Weekly Indicators for September 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

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

Not much change this week, but there are signs that consumer spending is beginning to cool off again.

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 penny or two for my efforts in collecting and organizing it for you.

August personal income and spending: positive, but with several important yellow flags and revisions

 

 - by New Deal democrat

Personal income and consumption is one of the two big monthly reports on the state of the average American, in addition to the jobs report. In the past several months, I have looked for a rebound from April and May’s “Liberation Day” aftermath of a cutback in spending. In July we did get a rebound, and this morning indicated that it has continued. 

Nominally income rose 0.4% and spending 0.6%. Since the PCE inflation gauge rose 0.3%, real income increased 0.1% and real spending rose 0.3%. As a result, real spending is at new record high, while real income is only below its peak in April:

[Note: with the exception of the personal saving rate, and one YoY graph, all of the data in the below graphs is normed to 100 as of just before the pandemic.]

Since real spending on services (blue, right scale) rarely turns down, even in recessions, the focus is on goods (red, left scale). In August they rose a strong 0.7%, also to a new record high:

Additionally, there is authority for the fact that spending on durable goods usually turns down before spending on non-durable goods. In July, this rose 0.9%, but the absolute level remained below that of March and last December:

While this is positive, the three month moving average (which unfortunately I can’t show with FRED tools) has been almost completely stagnant since April, so we may still be topping here.

Incidentally, while I was traveling yesterday, manufacturing new orders and core capital goods orders were both reported, and these were also very positive, with core capital goods orders hitting a new near 3 year high:

This is a major reason why no recession appears imminent, although I would very much like to see what this statistic looks like without the potentially “bubble”-like capital goods spending on AI data centers.

Next, here is the personal savings rate. I follow this because just before and going into recessions it tends to turn up as consumers get more cautious. This month the Census Bureau made major revisions going back three years. As a result, what last month looked like a “typical reading of 4.4%, along with many previous months, was revised substantially higher. Thus the 4.6% rewind for August was not a significant increase, but rather a significant *decrease* from readings in the past year:

A decline in savings is typically a bullish reading for the present, indicating consumer confidence, but when near new lows is also a sign that consumers may be stretching themselves too thin. Since the revisions may be due to the income side of the equation, or the spending side, or both, I will have to take a deeper look at each before commenting in more detail.

Finally, let’s take a look at two coincident indicators from this report which the NBER pays close attention to in dating recessions. First, here is real income less government transfers:

This was unchanged from July, and further is only 0.2% above its March and June levels, as well as below April’s (blue, right scale). On a YoY basis (red, left scale) the decelerating trend dating back almost three years has continued. Should this trend persist several more months, that would be recessionary.

Second, here is real manufacturing and trade industries sales, which is delayed one month and so if for July. This rose 0.6% for the month to a new all time high:

In summary, this was mainly a positive report, but with several yellow flags. Real personal income and spending both rose, one to a new record. Real sales (delayed one month) also made a new high. This confirms the recent rebound shown in capital goods orders, as well as the Regional Fed new orders reports. This is all good.

But, there are several cautionary elements. In addition to the substantial backward revisions, the three month average on durable goods spending may be on the cusp of rolling over, and as mentioned just above, real income less government transfers has essentially flatlined since March.

A tariff-triggered recession would likely be led by a decline in purchases of consumer durable goods, which will be updated in the next two weeks. Here’s what it looks like currently:

In addition a to the ISM reports and jobs report which will be released next week, this is the next big item I will be looking for.

Initial jobless claims: on the road again . . .

 

 - by New Deal democrat

I’m on the road today, and won’t have time to update anything until tonight.

So here is what to look for in initial and continuing jobless claims.

Remember that the most important figure for forecasting purposes is the YoY% change. One year ago, initial claims came in at 221,000, the four week average at 225,250, and continuing claims at 1.831 million.

A positive result would be numbers lower than those. A neutral result is any number in the weekly and four week average of initial claims lower than 10% higher YoY. For initial claims, depending on revisions to last week’s number of 221,000, 10% plus higher would be 244,000. More importantly, YoY 10% plus higher for the four week average of initial claims would be 248,000, again depending on revisions to last week’s numbers.

Continuing claims + initial claims are good for forecasting the near term trend in the unemployment rate, so any number higher than 1.831 in continuing claims plus 221,000 in initial claims, or 2.052 million total) suggests a higher trend in the unemployment rate vs. one year ago. Last week that combined figure was 2.151 million. 

New home sales: despite the noisy sharp increase in August, the last pre-recession metrics are firmly negative

 

 - by New Deal democrat

Have I mentioned before that new home sales, while perhaps the most leading of all the housing data, suffer from being very noisy and heavily revised? Yes, I think I have, just about every month. And this month’s report is a good example of why.

Let me start with prices this month. Last month it was reported that the median price for new houses sold was $403,800. This month that number was revised down -2.2% to $395,100, and this month itself jumped $18,400 from there to $413,500, a 4.7% increase! This number is not seasonally adjusted, so the best way to look at it is YoY (red in the graph below, left scale), which was higher by 1.9% this month:

The three month average takes out most of the volatility, and so measured prices are down -2.8% YoY, and the declining trend in the absolute number (blue) is intact as well.

But the volatility in the price metric is chicken feed compared with sales (blue in the graph below), which jumped just over 20% (!) from an upwardly revised 664,000 last month to 800,000 seasonally adjusted and annualized this month, a 3+ year high:

I’ll come back to houses for sale (red) in a moment. But while mortgage rates did decline to 10 month lows in August (and more since):

that hardly suggests a complete turnaround in the market. For example, mortgage rates were lower last October, and there was no comparable jump in sales. So, to return to the theme of “noisy and heavily revised,” let’s see what next month’s revisions are before we make a champagne toast, because it is perfectly likely that this is an outlier.

Now let’s return to the number of houses for sale (red in the graph above), which declined another -7,000 from a downwardly revised July to 490,000 annualized, a declined of -2.8% from peak. This is nearly certain confirmation that this metric, which along with employees in residential construction is one of the last to turn in the cycle, has decisively turned down.

Here is the long term historical YoY look at new houses sold (blue) and new houses for sale (red):

It is easy to see that the former (blue) always turns first. Further, it almost always has been negative for a year or more before a recession occurs. The latter (red) - the number of houses for sale - typically turns negative YoY close in time to when a recession actually begins.

Now here is the post-pandemic look:

This month for the first time in a year, the number of houses sold zoomed higher to 15.4% YoY, while the number of houses for sale declerated to a paltry 4.0% higher YoY. It could easily turn negative by about the end of this year.

In sum: housing is recessionary, and the last shoes to drop, have dropped.

The State of the Consumer: the nowcast recession forecasting tool

 

 - by New Deal democrat

In addition to my system of long and short leading indicators, and the weekly high frequency data, the third system I use to mark to market my views of the economy is what i call “the consumer nowcast.”

Consumers are 70% of the economy. Their sources of new spending include wages and salaries, refinancing existing debt at lower rates, and cashing in or borrowing against appreciating assents. When the spigots for all of these are turned off, and consumers start getting more cautious, a recession ensues.

Yesterday and today, for the first time in many months, I updated that tool, and it is posted over at Seeking Alpha. While it isn’t negative, the situation of consumers is more precarious than it might appear on the surface.

As usual, clicking over and reading will bring me a penny or two in lunch money, as well as hopefully being educational for you.