 1/4% later this month, and this report should give them a further reason for comfort to do so.

The state of the consumer, August 2024

 

 - by New Deal democrat

One of my alternate systems for forecasting recessions is what I call the “Consumer Nowcast.” This is a fundamentals-based system that looks at all the likely potential sources of consumer spending (which is 70% of the economy) and asks whether or not they have been stymied.

At the present moment, the answer is pretty decisive.  I have posted this as an article at Seeking Alpha, exploring the relevant metrics and coming to a firm conclusion, albeit a nowcast only and not a forecast.