Weekly Indicators for August 11 - 15 at Seeking Alpha

 

 - by New Deal democrat

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

This week I quantified the difference between commodity prices in the US$ vs. a basket of all other currencies. Perhaps unsurprisingly,  the upward pressure on commodity prices appears to be all, or almost all, about weakness in the US$.

Additionally, one thing I always mention in these articles is that high frequency data will tell you about a change in direction long before you get confirmation from monthly reports. In this case, the regional Fed manufacturing indexes are showing surprising strength - food for thought.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me a little bit for my efforts obtaining, collating, and categorizing the data for you.

July industrial production: meh!

 

 - by New Deal democrat

Industrial production is much less central to the US economic picture than it was before the “China shock,” since so much production moved overseas, meaning US consumers buy much more imported goods than they used to.

Still it is an important if diminished coincident indicator. This morning’s report for July can be summed up, as per the title of this post, as “meh.”

Headline industrial production (blue in the graph below) declined -0.1%% for the month, but was balanced by a +0.1% revision for June. Manufacturing production was unchanged in July, and June’s +0.3% increase was unrevised.

Nevertheless earlier this year saw a roughly a 1% increase in production, which has been maintained since:

Total production made a new post-pandemic high in June, and manufacturing production is just below its high of October 2022.

Further, industrial production is 1.4% higher than one year ago, and manufacturing production is higher by 1.6% than it was one year ago:

Although I won’t bother with a graph this month, earlier this year the big difference was the contribution of utility - especially electric utility - production, which is used both for mining crypto, and also for AI-related data mining. Which is an important reason why prices for electric power have become a problem child in the consumer inflation reports this year.

Along with retail sales, this is the second coincident positive for the economy this morning. And, to wrap it all up, the fact that both consumer spending and industrial production are holding up are important reasons why I have not gone on “recession warning” (vs. “watch”) at this point.

July retail sales: consumers party on, for now

 

 - by New Deal democrat

As per usual, retail sales are one of my favorite economic indicators, because in the past they have told us a lot about both where the economy is at present, and because consumption leads employment, so much about where the economy is likely to be in the near term future.

 The news in July was good, as nominally retail sales rose 0.7%. Additionally, June was revised higher, from 0.6% to 0.9%. Because consumer prices rose 0.3% in each of these months, that means real retail sales rose 0.6% in June and - after rounding - another 0.3% in July.

This suggests that after front-running tariffs in March and April, and then pulling back in May, consumers resumed normal activity in June and July, which is all good (just in time for the Administration to institute more tariffs in August). Here’s the graphic look, showing that in real terms August was only surpassed by March and last December:

The above graph also shows real personal spending on goods (gold, right scale), which is a broader measure and tends to shy age in similar fashion to retail spending, but won’t be reported until the end of this month.

Further, with several exceptions, most notably in 2022-23, in the past 75 years whenever real retail sales turned negative YoY, a recession was about to begin or had just begun. At present real retail sales are higher YoY by 1.2%, so there is no sign of any imminent downturn in the economy:

Finally, because consumption leads employment, here is the updated graph of real retail sales YoY, together with real personal consumption of goods compared with nonfarm payrolls (red):

Based on historical experience, real retail sales suggest that YoY jobs growth should continue to decelerate slowly in the coming months to 0.6%, which (although I won’t bother with a graph this month) in the past 40 years has only occurred during recessions.

The fly in the ointment, of course, is tariffs. Via Scott Linicome, Goldman Sachs’ preliminary analysis is that the majority of tariff price increases - 64% - have so far been eaten by US importers. Another 14% were eaten by foreign exporters. Only 22% have been passed through to US consumers. And unsurprisingly US producers whose foreign competitors have had to raise prices have taken advantage of the situation to raise their prices as well.

The above situation isn’t going to last forever. With average hourly wages having risen on average about 4% YoY recently, any price increases beyond those are going to lead to a downturn in consumption. So the big danger is still out there. It just hasn’t arrived at consumers’ doors yet.

Producer prices for July (apparently) show the first significant negative effects of Tariff-palooza!

 

 - by New Deal democrat

Normally I don’t pay too much attention to producer prices, but occasionally they are very important - and today is one of those days. 

Here’s why. In the past, as shown in this graph going back over 50 years:

when producer prices outstrip consumer prices, that means producers aren’t able to pass on the full amount of any price increases to consumers.

Put another way, corporate profits decline. Below is a graph of the last 10+ years, with the YoY changes in final demand producer prices and consumer prices averaged quarterly, vs. corporate profits (/2 for scale):

With a lag of several quarters, once producer prices outstrip consumer prices, the YoY gains in corporate profits decelerate and even outright decline. This shows up as weaker inputs in producer prices, and the cycle restarts.

Final demand producer price gains have been approximately equal to consumer price gains since last summer. If producer prices now spike even higher, we should expect that to show up in corporate profits within another quarter or two, and possibly even this quarter.

And when corporate profits turn down, they think about scaling back hiring, and even layoff off workers.

This morning suggested that such a spike in producer costs, probably engendered mainly by tariffs, but also by the weakened US$, has begun.

Raw commodity prices (dark blue in the graph below) increased 0.7% in July, while final demand producer prices (light blue) increased 0.9%, vs. 0.3% for consumer prices (red):

This is the second month in a row of such outsized gains, and the fourth time in the last seven months.

Meaning, on a YoY% basis, commodity prices are up 2.0%, while final demand prices are up 3.3%, vs. 2.7% for consumer prices:

And the relative surge in producer prices is showing up in both goods (red in the graph below) vs. services (blue):

The July increase in final goods prices was the highest since February of last year except for this past January, while that for services was the highest going all the way back to March 2022.

On a YoY basis, except for January the increase in goods prices is the highest in over two years, and services appear to be trending somewhat higher as well:

In summary, unless something changes in the tariff situation (unlikely), this is the beginning of a profit squeeze, and will likely negatively impact “real” consumer spending as well.

Initial and continuing claims continue to trend in opposite directions

 

 - by New Deal democrat

Obviously this morning’s PPI number was the most important report of the day. I want to get to that later, but first let’s update the jobless claims situation.

The good numbers in initial claims continued, as they declined -3,000 to 224,000. The four week moving average increased 750 to 221,750. But continuing claims continued elevated, down -15,000 to 1.953 million, still close to its 3.5+ year high:

On the YoY% basis more important for forecasting, initial claims were down -1.8%, and the four week average down -6.2%, while continuing claims were up 4.8%:

As per usual, this is not recessionary and indicates continued expansion.

Comparing initial, and initial + continuing claims with the unemployment rate YoY suggests that the latter should continue essentially unchanged from year ago levels in the coming month or two:

Since the unemployment rate last August through October was 4.1% and 4.2%, that suggests it will continue in that range in the next month or two.

Why are initial and continuing claims moving in opposite directions? As I discussed last week, there are two reasonable explanations. One is that there is some unresolved seasonality at work having to do with layoffs and rehiring in education. The other is that the recent deportation jihad against Latino immigrants means they are not showing up for work, or making jobless claims, meaning that employers are hanging on to their remaining workers more tightly even if their work orders are slackening.

Shelter, tariffs, and “just-so” inflation indexes

 

 - by New Deal democrat

In my note yesterday about the July CPI, I noted the transition from the trend where overall inflation ex-shelter was low, and shelter was high but disinflating, to a trend where inflation ex-shelter while still low was increasing, as shelter contributed the most to disinflation. The question was, and will be going forward, how much are tariffs contributing to inflation?

In the past 24 hours I’ve seen a number of “just-so” indexes; basically, if you exclude things that aren’t going up (e.g., gas and new cars), everything else is going up! Well, duh! So I am unconvinced by those analyses.

Let me start by re-upping two of my graphs from yesterday. First, headline inflation vs. core vs. all items less shelter:

All items less shelter have been increasing at less than 2.5% for two full years. Since officially measured shelter costs have been decelerating all during that time:

the headline number has decelerated as well. But inflation ex-shelter seems to be trending higher in the past 9 months, meaning core inflation has already stopped decelerating.

So let’s divide up everything *except* shelter, which oddly enough is counted among the “services” sector of the CPI. The below graph shows the YoY% change in consumers costs of durable goods (gold), non-durable goods (red), and services excluding shelter (blue):

The cost of durable goods had actually been undergoing *deflation* during most of 2023 and 2024, but the trend has reversed higher. The inflation rate for services has also ticked up mildly in the past few months, while that for non-durable goods has been meandering around 1%. Below I show the monthly changes in the first two since the beginning of 2023 better to show those trends. I excluded non-durable goods because that would just be a squiggle:

The uptrend in both durable goods and, since last summer, services excluding shelter is apparent.

Supposedly so far producers have only passed on a small portion of tariff costs to consumers, but that won’t last forever, so - IF inflation statistics remain reliable in the coming months - I expect those costs to start showing up particularly in goods prices.

The reliability of BLS statistics going forward is a real concern, given T—-p’s nomination of E. J. Antoni to become Chairman of the BLS. Last year he authored a paper arguing that the US had been in recession since 2022, using a “unique” measure of inflation that used the Housing Affordability Index instead of OER for the shelter component.

The Housing Affordability Index consists of two components: the change in house prices, as well as the change in mortgage rates. In terms of inflation, both of those components have uses. For example, no less than Barry Ritholtz of the Big Picture has argued that Fed rate hikes actually *increase* inflation but raising the costs of mortgages in particular. And I among others have argued that replacing OER with House Cost Indexes is a better model for consumer prices (bearing in mind that in any given month or year only a small fraction of consumers make a new house purchase). Further, I have argued that because house prices lead OER by 12-18 months, the Fed should use a “House price indexed CPI” in setting rates, since that tells them where inflation is likely to be in a year or so. 

But putting those two components together to measure inflation strikes me an another “just-so” compilation, designed to arrive at a desired conclusion, i.e, Biden’s Presidency featured a long recession.

And interestingly, Antoni’s analysis begins in the year 2019. I have learned that politically motivated economic analysis often makes use of cherry-picked start or end dates - and it turns out that this is exactly such a case.

Below is a graph of house prices as measured by the FHFA, together with the Fed funds rate over the past 10 years. Remember, it is the combined effect of these that makes up the Affordability Index. And lo and behold, look at what happened in 2017 and 2018:

House prices went up 15%, and mortgage rates increased about 15% as well, from 4.20% to 4.87%.

In other words, it appears that Antoni’s own analysis would also show a recession during the entire first 2 years of T—-p’s first term. Ooops!

The consumer inflation transition continues, as shelter prices decelerate further, and other sectors show some re-acceleration

 

 - by New Deal democrat

The story of this month’s CPI report is summed up in the first few graphs below: the shelter portion of the index continues its slow deceleration, while the non-shelter portion of the index appears to be in a slowly rising trend. This has resulted in headline inflation trending ever so slowly lower, while core inflation shows no deceleration at all.

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

Note that I am no longer including the big inflationary spike of 2021-22. We all know about that, and we know that once gas declined from $5 to $3 a gallon in late 2022, as the supply chain un-kinked, inflation ex-shelter cooled rapidly. What the above graph shows is that since then, there have been fewer outright declines in prices ex-shelter, and bigger increases. Meanwhile there has been a slight trend of lower monthly increases in headline inflation, leading to roughly steady increases in core inflation.

Here is the YoY% look at the same data:

This is the graph that best tells the story: an apparent uptrend in non-shelter inflation, a slight deceleration in headline, and over the past 12 months flat YoY core inflation.

Looking at shelter specifically, we see once again that house prices lead by roughly 12-18 months. As YoY price advances in repeat home sales have waned again (and, per the experimental new and total tenant rent index I updated several weeks ago, new rents have gone sharply negative YoY, leading the total to continue its deceleration), shelter inflation has resumed its gradual deceleration:

On a monthly basis, both fictitious owners’ rent as well as actual tenants’ rent increased 0.3%, and YoY they advanced 4.1 and 3.5% respectively. These are the lowest YoY% increases since the beginning of 2022.

Underneath these big trends there are some other notable ripples in the pond.

Transportation services (mainly car repairs and insurance) lag the prices of new and used cars. The former have steadied for the past 2.5 years, while the latter decreased into last year, but have started to increase again, and are now up 30% compared to their pre-pandemic level:

Since used vehicles are something of a substitution good for new vehicles, this suggests renewed pressure on consumers - perhaps because of the interest rates on car loans, and perhaps also because of the pressure on their loans generally due to the sudden lapse of student loan payment abatements.

This has resulted in price increases of over 5% YoY for motor vehicle repairs and insurance, and in the past several months the pace has turned back up:

Looking at a couple of other problem children, recently price increases in medical care services have also re-accelerated, and did so again this month:

And prices for meat in particular are up almost 6% YoY, although inflation in the protein and dairy complex as a whole has cooled somewhat:

Finally, although I won’t use graphs, I did spend some time looking for specific impacts from tariffs. At first glance, so far they appear to be sporadic. Banana prices are up 4.3% YoY, and coffee prices up 14.5%.  Contrarily appliance prices declned -0.3% for the month, and are down -1.1% YoY.

Last month I wrote that consumer inflation was in a transitionary period. This continued to be the case in July, as shelter continues its disinflation, while other products and services have begun to re-accelerate in price. The widespread further increases in tariffs that were announced at the beginning of this month will only add to that acceleration over the coming months.

A decline in the immigrant labor force is not a valid reason for Wall Street’s optimism

 

 - by New Deal democrat



Despite some very soft employment and production data in the past several weeks, Wall Street has been on something of a tear, making repeated new all-time highs. Over the weekend I saw the following comment, which piqued my interest:

It certainly does seem that Wall Street is dismissing the news as inconsequential, and to be fair, Q2 earnings as of the most recent update have risen to all-time highs as well:

As a result, as I wrote on Seeking Alpha this past week, the “hard” monthly data and the high frequency data have diverged, the latter being heavily influence by a declining US$, a decline in new initial jobless claims, and the aforementioned stock market reaction.

We know that ICE is conducting daily raids rounding up undocumented workers (and also some lawful permanent residents and even a number of US citizens who unfortunately for them happen to be brown. And we know as a result in at least a few areas these workers have disappeared out of fear as a result. And according to the Federal Reserve Bank of Dallas, immigration to the US was down -82% in the first quarter of this year compared with Q4 of last year.

 

An abrupt decline in immigrant labor whether through formal deportations or simply ghosting employers out of fear could explain the decline in new jobless claims we have seen in the past month or so. Even if Los Illegales are not eligible to file such claims in certain states, employers might hold on to their native-born labor more tightly as a result.

But I am not sold on the idea of a downturn in immigrant labor as a reason to be sanguine about the recent soft employment report.

The “waning labor supply” argument is the reverse of the - as it turns out correct - argument in the past couple of years that the surge in immigration was behind the rising unemployment rate. Simply put, as an example if we start with an unemployment rate of 4%, the labor force then suddenly increased by 5%, and the number of new employees as a result increased 4%, the unemployment rate would go up: from 96% of the labor force employed to 100/105 of the labor force employed, meaning a 4.8% unemployment rate. 

Conversely, if the labor force suddenly goes down 5%, and 4 out of those 5 were employed immigrants, then the unemployment rate would decrease to 3.2%.

But here is the catch: those immigrants who have either been deported, or else stopped showing up for work are *also* either newly cash-strapped, or else not consumers at all anymore. In other words, in the above scenario consumption *also* goes down. Which means sales and production go down as well. In short, there is a recession.

And if sales and production go down, then almost certainly corporate profits go down as well. 

So I am not sold at all on the “optimistic” Wall Street argument.

One final point to consider is that the labor force participation rate is something of a long lagging indicator. Typically it only goes down once the mass of potential employees understand that the jobs market has softened, and only goes up after a recession after they understand that the jobs market is worth entering. Here is the long term graph from the 1980s:

Messy, but the general trend is that growth in the labor force participation rate peaks *after* peak growth in employment. And currently, the prime age labor force participation rate is -0.6% lower than a year ago (hence my addition of 0.5% to the rate, so that it shows at the 0 line in the graph above.

And as you can see from the above graph, typically such YoY declines in the prime age LFPR for longer than several months only happen during or right after recessions.

Further, the LFPR has turned down for *both* the native and foreign born:

Unfortunately these data sets are not limited to the prime age group, so must be taken with an extra grain of salt. But the decline among the foreign born has only eclipsed that of the native born in the past several months, not enough to explain the decline that was already ongoing.

In short, the situation with the labor force is not a valid source of Wall Street’s optimism.