Weekly Indicators for November 11 - 15 at Seeking Alpha

 

 - by New Deal democrat

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

More the recent ‘same’ this week: short term and coincident indicators are a little noisy, but continue to say the economic OK. Meanwhile the longer leading indicators are mixed and weighing on future growth.

As usual, clicking over and reading will bring you up to the virtual moment on the economic situation, and reward me with a little contribution towards my lunch money for collating and organizing it for you.

Production turns more negative

 

 - by New Deal democrat

Industrial and manufacturing production slid further in October, by -0.3% and -0.5% respectively. They are also down respectively -1.2% and -1.8% from their late 2022 highs:

It’s a good thing I suppose that manufacturing is no longer such an important part of the American economy, because as the below graph of the past 50 years shows, before 2001 and especially before the Great Recession, and decline YoY *always* coincided with or at least immediately heralded a recession:

But since the accession of China to regular trading status, even downturns of about -5% or more, as in 2015-16 and 2018-19 have not necessarily meant recession.

And as this close-up of the post pandemic record show, on a YoY basis production is only down about -1%:

 So, to reiterate what I wrote earlier this morning, it’s a good thing that consumption particularly of services continues to be positive.

Real retail sales jump nicely, but we’re not out of the woods on consumption just yet

 

 - by New Deal democrat

Let me start with my usual reminder that real retail sales is one of my favorite economic indicators, because it tells us so much about the state of the consumer, and since consumption leads employment, it is a short leading indicator for that as well.

In October retail sales rose 0.4% on a nominal basis. After adjusting for inflation, they rose 0.2%. There were also important positive revisions to September, which increased from a 0.4% gain to a 0.8% gain. The below graph norms both real retail sales (dark blue) and the similar measure of real personal consumption of goods (light blue) to 100 as of just before the pandemic:

Since the end of the pandemic stimulus in spring 2022, real retail sales had been trending generally flat to slightly declining, while real personal consumption expenditures on goods continued to increase. In the last four months, however, real retail sales appear to have broken out to the upside, in accord with the positive trend in real spending on goods, which is very positive.

An important reason why this breakout is so positive is that, on a YoY basis, real retail sales had been negative almost all this year. And over the past 75 years, a negative YoY comparison has usually meant a recession followed shortly (although that wasn’t the case in 2022 and 2023). But with this month’s data, YoY real sales are up 0.3%:

I had been increasingly concerned about the YoY trend in sales over the previous four months. For example, three months I concluded by saying that “the longer real retail sales go without posting a positive YoY number, the more concerned I will be.” The October number plus the September revision takes some of the pressure off.

Finally, real sales are a good if noisy short leading indicator for employment, as shown in the historical pre-pandemic graph below:

Despite the recent uptrend in real sales, since consumption leads employment and a 0.3% YoY gain is still very weak, this continues to forecast that on a YoY basis, job gains are likely to continue to decelerate. As you probably recall, the very poor October jobs report was distorted by hurricane impacts. Most of these will probably be reversed in the November report. But the three month trend of reports in the range of 75,000 to 175,000 appears likely. Here is the post-pandemic close-up:

Obviously this was a very good report. But we’re not completely out of the woods yet.

Jobless claims complete their reversion to pre-hurricane-disruptions trend

 

 - by New Deal democrat

Initial claims have now completely reverted to trend after their recent hurricane-induced blip.

Initial claims rose 3,000 for the week to 217,000, while the four week moving average decreased -5,750 to 221,000. With the typical one week delay, continuing claims declined -11,000 to 1.873 million:

On the more important YoY basis, initial claims were down -4.8% YoY, while the four week average was up +1.3%. Continuing claims were up 3.7%:

As indicated in the first sentence above, this is a complete return to the YoY positive to neutral trend before Hurricanes Helene and Milton hit. 

With the first two weeks of November in, let’s take a look at what this has to say about the near future trend for the monthly unemployment rate. Note this week I am presenting the YoY% changes in all three:

Since the unemployment rate was 3.8% one year ago, initial and continuing claims are forecasting roughly a 5% increase in the unemployment rate; i.e., 3.8% * 1.005 = roughly 4.0%. Anything significantly above that is likely due to the continued effects of the relative ability of new immigrants entering the job market to find their first employment.

October consumer inflation firms, driven - as usual - by shelter

 

 - by New Deal democrat



Today’s CPI report for October generally showed stable monthly increases, but slight increases in YoY comparisons. But as usual, it was almost all about the usual culprit of shelter, as more fully parsed below; to wit:

 - Headline CPI increased 0.2% for the month, the fourth month in a row of such an increase. The YoY% change slightly accelerated to 2.6%, just above last month’s 2.4% which was the best showing since February of 2021. 

 - On a 3 month annualized basis, prices are increasing 2.4%. On a 6 month annualized basis, they are only increasing 1.4%. 

 - energy inflation remains non-existent, with prices unchanged for the month and down -4.8% YoY.

-  excluding shelter, prices also increased 0.2%, and were up 1.3% YoY, the 18th month in a row the YoY change has been below 2.5%.

 - shelter inflation, after being up only 0.2% one month ago, increased 0.4% again this month, which cause the YoY% increase to rise 0.1% from 4.8%, the lowest YoY increase since February 2022, to 4.9%.

- core inflation remained slightly elevated, up 0.3% for the month and 3.3% YoY, the same YoY increase as last month.

Let’s break this down graphically to better show the trends.

Here are headline (blue), core (red), and ex-shelter (gold) inflation YoY:

Yet again, the only reason for the Fed not to treat inflation as well within its target zone is shelter.

If there is a fly in the ointment, it is that the deceleration in shelter inflation (blue in the graph below) appears to be slowing down. Here is the update vs. the YoY% change in the FHFA Index YoY (red):

Now let’s take a look at the former and remaining problem children. 

The former problem child of new (dark blue) vehicle prices were unchanged this month and are down -1.3% YoY. Used (light blue) vehicle prices rose 2.7% and are down   -3.4% YoY (shown as the change since right before the pandemic, below). It appears that the decline in used vehicle prices is over. I also show average hourly nonsupervisory wages (red) for comparison, showing that wage growth has outpaced new vehicle prices; although with this month’s increase it is the same as used vehicle prices:

As to the remaining problem children; first, electricity (gold) increased 1.2% for the month, and accelerated YoY to 4.5%. Food away from home (blue) increased 0.2% again, and is up 3.8% YoY. Finally, transportation services including vehicle maintenance, repair, and insurance (red) increased 0.4%, and is up 8.2% YoY:

Although I haven’t shown it above, food at home only increased 0.1% monthly, and is up 1.1% YoY. So much for grocery price inflation! Also, as I have previously pointed out, transportation services inflation is a typical delayed reaction to the previous big increase in vehicle prices. The one issue I have no insight into is why electricity prices are rising so much.

Also, medical care services, which increased 0.7% last month and was up 3.6% YoY, this month increased 0.4%, causing the YoY comparison to decrease to 3.8% YoY:

Finally, the CPI release allows me to update several important wage metrics.

First, real average hourly wages increased 0.2% for the month, and are up 1.5% YoY:

Second, real aggregate nonsupervisory payrolls declined -0.2%:

A one month decline in this metric is not terribly concerning, especially considering that nominally aggregate payrolls were severely impacted by the hurricanes last month. Remember that there has *never* been a recession without real aggregate payrolls turning down first.

In sum, this month’s inflation report was a little “hotter” than last month’s, and the renewed increase in shelter is unwelcome; but in the bigger scheme of things, it was one of the more tame reports in the last three years, and does not necessarily suggest any change in the generally decelerating trend of inflation. As usual, it is almost *all* about shelter.

Incomes, immigration, and the election

 

 - by New Deal democrat

On Friday I wrote about how the Fed likely contributed, via hurting aspiring homeowners, to the outcome of the Election last week. Today I want to take a look at another issue - wages.

As it happens, while I was writing this Paul Krugman put up a graph which he says explains the Election results:

This is a variation of a graph I run versions of every month after we get the inflation data, which is real hourly and weekly wages:

As you can see, both are significantly higher than they were in 2019 before the pandemic. After declining in 2022 (in part due to $5/gas), real average hourly wages are close to record highs. On the other hand, real weekly wages are lower than they were throughout most of 2020 and 2021.

But now let’s take a look at the monthly estimate of real median household income through September via Motio Research:

This really puts the difference between 2016-20 and 2020-24 into perspective. Real median household income rose consistently between 2016 and the onset of the pandemic. But for the entire three year period of 2021-23, real median household income went nowhere. In fact it was typically somewhat lower than late 2019. Only in the last few months of this year did it finally break out to the upside.

Puts a different gloss on why so many people might remember the former Administration more kindly than that of Biden, doesn’t it?

Further, another important way in which the signal is more complicated is that those who switched jobs since the beginning of the pandemic have consistently seen higher wage growth than those who stayed in the same jobs, via the Atlanta Fed’s wage growth tracker:

While the Atlanta Fed does not have a cumulative measure, I wanted to take a look at how job stayers had fared since the 2020 election compared with job switchers. It turns out that the average wage growth for those who stayed on the same job in the past four years was only 20.1%, while the (hypothetical) wage growth for a person who switched jobs every year was 25.5%. Since inflation over that time cumulatively was 20.6%:

this means - most importantly - that the *average* wage growth for a person who stayed in the same job during the entirety of the Biden Administration was a little *less* than inflation. And because that is just the median, that means that a very significant percentage of people - perphaps 25%, perhaps 40% - saw wage growth *significantly* below inflation.

I encountered several such people in the week before the Election, and even though they had voted Democratic in the past, they were seriously considering voting for Trump this year.

This ties in with one other hot button issue: immigration.

The CBO has estimated that an additional 5-6 million immigrants over the average have entered the U.S. between 2022 and this year, a huge jump over the typical number before the pandemic:

These immigrants subsequently became new entrants to the job market, which presumably made their experience more like job switchers than job stayers. By contrast, it is probable that native born older workers skewed in the direction of job stayers. When the situation is looked at that way, the potency of the immigration issue in this Election makes some sense, given the anger by some workers who feel that immigrants are making out better than them.

As Dan Guild wrote this morning, “if this election had been held nine months later and it became clear inflation was tamed, consumer sentiment would have reached the high 80s (even considering the partisan split), and Biden would have been close to 50% approval. This was always a race against time.”

And the Democrats lost that race.

On Remembrance Day

 

 - by New Deal democrat

Today in the US is officially Veterans Day, in which we salute the service of all veterans. But it started - and still continues in some countries - as Remembrance Day, a somber memorial to all those who were killed in World War 1, which ended on November 11, 1918. That is more how today feels to me now.

In behavioral economics, Hymen Minsky eludicated the brilliant theory that “stability breeds instability.” Basically, the more successful the guardrails erected to protect an economic system, the more players will try to take advantage of testing those guardrails until eventually, they give way catastrophically.

World War 1 was a demonstration that “stability breeds instability” applies to political systems as well.

In 1914 Europe had experienced almost a full century of relative peace, following the end of the Napoleonic wars. The only major conflict on the continent during that time was the Franco-Prussian war, which lasted only 6 months. During that period of stability Europe continued to make progress in science and industrialization, probably reaching the zenith of its relative global power as the 20th century dawned.

Human nature being what it is, as time progressed and the wars were forgotten, the monarchs made ever more aggressive military noises, “pushing the envelope” of the European system, ultimately rooting for its collapse it what was sure to be a brief triumphant march to victory for [insert empire’s name here].

Not so much.

In the aftermath of World War 2, primarily but not exclusively under the leadership of the US, a new global political and economic system was erected, including the United Nations, NATO, the European Common Market (now the EU), and US allies Japan and South Korea in Asia. 

The Cold War between the USSR and US was conducted within this framework. There were some terrible regional conflicts, e.g., the Korean, Vietnam, and Afghanistan wars, but these were contained. With the exception of the Cuban missile crisis, there never was a direct military superpower confrontation. Even things like the Berlin airlift was carefully scripted to avoid escalation.

World War 2 ended almost 80 years ago. A majority of people alive today do not remember Korea, Vietnam, the first Gulf War, or even the collapse of communism in 1989-91.

And in places like Ukraine and Taiwan, we see the escalating “pushing of the envelope.” Meanwhile the US has just elected a President who has made it clear he would like the US to pull out of NATO. 

I firmly believe that we are witnessing the final collapse of the post-WW2 order.

And so today, Remembrance Day, I have thought about Vera Brittain’s sad memoir of World War 1, “Testament of Youth.” 

In the most recent TV adaptation, the first scene is Brittain swimming in a pond with her brother and three of his school chums. She falls in love with one of them, Roland, and by the time he leaves for the front they are fiancées.

And one after another, all 4 die.

On November 11, 1918, Brittain, now a nurse, walks zombielike down a London street as around her people rejoice at 11 a.m., the precise time of the Armistice. The adaptation concludes with her once again going for a swim in that same pond, all alone; her brother, her fiancée, and the two other young men all dead and gone unto eternity.

A few days ago there was a comic strip, maybe xkcd, that consisted of two panels, the first of which said “Those who do not remember their history are doomed to repeat it.” 

The second panel says, “And those who *do* remember their history are doomed to watch helplessly as others repeat it.”

On this Remembrance Day I somberly contemplate the end of the post-WW2 order and the human price that will be paid.