Jobless claims suggest continuing, but resolving seasonality issues

 

 - by New Deal democrat

Initial jobless claims have been relatively subdued for the past month. Some have suggested that this is a byproduct of the large immigrant deportations which have recently taken place. Last week I noted that, “comparing the SA and NSA readings in the past several months suggests that [unresolved seasonality] has affected initial claims as well, with markedly fewer claims at the early July peak. But whereas NSA claims continued to decline through August last year, for the past three weeks this year they have held steady.”

This week’s report did not resolve the issue, but tilted it slightly back towards the unresolved seasonality argument.

Initial claims declined -5,000 to 229,000, while the four week average increased 2,500 to 228,500. With the typical one week delay, continuing claims declined -7,000 to 1.954 million:

It is interesting that during the recent weeks in which initial claims have declined, continuing claims have if anything drifted higher - again, suggesting that it is not a lack of immigrants making (initial, and then continuing) claims that is the main driver.

On a YoY basis, which is more important for forecasting, both the one week and four week average of initial claims were down -1.3%, while continuing claims were higher by 4.5%:

Note that in both 2023 and 2024, initial claims were declining all during August. This year on a SA basis they declined in late July and have instead trended higher during August. My suspicion is that within the next two weeks both the one week and four week average for initial claims will revert to being higher YoY once again. We’ll see.

Next week we will get the jobs report for August. Since jobless claims generally lead the unemployment rate, here’s the latest on what that comparison looks like, as YoY% changes:

One year ago the unemployment rate was 4.2% in August, declining to 4.1% in September. Last month it was also 4.2%. Initial claims suggest that it will remain 4.2% or perhaps decline to 4.1% in the next month or two, while the less leading but more comprehensive total of initial+continuing claims suggest it may rise to 4.3%.

Manufacturers’ new durable goods orders is a bright spot

 

 - by New Deal democrat

No new significant economic data today, but yesterday we did get a look at manufacturers’ orders for durable goods.

This is one of those noisy indicators that sometimes is leading (2000), sometimes is not (2007), and sometimes gives false positives (2016 and 2019), but has historically been considered a leading indicator for the economy:

Yesterday’s report for July showed a -2.8% monthly decline, which still kept the value higher than at any point before May. Since much of the volatility has to do with airplane orders (Boeing), the core capital goods measure, which excludes aircraft and defense, is typically more important. This rose 1.1% monthly, to the highest level since late 2022:

The general trend this year remains positive, which is a good - if surprising - thing; particularly as spending on goods, especially durable and consumer goods, is an important short leading indicator I am watching more closely since I have gone on “Recession Watch.”

Because so many durable goods are imported, real consumer spending on such goods has risen much faster than domestic production of such goods, so the best way to compare the two is YoY, which is shown in the graph below:

There has been some marked deceleration in real consumer spending on durable goods in the past few months, after the tariff front-running of earlier this year.

Real consumer spending will be updated on Friday. Will it resume its prior uptrend, or continue below the levels of earlier this year?

Repeat home sales indexes provide final confirmation that the housing market is in deflation

 

 - by New Deal democrat

Last week YoY existing home prices increased only 0.2%. Since those were not seasonally adjusted, it was apparent that the actual peak in such prices was about early this spring. Yesterday we saw that new home prices continued to deflate. This morning’s repeat home sales reports from the FHFA and S&P Case Shiller are the final confirmation that the housing market is in deflation.

On a seasonally adjusted basis, in the three month average through June, the Case-Shiller national index (light blue in the graphs below) declined -0.3%, while the FHFA purchase index declined -0.2%, matching their declines from the previous report. The FHFA index (blue in the graphs below) has now been declining for three straight months, and the Case-Shiller Index (gray) for four. the third. (note: as per usual, FRED hasn’t updated the FHFA information yet):

In other words, there has been actual *de*flation in the house price indexes since February, by -0.7% in the FHFA Index and -1.2% in the Case Shiller Index:

On a YoY basis, price gains in both indexes not only continued to decelerate, at 1.9% for the Case Shiller index, and 2.7% for the FHFA index; but these were the lowest YoY% increases since 2012 for both indexes excluding 5 months in 2023 for the Case Shiller index:

Because house prices lead the shelter component of the CPI by 12 - 18 months, this strongly indicates that they will continue to decelerate over that period. Here is the same graph as above (/2.5 for scale) plus Owners’ Equivalent Rent from the CPI YoY (red):

The last time the Case-Shiller and FHFA Indexes were in this range, excluding the Great Recession, was in the 1990s, during which time Owners Equivalent rent was in the 2.5%-3.5% range (vs. 4.1% as of the most recent CPI report).

Similarly, although I won’t bother with the graph, the latest “National Rent Report” from Apartment List from the end of July showed precisely zero YoY rent increases.

As of now, all phases of the housing market are either at or near their low points (sales, permits, starts), or declining (prices, construction, employment, and new spec units for sale). After a brief spurt earlier this year, for the past few months industrial production has also been flat. Before 2000, when both goods producing sectors of the US economy were flat to negative, the economy contracted promptly. On Friday, we will find out if consumer purchases of goods are flashing a warning (or not) as well.

New home sales: the final shoe in the housing sector has dropped

 

 - by New Deal democrat

In this month’s report on new home sales for July, the most important news was at the tail end, which I’ll get to last.

As per my usual intro, while new home sales are the most leading measure of the housing market, they are very noisy and heavily revised - which turned out to be important this month - and which is why I generally pay more attention to single family permits. Still, if averaged over three or more months they are valuable indicators of the underlying upward or downward pressure on the economy going forward one year or more. Further, as per usual, sales turn first, followed by prices and inventory, which is typically the last shoe to drop.

So let’s turn to each metric in order.

With mortgage rates remaining in the 6%-7% range, sales of both new and existing homes have also been rangebound for over two years. In July that continued to be the case, as new home sales declined -4,000 (from a June level upwardly revised by 29,000!) to 652,000, near the bottom of that range: 

After sales peaked, prices also stalled, and then began a very slow deflation on the order of -1% -5% YoY. That trend not only continued but amplified in July, as on a non-seasonally adjusted basis prices declined -$3,400 to $403,800 (gold, right scale in the graph below). More importantly, on a YoY basis prices declined -5.9%, the steepest such decline since last November (blue, left scale):

Recall that last week the median price for existing home sales was only up 0.2% YoY. Tomorrow we will get both the FHFA and Case Shiller repeat sales indexes, which also have shown recent, seasonally adjusted, declines. If that continues, it will be the steepest such retreat since the Great Recession’s housing bust.

But the most important news was at the tail end. Last month’s initial report indicated that the inventory of homes for sale had risen to 511,000, a new post-pandemic high.

Revisions made a major difference this month. The data now indicates that the inventory of new homes for sale in fact peaked in March at 504,000, with both May and June being revised down, the latter by -9.000 to 502,000. And this month inventory for sale was reported declining another -3,000 to 499,000:

Why is this so important? Because in the past recessions have happened after not just sales decline, but the inventory of new homes for sale (red, right scale) - which also consistently lag - also decline, as builders pull back:

To reiterate: in the typical housing cycle mortgage rates lead sales, which slightly lead permits and starts, which in turn lead prices and housing units under construction (gold in the graph below), which finally lead employment in residential construction (blue) and housing for sale (red):

For the record, I pay very little attention to months’ supply, becuase it depends on both units sold and for sale. There does not appear to be any “magic level” that serves as a turning point, and indeed, it frequently only turns down after a recession has begun, as homes for sale decline even more than homes sold:

So, the important conclusion is: all of the important sequence of metrics in the housing sector have now turned down. The final shoe has dropped. Now we pay more attention to short leading indicators like major durable goods purchases and initial jobless claims, for signs that the turn in the bigger economy is near.