Weekly Indicators for August 1 - 5 at Seeking Alpha

 

 - by New Deal democrat

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

The high frequency data continues to be buoyed by financial indicators as well as consumer spending, despite the weakness we saw in, among other things, Friday’s employment report.

As usual, clicking over and reading will bring you up to the virtual moment as to the economy, and reward me with a little pocket change for collecting and collating it all for you.

August jobs report: “Recession Watch” as the leading indicators across the spectrum turn negative

 

 - by New Deal democrat

Even before the utter chaos of the new Administration in Washington, my focus had been on whether the economy would have a “soft” or “hard” landing, i.e., recession. Last month I said that the report virtually screamed “Hard Landing!!!” 

If so, this month’s report added the sound of a crash with explosions. Almost everything about this report with the exception of the headline number indicated a recession is imminent or at least close.

Below is my in depth synopsis.

HEADLINES:

• 22,000 jobs added. Private sector jobs increased 27,000. Government jobs declined -6,000. The three month average declined sharply to +29,000, well below the breakeven point necessary with any kind of population growth.
• The pattern of downward revisions to previous months continued. June was revised downward by -27,000 to a *decline* of -13,000, while July increased 6,000 to +79,000, for a net declined of -21,000. 
• The alternate, and more volatile measure in the household report, rose by 288,000 jobs. On a YoY basis, this series increased 1,969,000 jobs, or an average of 164,000 monthly.
• The U3 unemployment rate rose 0.1% to 4.3%. Since the three month average is 4.2% vs. a low of 4.0% for the three month average in the past 12 months, or an increase of 0.2%, this means the “Sahm rule” is not in play.
• The U6 underemployment rate rose 0.2% to 8.1%, a new 3.5 year high.
• Further out on the spectrum, those who are not in the labor force but want a job now rose by 179,,000 to 6.354 million, its highest level since July 2021.

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. For the second month in a row they were sharply negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was fell -0.2 hours to 40.9 hours, and is down -0.7 hours from its 2021 peak of 41.6 hours.

• Manufacturing jobs decreased by -12,000, the fourth decline in a row. This series declined sharply in the second half of 2024 before stabilizing earlier this year. It is now at a 3+ year low.
• Truck driving, which had briefly rebounded earlier this year, declined another -900.
• Construction jobs fell -7,000.
• Residential construction jobs, which are even more leading, declined -900. This is the 5th decline in a row for this important series.
• Goods producing jobs as a whole declined -25,000. This is now the 4th decline in a row, which is very important because these jobs typically decline before any recession occurs. Further, on a YoY% basis, these jobs are now negative by -0.2%. Only three times in the past 70+ years - 1952, 1967, and 1984 - has this series been more negative YoY than this without it being during or shortly before a recession. 

• Temporary jobs, which have declined by over -650,000 since late 2022, declined again this month, by -9,800, a new post-pandemic low.
• the number of people unemployed for 5 weeks or fewer rose 177,000 to 2,476,000, its highest level in 3.5 years.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.12, or +0.4%, to $31.46, for a YoY gain of +3.9%, close to its lowest YoY% gain in 4 years set last month. Nevertheless, this continues to be well above the 2.7% YoY inflation rate as of last month.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers was unchanged, but is up 1.0% YoY, about average for the past two years.

• The index of aggregate payrolls for non-managerial workers rose 0.4%. It is now up 5.0% YoY, about average for the past 18 months. 

Other significant data:

• Professional and business employment declined another -17,000. These tend to be well-paying jobs. This is the fourth decline in a row, and is the lowest number in over 3 years. It is also lower YoY by -0.2%, which in the past 80+ years - until now - has almost *always* meant recession. This is vs. last spring when it was down -0.9% YoY.
• The employment population ratio was unchanged at 59.6%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate increased +0.1% from last month’s 2.5 year low to 62.3% , vs. 63.4% in February 2020.

SUMMARY

This was probably the worst report, including last month’s, since the 2020 pandemic shutdown months.

The *only* bright spots in addition to the positive headline number were the YoY increase in average hourly earnings and in real aggregate nonsupervisory payrolls, an excellent short leading indicator for continued economic growth, which likely another new all-time high once we find out about inflation last month.

Everything else was negative: all of the leading indicators in the goods producing sector, plus temporary and professional jobs. In particular, residential construction jobs, typically one of the last shoes to drop in that sector before a recession begins, declined further. And more broadly, goods producing jobs as a whole continued their significant downward turn.

Additionally, both unemployment and underemployment increased. Further out on the spectrum, once again those not in the labor force but who want a job increased to the highest level in 4 years. And the icing on the cake was the revised negative June payrolls number, the first negative print since 2020.

Last month I concluded that “We are now a hair’s breadth away from ‘recession watch.’” Last month’s ISM reports confirmed that, but then they rebounded in August. But with this report, the “recession watch” is back on. In fact, depending on how other short leading reports come in later this month, it may need to be upgraded to a “recession warning.”

Economically weighted ISM headline and new orders indexes back into weak expansion

 

 - by New Deal democrat

The regional Fed August indexes, including both manufacturing and general business activity, rebounded sharply, telegraphing that a rebound was also likely in the ISM indexes. On Tuesday, the ISM manufacturing index rose slightly. This morning the ISM services index increased sharply.

To wit, the headline number increased to 52.0, while the new orders index rocketed all the way to 56.0:

As a result, the three month average of the headline number rose 0.7 to 51.0, and the new orders subindex rose 3.2 to 52.5.

For a read on the general economy, I assign a weight of 75% to the services index and 25% to the manufacturing index. Here is what the comparison of two headline numbers looks like:

Since the three month average of the manufacturing index was 48.6, the economically weighted headline number rose above 50 to 50.4.

Next, here is the comparative look at the two new orders indexes: 

Since the three month average of the manufacturing new orders subindex was 48.3, the economically weighted new orders number rose sharply to 51.5.

This takes the economically weighted averages back out of “recession watch” territory. Because of the ever-changing situation with tariffs, I expect the monthly ISM numbers to be particularly volatile, so this isn’t really an all-clear vs. a respite. But the bottom line is, the economically weighted averages are at back a level suggesting a weak continuing expansion.

Jobless claims revert to neutral

 

 - by New Deal democrat

In the last few weeks, there has been speculation that jobless claims may have been affected by the jihad against immigrants, the theory being enough were being deported or else were simply afraid to report to work that the number of jobless claims was held down. But I suspected it might at least mainly be due to unresolved seasonality issues involving educational layoffs and rehires. 

To refresh, in the past several years even the seasonally adjusted data appeared to show a bottom in claims after the Holiday season, rising through spring to a wave peaking during the summer, and then declining back through the end of the year. Because of issues involving the school calendar this year, the June and July employment reports showed sharp, adjusted, swings in education employment. I hypothesized the same thing might be going on with jobless claims.

This week’s report added to evidence that my hypothesis has been correct. Initial claims rose 8,000 to 238,000, a ten week high. The four week average rose 2,500 to 231,000, a seven week high. With the typical one week delay, continuing claims declined -4,000 to 1.940 million, near the bottom of this summer’s range, but above any other readings since November 2021:

As usual, the YoY% changes are more important for forecasting purposes. And as of this week, all three were higher. Initial claims were up by 3.9% YoY, the four week average up 0.4%, and continuing claims up 4.9%:

Thus, after over a month as a “positive” indicator, jobless claims now revert to “neutral,” suggesting a weak but still expanding economy in the next several months.

Tomorrow we will get the August jobs report. The comparison of the monthly YoY% changes in jobless claims vs. the unemployment rate (which was either 4.1% or 4.2% in the July through September period last year), suggests that it will remain in that range, or possibly tick higher to 4.3%:

The important takeaway today is that initial claims had been one of the two main positive indicators, along with the stock market, suggesting clear sailing ahead. While it is not forecasting recession, it is no longer suggesting strength either.

The “soft landing” scenario in the JOLTS report remains intact

 - by New Deal democrat

In contrast to much other data in the jobs sector, the JOLTS reports have been very much consistent with a “soft landing scenario,” and that trend continued in this morning’s report for July.

As a quick refresher, this survey decomposes the employment market into openings, hires, quits, and layoffs. So to begin, here are job openings, hires, and quits all normed to 100 as of just before the pandemic:

Except for openings, which declined over -2% to close to their post pandemic low, all of the other series were close to unchanged for the month. Since I regard openings are “soft” data, which have trended down for several years, but remained above their pre-pandemic levels, they are not of much concern to me. While the remaining metrics are all weaker than one year ago, their trend has been virtually flat for the past 11 months.

Now let’s look at several components are slight leading indicators for jobless claims, unemployment and wage growth.

Layoffs and discharges, which have trended slightly higher since last summer, but have been rangebound since last autumn, remained so again (although if you are looking for a negative take, their three month average is the highest since last autumn):

This generally accords with both the increase in the unemployment rate in 2023-24, as well as its plateauing this year (red, right scale), as well as the recent trends in new and continuing jobless claims (not shown), which after a YoY increase earlier this year, improved in July and remained lower YoY in August.

Finally, the quits rate (left scale) typically leads the YoY% change in average hourly wages for nonsupervisory workers (red, right scale):

In July the quits rate continued to remain steady at 2.0%, about average for the past 12 months. The latest data suggests that nominal wage growth will not decelerate further in the next several months, and may increase slightly back to 4.0%.

To reiterate, the recent JOLTS reports have been consistent with the “soft landing” scenario remaining intact. In two days we will get the jobs report for August. Because T—-p’s partisan lackey has not been confirmed by the Senate (at least, not yet), I anticipate Friday’s report will not be skewed. As you know, last month there were severe downward revisions. Since much of that had to do with unresolved seasonality in the education sector, and in August many of these people are rehired, I would not be surprised by an equally sharp rebound - but we’ll see. Further, the final QCEW revisions for 2024 will be unveiled later this month, and they are likely to be very substantial and further muddy the waters.

ISM manufacturing confirms rebound in new orders in August, but construciton spending continues to decline

 

 - by New Deal democrat

As usual, the new month begins with important manufacturing and construction reports which give us the pulse of the goods-producing economy.

The ISM manufacturing report has been a recognized leading indicator for the past 60+ years, although of diminished importance since the turn of the Millennium and China’s accession to regular trading status. While any number below 50 indicates contraction, the ISM itself indicates that the number must be under 42.8 to signal recession. 

Because of the report’s diminished importance, for forecasting purposes, I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively. For the last three months,  months ago, that average justified a “recession watch.” 

Today’s report was an improvement, although the headline number continued in contraction at 48.7. Significantly, the more leading new orders subindex rose from 47.1 in July to 51.4 in August. Here is a look at both the total index (blue) and new orders subindex (god) for the past fifteen years (via Briefing.com):

Note that both remain slightly better than their low points in 2022-23.

Hare the last six months of both the headline (left column) and new orders (right) numbers:

MAR 49.0. 45.2

APR 48.7. 47.2

MAY 48.5. 47.6

JUN. 49.0. 46.4

JUL 48.0.  47.1

AUG 48.7. 51.4

The current three month average for the total index is 48.6, and for the new orders subindex 48.3. Note that the regional Fed reports, which turned positive during the last month, accurately telegraphed the improvement in the new orders subindex into expansion. But at the same time, although the three month averages improved, they both remain in slight contraction.

As I indicated above, for the economy as a whole the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. In the non-manufacturing report, the average of the last two months for the headline and new orders numbers has been 50.5 and 50.8, respectively. Pending the ISM report on services Thursday, the economically weighted headline number is exactly 50.0, and the new orders average is 50.2.

If the ISM services report on Thursday does not indicate any further downturn, this means that the economy as a whole is every so slightly expanding, and would justify lifting the “recession watch” posted last month.

But if the news from new orders in particular in the manufacturing index was a relief, construction in July, the month covered by this morning’s report, continued to be more of the same, i.e., a continuing decline since a summer of 2024 once we adjust for the cost of construction materials.

For the month, total construction spending (blue in the graph below) declined -0.1%,  while residential construction spending (red) increased 0.1%. Nominally, total  residential construction spending has declined every month but one since last August, and is now down -3.4% from its August 2024 peak. Residential construction spending has declined every month but two (including this month) in the past year, and is down —6.8% since May of last year:

Adjusted by the cost of construction materials, both measures declined again last month. So adjusted from their peaks last year, total construction is down -7.1%, while residential construction is down -9.4%. If there is a silver lining, it is that adjusted residential construction spending may have stabilized in the past three months:

For the last three months I have concluded that these two reports together suggested that the goods-producing part of the economy as a whole has been contracting, if only slightly. That still appears to be the case.