Housing permits and starts still rangebound, but with units under construction down almost -20%, is the last shoe finally dropping?

 

 - by New Deal democrat

In April total permits (dark blue in the graph below) declined -69,000 on an annualized basis to 1.412 million, while the less volatile single family permits (red, right scale) number declined -50,000 to 922,000. The slightly lagging and much more volatile starts number (gray, narrow) rose 22,000 to 1.361 million annualized:

The same data on a YoY basis demonstrates how it has been rangebound:

This is of a piece - and largely caused by - mortgage rates (YoY change, inverted, *10 in the graph below), which have also been rangebound between roughly 6% - 7%:

You may recall several years ago, even though starts and permits had declined sharply, the number of housing units under construction - the closest proxy for the actual economic impact of new housing construction - continued to levitate at all-time record levels. But ultimately they declined sharply as well, Once that happened, ever since the beginning of 2024, I have paid ever more attention to how deeply it would decline. Typically it has taken about a -15% decline to be consistent with a recession. Once that happens, the last show to drop is the number of employees engaged in residential building construction (red, right scale in the graph below). In April, housing units under construction dropped another -9,000 to 1.382 million annualized, a -19.6% decline from their October 2022 peak, while residential construction employment finally did decline as well, if only by -700:

Last month I wrote that “Since the significant downturn in units under construction began about 18 months ago, I suspect the turn in employment will take place within the next few months.“ I suspect April did indeed mark the turn.

To better show the trend, here is the same data on a YoY% change basis, together with manufacturing employment (gray):

With the exception of one month in 1995, any time both housing units under construction have been joined by residential construction employment as YoY negative, a recession has followed within 12-18 months. When manufacturing employment is also down, recession has been inevitable.

If April did indeed mark the turning point for residential construction employment, a loss of only -7,000 jobs in that sector over the next six months would be enough to set of recession alarm bells.

Industrial and manufacturing production suggest front-running production has peaked

 - by New Deal democrat

The final datapoint for today is industrial production, including its important manufacturing component. 

Last month I wrote that “I suspect the big increases in February and March in manufacturing, like this morning’s retail sales numbers, were about front-running T—-p’s tariffs. Which means that like retail sales, production might have been pulled forward from the next few months, which may lead to whipsaw declines.”

That probably started to happen in April, as total production (blue) was unchanged, while manufacturing production (red) declined -0.4%:

But improvement continues to show on a YoY basis:

This data was partially supported by the first two regional Fed manufacturing reports for May, from New York and Philadelphia, which came in at -9.2 and -4.0, respectively. But the new orders components of both the NY and Philadelphia surveys improved, however, to +7.0 and +7.5, respectively - which were sharp improvements from -8.8 and -27.2 last month.

I think it is safe to suggest that the front-running of tariffs on the production side may have peaked; but on the other hand there is no significant evidence of contraction beyond what may be monthly noise. The expansion continues, for now.

Real retail sales turn down in April, but continue to reflect consumers’ front-running of tariffs

 

 - by New Deal democrat

Next up in today’s slew of data is retail sales. This is one of the most important indicators I look at, because it tells us so much about consumers, and since consumption leads employment, it gives us information about the trend in that as well.

In April, nominally retail sales rose 0.1%. But because consumer prices rose 0.2%, real retail sales declined after rounding by -0.2% (blue in the graphs below). In recent months I have also been calculated real sales excluding shelter, because that has been distorting the CPI. This month the result was the same: real retail sales ex-shelter were down -0.2% (gold). In the below graph I also show real personal consumption expenditures for goods (red), which tends to track real retail sales well, but won’t be reported for several more weeks:

With rare exceptions - one of which was in 2023-24 - when real retail sales are negative YoY, a recession has followed shortly. In the past 12 months, real retail sales YoY have been positive, and was so again in April, up 2.8%. Excluding shelter, real retail sales were up 3.7%:

These are strong positive readings, and as so much I have reported on in the past few weeks, almost certainly have been affected by consumers front-running price increases and shortages anticipated from tariffpalooza.

Finally, let’s compare the YoY% changes with their potential effects on employment (red):

The good news is that these imply that the YoY% change in employment should hold steady or even improve a little bit in the next several months. Given that all but one month last spring and summer shoeed under 150,000 gains in employment, this implies job gains in the 150,000-200,000 range.

Jobless claims: more of the same

 

 - by New Deal democrat

After a long data drought, there are many releases today. I’ll start with jobless claims.

Initial claims were unchanged at 229,000, while the four week moving average rose 2,250 to 230,500. With the typical one week delay, continuing claims rose 9,000 to 1.881 million:

On the YoY% basis more important for forecasting purposes, initial claims were up 3.2%, the four week average up 6.1%, and continuing claims up 5.1%:

These YoY numbers are in line with what we have been seeing for the past eight months. They imply a relatively weak but expanding economy.

Finally, let’s take our first look at what this might imply for the unemployment rate in the next several months:

There is no upward pressure from either initial or continuing jobless claims, implying the unemployment rate will stay in the 4.1%-4.2% range.

Average and aggregate nonsupervisory real April wages continued to fuel the consumer

 

 - by New Deal democrat

Now that we have April’s consumer inflation data, let’s update real wages for average American families.

In April average hourly wages for nonsupervisory employees increased 0.3%, and aggregate payrolls for nonsupervisory employees increased 0.4%. Since CPI increased 0.2%, in real terms wages (light blue) increased 0.1% and aggregate payrolls (dark blue) increased 0.2%:

In the case of payrolls, this was a new all-time high. In the case of wages, it was an all-time high excluding April and May 2020, which were distorted by layoffs that concentrated on low wage service workers.

Here are the same metrics as YoY% changes:

Real hourly wages are up 1.7%, while real aggregate payrolls are up over 3%. 

The bottom line is that in April ordinary American consumers had more to spend in real terms, which is good for confidence and also means they had more of an ability to front-run tariff impacts by purchasing goods in advance.

In preparing this post, I wondered how much it was a feature of earlier recessions that low wage employees bore te brunt of layoffs. So the below two graphs compare real average hourly wages (light blue) and real aggregate nonsupervisory payrolls (dark blue) since the 1960s.

Looking in reverse chronological order, we see that low wage workers appear to have borne the brunt of recession layoffs in both the 2001 and 2008 recessions as well:

But in the 1970s through 1991, both aggregate real payrolls and average real hourly wages moved more or less in tandem:

Note by the way that over time aggregate payrolls increase more than wages, because of populations and labor force increases. In other words, if real wages are unchanged, but more people are earning those wages, then the aggregate goes up while the average does not. And when we are talking about whether the economy as a whole is improving or contracting, the aggregate amount is more important.

In any event, the above suggests that those earlier recessions hit the spectrum of wage earners more equally; but it is also possible that it is not a coincidence that this earlier period is when women entered the workforce in huge numbers, so that recessions exacerbated the securlar downtrend in real wages that lasted until women were fully absorbed into the labor force by around 1995.

In any event, the news for April suggests that American consumers are not ready to roll over into a cautious recessionary ball.

April CPI: the second victorious report in a row

 

 - by New Deal democrat

Last month, I wrote that the March CPI report was the one we had been waiting for for the past three years. April’s was the second one in a row.

To cut to the chase, there were no major components besides shelter which qualified as “problem children,” i.e., sectors with 4.0% YoY inflation or more, and these were minor components: meat, motor vehicle repairs and insurance, and gas utility service. Even eggs no longer qualified. In the aggregate, consumer prices ex-shelter were once again totally somnolent.

Here’s my more detailed look.

First, here are the headline (blue), core (red), and ex-shelter (gold) m/m numbers m/m for the past two years:

For prices ex-shelter, which rose 0.2% last month, only May and June of last year, in addition to one month ago, were comparably low. Headline and core inflation, both also up 0.2% for the month, remain low for the last 24 months, but not totally sanguine.

Here is the same data YoY:

On a YoY basis, headline prices were up 2.3%, the lowest since February 2021. Core prices were up 2.8%, tied with last month for the lowest since November 2021, and CPI less shelter was up 1.4%, the lowest since last October.

The recalcitrant sector of shelter increased 0.3%, tied for the 2nd lowest monthly increase in the past 2.5 years. Breaking shelter down further, rent increased 0.3% for the month, and owner’s equivalent rent increased 0.4%, the same as in March. These were all slightly above average for the past 12 months, but all slightly lower, by less than -0.1%, than last April:

On a YoY basis, the increase of shelter at +4.0% was the lowest in almost 3.5 years, as was rent. Owners equivalent rent has been even more recalcitrant, at 4.3%, but is still at a 3 year low on a YoY basis:

For comparison, here is the YoY change in repeat home sales in the FHFA index vs. OER:

I continue to expect slow disinflation winding up somewhere around the 3.5% range within the next year.

The even more lagging problem child, transportation services (blue in the graph below), mainly motor vehicle insurance and repairs, increased 0.1% for the month, after decreasing -0.7% in March. On a YoY basis it was up 2.5%, the best reading in 4 years:

This deceleration has been driven mainly by a decline in airfares. Unfortunately FRED does not break out motor vehicle insurance, but they increased 0.6% for the month and 6.4% YoY, while the the cost of repairs (red above) increased 0.7% and 5.6%, respectively.

Further, the former problem children of both new and used vehicle prices gave further evidence that they appear to have nearly completed their normalization process. New car prices were unchanged for the month and up only 0.3% YoY, while used car prices declined -0.5% in April after a -0.7% decline in March, and are only up 1.5% YoY:

Finally, although energy prices rose 0.7% for the month, they are down  -3.5% YoY:

As indicated in the intro, the only other remaining problem children are gas utilities, up 15.7% YoY, and meats and poultry up 7.0% YoY. Even eggs declined -12.7% for the month.

  

All is not rosy, since grocery prices for meats and eggs are an important basic group. But they are a very small share of total prices. The only significant problem children are either lagging (shelter vs. home prices; motor vehicle repairs vs. new vehicle prices), and even more lagging (motor vehicle insurance vs. repair costs). Indeed, ex-shelter consumer inflation has not even reached 2.5% in almost 3 years.

This was another good report which ought to allow the Fed to declare victory, if it chose to.

Measures of median wage growth show why consumers have still been able to outpace tariff increases

 

 - by New Deal democrat

We’re still in a new data drought. CPI gets released tomorrow, and then a slew of data on Thursday. In the meantime there is one more data point that helps explain why consumers are still powering the economy forward.

The Atlanta Fed maintains a “wage tracker” that measures wage growth, most importantly sliced between “job stayers” and “job leavers.” In general people switch jobs for better wages so unsurprisingly the latter make out better than the former, who take whatever their current employer gives them.

On of the important reasons why many people were so down on the economy last year is that outrunning 20% inflation by 1% is far less attractive than outrunning 3% inflation by 1%, which a recent Fed study reinforced. Further, job stayers typically didn’t outrun inflation at all! It was job switchers who came out ahead.

Well, the Atlanta Fed updated their data a couple of weeks ago. It showed that on a three month average basis, job switchers’ wages were growing at a 4.3% annual rate, which job stayers’ wages were actually growing slightly better, at a 4.4% annual rate. The below graph shows the historical basis by subtracting the current figures so that they show at the 0 line:

Although wage growth has slowed considerably from its torrid days of 2022 and 2023, on a historical basis job switchers are still seeing wage growth better than about 3/4’s of the time between the turn of the Millennium and the pandemic. Job stayers are making out better than at *any time* between 2001 and the pandemic. So while I read some commentary last week about how wages are growing at a much slower rate than recently, they are still growing at a historically high rate.

But how does that play out in “real” terms? In the below graph I add on the YoY% growth in CPI (red) for comparison:

In the decade between 2004 and 2014, wages grew barely more than inflation for either group. One reason the first T—-p term may be remembered fondly by some in economic terms is that wages substantially outperformed inflation from 2015 through 2019.

Now let me take the same data focused in on the post-pandemic era:

In 2021 and 2022, neither job stayers nor switchers were able to keep up with inflation. By the end of 2022, job switchers started pulling ahead, but job stayers did not do so until four months later. Since 2023, wages for both groups have consistently grown more than inflation by about 2%-3%.

This has been giving consumers a lot more leeway to spend on stuff, up to and including now.

Finally, here are a couple of median, rather than average, wage metrics adjusted for consumer inflation:

One important difference is that the Employment Cost Index is adjusted for the type of job performed, while usual weekly wages are not. Since many low-paid service workers were laid off during the COVID lockdowns, the latter metric was distorted by the job mix, whereas the former measure was not.

This is important, becuase even with improvement, adjusted for inflation, the median E.C.I. has still not made up all of the ground it lost after the outset of the pandemic.