Weekly Indicators for November 4 - 8 at Seeking Alpha

 

 - by New Deal democrat

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

Surprisingly, corporate profits have come in relatively light in Q3. And there’s lots of noise in the coincident indicators as well.

A forecast in flux? Maybe. As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two for collating the information and presenting it to you in a coherent format.

How the Fed helped Doom the Democrats

 

 - by New Deal democrat

This is not a formal post about Tuesday’s election. But with the benefit of “revealed preference” a/k/a 20/20 hindsight, it’s pretty clear that the Fed rate hikes were an important part of why Kamala Harris and the Democrats failed.

Because we may or may not be experiencing a “soft landing” in the economy, but it came at a steep price to some important demographics.

Let me start by going back to a graph I ran a few times about 18 months ago, when just about everyone including me thought that a recession was at least fairly likely. This is the graph of the *steepness* of the Fed rate hikes:

Between March 2022 and August 2023 the Fed hiked rates by 5.25%, even in nominal terms the steepest rate hike regimen in 40 years.

Further, in “real,” inflation adjusted terms rates went from -8.3% in May 2022 to +2.0% only 13 months later:

Even now rates in real terms are 2.7% higher than one year ago (graph above norms that value to zero for easy comparison). Outside of the 1980s this is one of the highest such “real” levels in the past 60+ years, and in most of those cases it was right before recessions.

Not only is the current *level* of “real” interest rates very high, but it was a throttling that occurred very quickly, as is shown in the below graph which takes the same data as above, and measures the YoY change in the *pace* of Fed rate hikes or decreases (red line shows the same data minus shelter inflation, more on which below):

Only the Volcker rate hikes of 1980 were steeper.

In other words, in the last 2.5 years of Biden’s term, the Fed hiked rates to extremely constrictive *levels* compared with inflation, and it hiked on a much *faster* basis.

This is a recipe for a drastic slowdown in consumer behavior, and it hit one group the hardest: young people trying to buy a home, move up to a bigger home, or rent an apartment for the first time.

To wit: mortgage rates topped 7%, the highest level since the turn of the Millennium. As a result, monthly mortgage payments on equivalently priced housing nearly doubled.

To make matters worse, the price of houses (dark blue) increased nearly twice as fast as the pace of wage increases, while the cost of rent (light blue), after initially being restrained during the COVID moratorium, also rose faster than wages:

So if you are the typical demographic for a new homebuyer or renter, the Fed rate hikes killed you. And that shows up very much in housing starts and permits:

Starts declined -31.7% through July from their 2022 peak, and the less volatile permits declined -20.4% through their lows in May. Outside of the near recession of 1966 and the mid-1980s, this is the only time such levels of decline have not coincided with a recession.

And on Tuesday, the preliminary evidence is that young people took it out on the Democratic ticket, either by voting for Trump, or just staying home.

As a postscript, just on time for a new GOP Administration to arrive, the Fed is helping out by a rate-lowering regimen.

Jobless claims: back to almost completely normal and neutral

 

 - by New Deal democrat

Initial jobless claims continued their return to normalcy this week, as they increased 3,000 to 221,000. The four week moving average declined -9,750 to 227,250, which is tied for the lowest number except for two weeks in five months. Continuing claims, with the typical one week delay, rose 39,000 to 1.892 million:

As per usual, the YoY% comparisons are more important for forecasting purposes. And here, the hurricane effects have almost all disappeared. Initial claims are higher by only 2.3%, the four week moving average higher by 7.3%, and continuing claims up by 3.8%:

Adding a line (light blue) for the biweekly YoY% in claims helps show this even better. Here it is over the past year:

On a biweekly basis, claims are actually *down* -0.5%. For the last three weeks, they are higher by 3.4%. 

Next week the big hurricane effects will drop out of the four week average, and all indications are that we will be completely back to normal.

And the takeaway is that the numbers are slightly higher YoY. This is not a “positive” result, but it is completely neutral and not recessionary at all (remember: to trigger even a yellow flag I would need monthly claims to be higher by 10% YoY. For a red flag it would take two consecutive months higher by 12.5% or more).

The economically weighted ISM average indicates economy expanding nicely, but likely in latter stage of the cycle

 

 - by New Deal democrat

[I was busy doing my civic duty the past few days. I’ll have something to say about the election at some point later, but not now.]

Yesterday the ISM services report came in very strong for the second month in a row, with the headline at 56.0 and the more leading new orders subindex at 57.4:

This is important, because services are roughly 3/4’s of the economy.

To reiterate, because manufacturing is of diminishing importance to the economy, and was in deep contraction both in 2015-16 and again in 2022 without any recession occurring, I now use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.

Here are the last six months, including September, of both the manufacturing (left column) and non-manufacturing index (center column) numbers, and their monthly weighted average (right) :

MAY 48.9. 53.8. 52.5

JUN 48.5. 48.8. 48.7

JUL. 46.8. 51.4. 50.2

AUG. 47.2. 51.5  50.4

SEP. 47.2. 54.9  53.0

OCT. 46.5. 56.0  53.6

And here is the same data for the new orders components:

MAY 45.4. 54.1. 51.9

JUN. 49.3  47.3. 47.8 

JUL.  47.4. 52.4. 51.2

AUG. 44.6. 53.0. 50.9 

SEP.  46.1. 59.4. 56.1 

OCT. 47.1. 57.4. 54.8

The three month economically weighted headline number is 52.4, and for the more leading new orders index is 54.0.

The gist of this is pretty clear: while goods production is in contraction, services provision is expanding strongly. The expansion is in good shape for the immediate future. If there is a caution here, it is that as expansions age, goods production tends to wane while services continue to grow. This suggests pretty strongly that, even if no recession is close at hand, the expansion is likely in its latter half.