Weekly Indicators for March 3 - 7 at Seeking Alpha

 

 - by New Deal democrat

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

The malign and moronic “policies” of the 2nd T—-p Administration so far have driven Economic Policy Uncertain to all time record highs:

But despite that, the rumblings under the surface of the data have been quite minor so far. There are changes in the Treasury yield curve, stock market, jobless claims, commodity prices, and the US$. But aside from the first two, the moves have not been significant, and haven’t been enough to move the overall needle.

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 couple of pennies for organizing it all and presenting it to you.

February jobs report: weak employment gains, but some 3+ year highs in unemployment metrics

 

 - by New Deal democrat

My question over the past year has been whether “decleration” would turn into “deterioration.” For a “soft landing,” deceleration would need to end, and the numbers stabilize, vs. continuing to deteriorate towards an actual downturn. 

The verdict this month was mixed. On the employment side, YoY job gains have been relatively stable for the past six months, as has the three month average. But on the unemployment side, there were a number of poor readings at 3+ year highs. Additionally, real aggregate payroll growth shows continuing signs of a marked slowdown.

Below is my in depth synopsis.

HEADLINES:

• 151,000 jobs added. Private sector jobs increased 140,000. Government jobs increased by 11,000. Noteworthily, federal jobs decreased -11,000. The three month average was an increase of +200,000.
• The pattern of downward revisions to previous months, which was broken last month, resumed ever so slightly this month. December was revised upward by 16,000, while January was revised downward  by -18,000, for a net decrease of -2,000.
• The alternate, and more volatile measure in the household report, showed a decrease of -588,000 jobs. On a YoY basis, this series increased 2,294,000 jobs, or an average of 191,000 monthly.
• The U3 unemployment rate rose 0.1% to 4.1%. Since the three month average is 4.067% vs. a low of 3.733% for the three month average in the past 12 months, or an increase of less than 0.4%, this means the “Sahm rule” remains off the table. 
• The U6 underemployment rate rose sharply, by 0.5%, to 8.0%, its highest level since October 2021, and 1.6% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now also rose a sharp 414,000 to 5.893 million, the highest number in over three years, vs. its post-pandemic low of 4.925 million in early 2023.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. This month they were generally positive:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.2 hours to 40.8 hours, This remains down -0.7 hours from its February 2022 peak of 41.5 hours, and is tied with last May and December for the highest reading over the past 12 months.

• Manufacturing jobs increased 10,000. Nevertheless this series is firmly in decline, as the three month average is the lowest since mid year 2022.
• Within that sector, motor vehicle manufacturing jobs rose 8,900.
• Truck driving decreased -1,900.
• Construction jobs increased another 19,000.
• Residential construction jobs, which are even more leading, rose by a mere 100 to another new post-pandemic high.
• Goods producing jobs as a whole increased 34,000, and made their first post-pandemic new high since last September. This is especially important, because these typically decline before any recession occurs. On a YoY% basis, these jobs are only up 0.4%. Nevertheless, only during the 1985-86 slowdown and for 3 months during the 1990s and 2000s have manufacturing jobs had this anemic a YoY increase without a recession occurring. 

• Temporary jobs, which have declined by over -550,000 since late 2022, declined by another -12,300. But this month remained above their October 2024 low, so this may still suggest that the bottom in this metric is in. 
• the number of people unemployed for 5 weeks or fewer rose 47,000 to 2,337,000, vs. its 12 month high of 2,465,000 last August.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.09, or +0.3%, to $30.89, for a YoY gain of +4.1%, the highest in three months, but right in line with its average YoY% gain since last April. Importantly, this continues to be well above the 2.9% YoY inflation rate as of 3.0% last month.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers rose 0.2%, and is equal to its post-pandemic peak set in December This measure is also up 1.1% YoY, right in line with its average for the past 12 months. 

• The index of aggregate payrolls for non-managerial workers rose 0.4%, but is up 5.1% YoY, slightly above its average YoY rate in the past 12 months. On the other hand - importantly - adjusted for inflation this series will probably only be up 0.3% +/-0.1% since last September, indicating at least a slowdown in the ability of households to increase consumption.

Other significant data:

• Professional and business employment declined -2,000. These tend to be well-paying jobs. This series has been down YoY since September 2023, and is now -0.4% YoY, which in the past 80+ years - until now - has almost *always* meant recession. 
• The employment population ratio declined -0.2% to 59.9%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate decreased -0.2% to 62.4%, vs. 63.4% in February 2020.

SUMMARY

This was a mixed but generally weak report. While the number of net jobs increased, and also increased in most of the leading sectors, most importantly at present in residential building construction and goods production as a whole, the numbers were not strong. The big weakness was on the unemployment side, where the unemployment rate, underemployment rate, number of newly unemployed, and those not in the labor force who want a job all increased sharply. The employment to population ratio and the labor force participation rate also declined.

Hours worked rose, but not by much; and both hourly wages and aggregate payrolls likely did little better than keeping even with inflation, although we won’t know that for sure until next week. Most concerning is the likely slowdown in aggregate real payrolls in the past five months.It isn’t negative, but it could indicate that a peak is forming.

So again, the verdict is “positive but weak.”

Jobless claims decline back into neutral territory

 

 - by New Deal democrat

After last week’s big jump, this week initial jobless claims declined -21,000 to 221,000. The four week moving average increased 250 to 224,250. With the typical one week delay, continuing claims rose 42,000 to 1.897 million:

On the more important YoY basis for forecasting purposes, initial claims were higher by 5.2%, the four week moving average was up 7.6%, and continuing claims were up 5.7%:

After last week, I think all observers were waiting to see if Federal employee layoffs would drive this series further into negative territory. This week, at least, they did not. These are all “neutral” readings, suggesting a somewhat sluggish but still growing economy.

Finally, since this week’s jobless claims feed into the March rather than February average, they do not affect the latest monthly average of claims. Thus the leading indicator for the unemployment rate in tomorrow’s jobs report remains the same as last week:

Which means that the conclusion is also the same as last week, to wit:   On a monthly basis initial claims are up 7.0% YoY, and initial + continuing claims together are up 10.4%. Since one year ago the unemployment rate was 3.8%, for the first time in many months this suggests upward pressure on the unemployment rate, since 3.8%* 1.07 and *1.10 indicates an unemployment rate of 4.1% or 4.2%, vs. last month’s 4.0%.

Economically weighted ISM indexes for February indicate continued slow growth

 

 - by New Deal democrat

Because manufacturing is now of much less importance to the economy than in the decades before the Millennium, I now use a weighted average of the ISM services index (75%) as well as manufacturing (25%) as the primary forecasting tool. This economically weighted average, especially over a three month period, has been much more accurate since 2000.

In February the expansionary readings in the ISM services report continued, with the total index coming in at 53.5, and the more leading new orders subindex at 52.2. These aren’t strong, but they are expansionary. The three month weighted average of each was 53.4 and 52.6 respectively.

Here is a graph of both the headline number (blue) and the new orders subindex (gray) for the past three years:

It is interesting that the new orders component appears to be in a continued slight downtrend, but there is no indication that it will be below 50.0 and thus indicating contraction soon.

More importantly, since the three month total average in the manufacturing index was 50.1, and for the new orders subindex 51.9, that means the three month economically weighted average for the manufacturing and non-manufacturing indexees is 52.6 for the headline, and 52.4 for new orders.

In short, the economically weighted average of the two ISM indexes continues to forecast growth, if at somewhat a slow pace, in the months ahead.

Important changes in trend in the bond and stock markets, and a note on GDP estimates as well

 

 - by New Deal democrat

There’s no important economic data today, so this is a good time to write about several important developments in the stock and bond markets.

First of all, as many of you may already know, a portion of the US Treasury yield curve, between the 10 year and 3 month Treasuries, re-inverted last week. Here’s what that looks like (dark blue), plus the similar pattern as to the Fed funds rate (light blue):

I put up a post over at Seeking Alpha about how this is not uncommon, and what it means going forward (hint: not so good).

Secondly, especially with the Administration’s latest geopolitical and economic moves, there’s been a little excitement over at the stock market as well. Below is a graph of the S&P 500 Index normed to 100 as of November 1, 2023. I’ve put a line through the level as of November 6, one day after the Election:

As you can see, in the year before the Election, stock prices had increased nearly 40%. That is a huge bull move. While there was a 4% spurt higher on the day after the Election, and several new all-time highs, most recently on February 19, the overall trend in the four months since Election Day has been flat. In fact, yesterday during the day they briefly made a new 3 month low. Should such a low be made at the close of the trading day, that would break the long term uptrend.

UPDATE: The S&P 500 did tumble to a new 3+ month low on the close today, at 5778.15. This breaks the uptrend of the past two years.

There’s also been quite the hubbub in the last few days - particularly by political activists - about the negative GDP prints in the Atlanta Fed’s “nowcast” series, as below:

I suggest taking this with more than a few grains of salt.

The Atlanta Fed’s nowcast of quarterly GDP is an ongoing estimate that changes with each new data point, and can vary widely between the beginning of the Quarter and the end. For sxample, here is the nowcast’s record from Q3 2022, at a time when many observers were predicting a recession:

Note that at the end of August, with only one month to go in the Quarter, it was “nowcasting” a GDP print of nearly 3%. Three weeks later it was barely above 0%. 

What actually happened? It was first reported as up 2.6%, and after many revisions, it is presently reported to have been 2.7%.

Even when the nowcast gets it “right,” as it did last Quarter, there is still a lot of variation in the estimate over the course of the three months:

The bottom line is that it would not be surprising at all if the Atlanta Fed’s nowcast rebounded in the next month just as sharply as it declilned in the last week. 

The most up to the moment forecasting tool I have is the “quick and dirty” model using the YoY% changes in stock prices and (inverted) initial jobless claims:

While the four week average of jobless claims is higher - but by less than the 10% necessary for me even to consider it a “yellow flag,” even after their 5% sell-off, stock prices are still higher by 14% YoY. The upturn in claims, and downturn in stocks, must get considerably worse for me to issue a “recession watch,” let alone a “warning.”

It is important to note that sometimes the main factors affecting the economy are intrinsic to it, like wage gains or commodity prices. But there are also individual (or small group of) actors with singular economic power, and the decisions they make can have immediate or nearly immediate impacts on the situation. That was the case with the OPEC price hikes of the 1970s, and Paul Volcker’s single-handed ratcheting up of interest rates that caused the 1981 “double dip” recession. 

The new Administration is behaving like the proverbial “bull in a china shop,” in a way it did not in 2017, because at that time T—-p did not know how to use the levers of economic power available to the President. This time around he does, and is ignoring Congress, and previous laws and appropriations passed by it, right and left. Many voters in 2024 probably expected that a 2nd T—-p Administration would look like the 1st, which was a traditional GOP Administration when it came to the economy. Obviously that is not going to be the case.

I am going to continue to look at the data (which hopefully will remain reliable for a long enough time), and not go further than what it tells me in terms of forecasting the near term trend going forward in the economy.

ISM manufacturing index and construction spending report paint a picture of a goods producing sector that is no longer expanding

 

 - by New Deal democrat

Although manufacturing is of diminishing importance to the economy, (it was in deep contraction both in 2015-16 and again in 2022 without any recession), the ISM manufacturing index remains an important indicator with a 75+ year history of accurately describing that sector and forecasting it over the short term. 

Any number below 50 indicates contraction. The ISM indicates that the number must be 42.5 or less to signal recession. I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.

The last few months may have an additional confounding factor in that after the Election, most businesses likely figured that the new Administration would be laying more tariffs, and may well have been in a rush to get their orders in ahead of time.

This probably figured into the fact that the ISM report for January was the strongest since the second half of 2022. And now in February the Index has fallen back. Specifically, the total index fell -0.6 to 50.3, and the more leading new orders subindex fell from its very strong January reading of 55.1 back into contraction at 48.6, the lowest reading in four months.

Here is a look at both the total index and new orders subindex since the Great Recession:

Including this month, here are the last six months of both the headline (left column) and new orders (right) numbers:

SEP 47.2. 46.1

OCT 46.5. 47.1

NOV  48.4. 50.4

DEC 49.2. 52.1

JAN 50.9  55.1

FEB  50.3  48.6

The current three month average for the total index is 50.3, and for the new orders subindex 51.9.

The surge and then retreat in new orders in particular certainly looks like front-running potential tariffs. The regional Fed manufacturing reports will take on added significance this month to see if they confirm whether that is the case.

For the economy as a whole, the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. Since the latter has been very positive in the past few months, the combined indexes have suggest continued growth in the months ahead. The non-manufacturing index will be reported on Wednesday.

Meanwhile, construction spending declined as well in the latest report, which was for January. Total spending fell -0.2% and residential spending fell -0.5%. Both of these have been close to flat in the past twelve months:

After declining slightly during the first nine months of 2024, the prices of construction materials have increased in the past few months:

Finally, the boom in manufacturing construction that followed the Inflation Reduction Act has also flattened:

Construction spending isn’t declining in any significant way, but it is no longer increasing either.

Together, this morning’s ISM and construction spending reports paint the picture of the goods producing sector of the economy that is not contracting, but is also no longer expanding.