- by New Deal democrat
This week I’m spending some time updating the non-financial long leading indicators. As I wrote on Monday, I haven’t updated these in a while in large part because the chaos coming out of Washington has blindsided much of the economic data. There’s not a big point in obsessing over what the yield curve of US Treasurys in the bond market might mean for the economy in 2027 when the Commander in Chief barges in and says, “Hey, let’s see what happens when Iran shuts the Strait of Hormuz!”
On Monday I looked at real spending and consumption per capita. Basically, with some noise these have been trending sideways since last summer, and are hovering around 0% gains YoY. Yesterday we saw that gas prices had caused consumers to spend significantly more in the aggregate than they had in the past months, mainly to fill up their gas tanks. Excluding gas, “real” sales were still below last August’s peak.
There are two more nonfinancial long leading indicators, one on the production side and one that is an important interface between production and consumption.
The long leading indicator on the production side is corporate profits deflated by unit labor casts. There have had a long history of turning down one year or more before the onset of recessions. Below I show them both including (dark blue) and excluding (light blue) inventory and capital spending adjustments. I also show proprietors’ income (red), which is almost as leading but has the virtue of being reported at least one month before corporate profits as part of GDP:
As you can see, after virtually stalling during 2024, and then being whipsawed by the front-running of tariffs and the subsequent payback, in the last two quarters of 2025 both measures of deflated corporate profits rose sharply. Proprietors’ income did turn down slightly, and although that bears watching, it is not as important.
A more up-to-date measures is the weekly update of reported and estimated corporate profits as they will be reported to Wall Street, from Earnings Insight. Here is the most recent update from last week:
Q1 profits have just begun to be reported. Typically companies massage their earnings expectations so that they “beat” them in the report, so I anticipate the current anticipated Q1 level will improve by at least several points. In any event, the weekly updates confirm that Q3 and Q4 saw stout growth in corporate profits but a possible pullback in Q1.
Nevertheless, deflated corporate profits are a long leading positive as of the end of 2025.
The other nonfinancial long leading indicator, which captures an important producer and consumer interface, is housing permits. Below I show total permits (light blue) along with the much less noisy single family permits (dark blue), and also mortgage rates (red), which largely - but not exclusively - drive much of the changes in homebuilding:
In general we can see that for the past two years housing permits have gradually trended downward as mortgage rates oscillated between 6% and 7%.
The relationship is best shown in the YoY% changes of the same data, below (with mortgage rates inverted better to show the relationship):
Mortgage rates have been close to stable for most of the past year with a few positive oscillations (before the March spike secondary to the Treasury market’s reaction to the oil price spike). Building permits on a YoY basis have continued to fade slightly.
As I have written many times in the past year, the downturn in the housing market at this point is frankly recessionary.
To sum up, of the three non-financial long leading indicators I have looked at this week, one - corporate profits - is positive. One - building permits - is negative. And one - real spending per capita - is close to being flat. My suspicion is that if the oil price spike persists for another month or two, real spending per capita is going to turn down. At that point we will see just how much of a burden the AI data center construction driven improvement in corporate profits can carry all by itself.
Housing permits will next be updated on April 29th, and proprietors’ income on April 30 as part of the first estimate of Q1 GDP.