Weekly Indicators for September 23 - 27 at Seeking Alpha

 - by New Deal democrat

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

With the Fed cutting rates, those long leading indicators which are based on interest rates have continued to trend towards improvement, this week featuring mortgage applications, which turned higher YoY for the first time in over two years.

As usual, clicking over and reading will bring you up to the virtual moment as to the economy, and reward me with a little pocket change for collecting and organizing the information for you.

Personal income and spending hits a triple, plus a big positive surprise revision

 

 -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.

And to put this month’s report into the perspective of the imminent baseball postseason, it hit a triple.

To the numbers: in August both nominal personal income and spending rose 0.2%. Since PCE inflation rose 0.1%, both rounded to an increase of 0.1% (graph normed to 100 just before the pandemic) :

If there was any fly in the ointment, it was spending on goods. In historical terms, spending on goods tends to rise more during the early part of an expansion, and be overtaken by real spending on services in the latter part of an expansion. Additionally, spending on services tends to rise even during recessions. So the more important component to focus on is real spending on goods. This was unchanged, but still tied for its all-time high. Meanwhile - par for the course - real spending on services increased 0.2% to another all-time high:

On a YoY growth basis, real spending on services remains slightly higher than real spending on goods, at 3.0% vs. 2.7%.

Prof. Edward Leamer’s business cycle model indicates that spending on durable goods (dark blue, left scale) tends to peak first, before nondurable or consumer goods (light blue, right scale). These were both unchanged in real terms, but both at all time highs (the former excepting the two binge-spending stimulus months in 2021):

As indicated above, PCE inflation was tame, at +0.1%. On a YoY basis, PCE inflation is 2.2%:

This is the lowest YoY rate since February 2021, and needless to say, only slightly above the Fed’s target. To reiterate, the chief difference between this measure and CPI is a much lower weighting given to shelter. 

Meanwhile, there was a big positive surprise in the form of multi-year revisions to the savings rate. All this year my one caveat about this report was the low savings rate, for example last month at 2.9%, which was lower than at any other point since the turn of the Millennium except for the 2005-07 timeframe and briefly in 2022. 

Well, that all got revised away (red in the graph below), as shown in the long term look since the turn of the Millennium: 

As revised, the personal saving rate is currently 4.8%, right in line with the average saving rate for the past quarter century. In other words, my concern about the consumer being stressed by any adverse shock has been revised away!

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 0.1% to another all-time record, and is up 3.1% YoY:

Second, with the usual one month delay, real manufacturing and trade sales rose sharply again, by 0.7%, also to a new all-time record:

This was the second excellent report in a row, with the main concern from earlier this year revised away. The only soft spot was real spending on goods, which continues to grow slightly less than for services, suggesting we are later than halfway through this expansion. Additionally, to the extent it is at all necessary to say it, this completely removes any doubt, contra the usual small cadre of DOOOMers, that we continue to be in an expansion.

Weekly jobless claims: good news and ‘meh’ news

 

 - by New Deal democrat

I’ve been writing for the past number of weeks that we were approaching the acid test for the hypothesis that unresolved post-pandemic seasonality explained the sharp increase in jobless claims in the summer. This week we are fully immersed in the 6+ month comparison period where initial claims in the past two years averaged between 200,000-220,000.

So, first the good news: initial claims declined -4,000 to 218,000, to the lowest level in over four months, and putting them in that range. The four week moving average, which has a few weeks to go before its transition period is over, declined -3,500 to 224,750, also the lowest in four months. Continuing claims, with their typical one week lag, increased 13,000 to 1.834 million:

Now, the not bad, but ‘meh’ news: on the YoY basis more important for forecasting purposes, initial claims are up 2.3%, the four week average up 2.4%, and continuing claims up 2.2%:

While continuing claims continue to have their best YoY comparisons since February 2023, this is the weakest showing for initial claims and their four week average since last December, outside of a brief period in February.

Which means that initial claims are no longer a “positive” for the economy. On the other hand, they aren’t recessionary or pre-recessionary either. That would require at minimum 10% or higher YoY comparisons lasting for two months or more. Initial claims are now a ‘meh,’ or neutral for economic forecasting purposes.

Finally, we do get the monthly jobs report next week, so let’s update our look at jobless claims vs. the unemployment rate. Recall that for 60 years, the former has led the latter. This past year has seen the relationship break, mainly due to a huge increase in new entrants to the labor force via immigration:

But for the outsized influx in immigration, jobless claims indicate that the unemployment rate should be in the 3.7%-3.9% range - which isn’t bad at all.

The rebalancing of the housing market continues, as new home sales and existing home prices are consistent with the “soft landing” scenario

 

 - by New Deal democrat

With this morning’s release of new home sales, we have all of the important housing data releases for the month. So let’s integrate that into the overall housing outlook.

Let’s begin with my usual  overview that new home sales are the single most leading metric for the entire sector, but they suffer from the fact that they are extremely volatile and also heavily revised. So it is best to look at them in comparison with single family permits, which are almost as leading and have a much better signal to noise ratio.

August data confirms that caution, as they declined -4.6% on a month over month basis, but from a nearly 2% upward revision to July. On a three month moving average basis, they are at their highest level in over a year (blue in the graph below). As you can see, in the past several years single family permits (red) have followed with a several month delay. New home sales tell us that the uptick in permits in August was probably the beginning of an upward trend to follow new home sales:

As I also usually reiterate, sales (blue again) lead prices (red, right scale):

The boom in prices followed the boom in sales, and as sale cooled off sharply, prices stalled. Here is the same data in a YoY format, which shows the leading/lagging relationship a little more clearly:

New home sales bottomed in 2022, and the trend has been higher for over a year. As of last month, they are 9.8% higher YoY. Prices are still lower YoY by 4.6%, the lowest comparison in 10 months, but can be expect to move higher soon.

In the past number of months, I have been looking for a rebalancing of new vs. existing home sales. The sharp increase in mortgage rates beginning in 2022 locked many existing homeowners into their houses, since they could not afford the concomitant increase in mortgage payments that would accrue from moving. This depressed existing home sales, but drove up prices due to the very limited supply.

Last Friday we saw that existing home sales continues near the bottom of their 18 month range, at 3.86 million annualized:

Perhaps more importantly, the YoY% change in prices continued to moderate (below graph shows non-seasonally adjusted data):

On a YoY basis, in response to the longer term decline in inventory, existing home prices have risen consistently since 2014, and accelerated during the COVID shutdowns. After briefly turning negative YoY in early 2023, troughing at -3.0% in May, comparisons accelerated almost relentlessly to a YoY peak of 5.8% in May of this year. Since then the YoY comparisons have decelerated to 4.1% in June, 4.2% in July, and only 3.1% in this month’s report.

This sharp decleration in existing home prices mirrors the repeat sales price deceleration we saw yesterday in the Case-Shiller and FHFA reports.

Meanwhile the inventory of existing homes is up sharply, by 22.7% YoY:

And the inventory on new single family homes (red, right scale in the graph below) is up 9.1% YoY. I have used the long term historical graph to show that sales (blue) peak first, and inventory later; and even more importantly that with the sole exception of 1969, inventory has always turned down by a few months to over a year in advance of a recession:

The bottom line for this month is that the rebalancing of the housing market is continuing, as lower mortgage rates help in the sales of new homes, which has helped drive down demand somewhat for existing homes, which in turn has led to an abatement in their price increases and an increase in inventory. A rebound in housing would be the most potent element of a “soft landing” vs. any oncoming recession.

Repeat home sales indexes show further, marked deceleration in price inflation; bode well for the Fed

 

 - by New Deal democrat

This morning’s repeat house price indexes from the FHFA and Case Shiller continued to show deceleration in this metric which is very important to home buyers. Specifically, in the three month average through July, U.S. house prices rose 0.2% according to Case Shiller’s national index, and only 0.1% according to the slightly more leading Federal Housing Finance Agency (FHFA) purchase only index, both on a seasonally adjusted basis. For the last three months, the FHFA index has risen a *total* of 0.1% as well. The Case Shiller monthly change is also tied for the lowest in the past 18 months [Note: FRED has not updated the monthly Case Shiller numbers yet. When they do, I’ll update this graph]:

On a YoY basis, the FHFA Index rose 4.5%, while the Case Shiller measure rose 5.0%. These both compare with 5.4% YoY increases through June. The former also compares with 7.2% in February, and 19.8% in March 2022, and the latter with 6.6% in February, and 20.8% (!) in March 2022:

For the last six months, the FHFA index is only up 0.6%, for a 1.2% annual rate, while the Case Shiller index is up 1.2%, for an annual rate of 2.4%. As shown in the above graph, the latter rate would be absolutely typical for an annual increase before the pandemic, while the former would be significantly below the average outside of the 2006-10 housing bust.

This is of heightened importance compared with normal historical times, because of the outsized impact house prices, via OER, had on consumer inflation, and also because more recently my focus has been looking for movement towards rebalancing new and existing home sales. This morning’s report is evidence of that rebalancing. 

Finally, because 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 continue to expect deceleration in that very important component of consumer prices as well, if somewhat slowly:

Specifically Owners Equivalent Rent, which is 25% of the entire CPI, should continue to trend towards 3% YoY increases in the months ahead, continuing to bode well for both the headline and core measures of that index, and a tailwind for the Fed’s desire to lower interest rates.

Disaggregating the Big Picture: the Fed *still* wants to make your recession forecast wrong

 

 - by New Deal democrat

This is Housing Week, but there is no significant data today, and I’m going to wait for new home sales to be reported on Wednesday before commenting on how existing home sales fit in. In the meantime, let me unpack a Big Picture look.

Since the Fed began actively managing interest rates over 60 years ago, expansions and recessions have followed a typical pattern. The unemployment rate decreases until ultimately inflation increases. Real wages and income ultimately fall behind inflation. At the same time, the Fed hikes interest rates to fend off the higher inflation. Consumers react by cutting back, unemployment increases, and the economy topples into recession. The Fed reacts by cutting rates while Inflation decreases, consumer spending, mainly on durable goods financed by loans, increases again, and the cycle repeats.

We can capture most of this paradigm by comparing the YoY change in the Phillips curve, i.e., the inflation rate minus the unemployment rate (blue in the graph below) with the Treasury yield curve, as represented by the 10 year minus 2 year spread (red):

As the economy gets “tight,” i.e., lower unemployment and higher inflation, represented by peaks in the blue line, the Fed tightens, causing the yield curve to invert, i.e., the red line goes below zero. The blue line plummets below zero, more or less coincident with the onset of a recession, and the responding Fed interest rate cuts cause the yield curve to re-normalize, i.e., head back above zero. The economy responds to easy money and lower inflation by starting back into recovery, as unemployment declines towards the inflation rate.

Now let’s zero in on the post-pandemic expansion:

The economy was at its tightest in 2022. The Fed reacted by raising interest rates sharply, causing the yield curve to invert. The YoY change in unemployment now exceeds the inflation rate. The yield curve has just begun re-normalization with the Fed’s first rate cut.

If you go back and look at the historical record, this is typical of an economy just tipping into recession.

But when we disaggregate the two curves, some important differences appear.

First of all, as I and others have noted, the increase in the unemployment rate appears to be much more a historically high spike in new entrants to the labor force, rather than existing workers being knocked out of jobs.

Now let’s disaggregate inflation (blue in the graphs below) and unemployment (red):

In every expansion except for the two immediate post-WW2 ones, inflation has always risen significantly in the year or more before the ensuing recession. The unemployment rate follows higher with a delay, usually because the Fed has begun hiking rates. 

Importantly, during this period of increased inflation, it has almost always exceed YoY average wage gains (light blue), and always exceeded aggregate payroll gains (dark blue):

Inflation declines sharply during recessions, setting the stage for the next expansion.

Now let’s look at this disaggregation for the present expansion:

Inflation has decelerated sharply - and as of the last report, has continued to decelerate, while the unemployment rate is only modestly higher YoY. This looks much like the pattern in a number of mid-expansion corrections, most notably 1966, 1986, and 1995. In those cases inflation declined, the Fed eased up, and there were no recessions.

Now that we’ve disaggregated the Phillips curve, let’s do the same thing with the yield curve, and superimpose Fed rate moves (black):

The point here is fairly straightforward. Interest rates, especially shorter term interest rates, move close to in lockstep with Fed funds interest rates. In other words, the inversion and re-normalization of the yield curve has an awful lot to do with Fed interest rate hikes and decreases.

Now let’s superimpose consumer inflation (red) on those Fed interest rate changes (black):

Virtually 100% of the time before the pandemic, the Fed reacted to a decline in the inflation rate by lowering interest rates. One notable exception, 2006, is explained by the post-Katrina gas price spike which immediately abated. Thus the YoY CPI reading declined sharply for 12 months and then resumed its higher trajectory.

Again, here is out post-pandemic expansion:

The Fed maintained very high interest rates vis-a-vis inflation ever since mid-2023, a nearly unique situation. Which means it has a lot of room to cut now. Which means that interest rates could renormalize at lower levels fairly quickly.

Let me sum up here with some comments. I read a piece several years ago entitled “The Fed wants to make your recession forecast wrong.” There is no “free market” in Fed interest rates. Rather, the Fed is a human actor, like a dictator or monopolist, whose single human decisions, whether right or wrong, greatly impact the other markets. And as a human actor, the Fed has had the capacity to *learn* over time from past successes and failures. As I have repeated a number of times, human systems are inherently chaotic, because when you observe human behavior (like in job and consumer markets, or Presidential election polling), the humans always observe back, changing their behavior accordingly.

The Fed wants to avoid a recession. Unlike the 1960s and 1970s, over time it has tended to make interest rate cuts earlier. At present, we do have a weakening jobs market, but some of that weakness appears to be a false positive caused by the above-discussed spike in labor force participation. As measured by average real wages and aggregate real payrolls, consumers are in pretty good shape, as YoY growth in both continues to exceed the inflation rate:

If the Fed continues to move aggressively as consumer inflation (ex-fictitious shelter) remains fairly subdued, the housing market in particular should turn around. This is what we would expect if this is only a mid-cycle correction rather than the cusp of a recession.

Weekly Indicators for September 16 - 20 at Seeking Alpha

 

 - by New Deal democrat

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

The Fed rate cut had the unsurprising effect of boosting both stock prices and decreasing bond yields. The broader general trend of gradually improving activity also remains intact.

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