Light vehicle sales and transportation of goods: the next recession caution shoe may have dropped

 

  - by New Deal democrat

Although the temporary continuing resolution was signed last night, reopening the Federal government through January, needless to say the reporting of economic statistics has not yet resumed, meaning that this morning’s scheduled reports on consumer inflation and retail sales for October were not released. So we must continue to rely on private data to give us a sketch of the current economic situation.

One of the most important blind spots for data during the shutdown has been on durable goods production and purchasing. According to the paradigm discussed by Prof. Edward Leamer 20 years ago, the typical procession of a downturn begins with housing, then durable goods such as motor vehicles, then consumer goods spending, and finally the coincident production and employment sectors.

The housing sector has been recessionary, and worsening, for many months, as units under construction and real residential construction spending turned down sharply earlier this year. Another early warning sector, heavy truck sales, also turned recessionary in the past few months.

But what of the next shoe to drop - motor vehicles sales? For that we do have some insight via manufacturer and dealer reports of sales, and indirectly by motor vehicle shipments information.

Let’s begin with motor vehicle sales.  Here’s the historical look at heavy truck vs. light vehicle sales for the past 50 years (through August). Note that heavy truck sales typically turn down first, and turn down decisively months before the onset of recessions, vs. light vehicle sales, which are much more noisy and thus give a much more muddied signal:

While the official US DoT report for October was not released, via Bill McBride, Omdia (formerly reporting as Ward’s Auto) reported that in October light vehicle sales came in at 15.3 million units annualized, the lowest in 15 months:

Here is the close-up of the past five years, with light vehicle sales normalized by -15.3 million units so that October shows at the zero line:

Typically the three month moving average of light vehicle sales have had to decline about -10% YoY for a clear recession signal, and often that hasn’t occurred until the very cusp of the recession. For a clear signal now, we’d need to see monthly sales of 14.2 million vehicles annualized, so even though October’s number was among the lowest in the past three years, we aren’t there yet.

But even more recent weekly data from the AAR showing YoY transportation of motor vehicles released just this morning not only confirms the downturn, but suggests that it has intensified in the past few weeks:

In the last week, rail transport of motor vehicles and parts was down -9.4% YoY, and has been negative for the past four weeks. These are presumably vehicles being shipped to dealers, so this suggests that sales have continued to slump, and manufacturers’ shipments have been cut back.

If light vehicle sales have declined, suggesting at least a yellow caution signal from that sector, further data released just this morning suggests that the four economic shocks I outlined earlier this week (plus one I didn’t mention, the effect of the resumption of student loan repayments) are having a significant effect on sales in the wider goods producing sector.

First, here is this morning’s update on rail intermodal traffic from the AAR:

This includes motor vehicles as well as many other goods. Note that this too has declined YoY in recent weeks. As of this week, it was down -8.7% YoY.

This negative trend was reinforced this morning by the Cass Freight Report for October, which showed a -7.8% YoY decline in truck shipments:

Here is a longer term historical view of Cass Freight shipments together with rail intermodal traffic YoY. 

Typically it has taken a -10% decline in truck shipments to be consistent with an oncoming recession, together with a smaller decline, on the order of -5%, for rail intermodal traffic. 

Ordinarily I have a lot of cautions about relying too much on the Cass metric. It correlates well with manufacturing data, bust as we have seen several times in the past 10 years, a signficant downturn in manufacturing is not enough to warrant a recession call. Further, the Cass index tends to come in more negative than the official freight report, currently suspended, from the GoT.

But in the past few months the Cass Report has been sending a signficant negative signal.

I should point out that as of this week consumer retail spending continues to hold up well, up 5.9% YoY as of this week, as measured by Redbook:

In fact generally speaking it has improved since July, in consonance with the stock market’s gains fueling a wealth effect.

To reiterate what I wrote at the beginning of this post, alternate private data can only provide us with a sketch of the state of the economy. More thorough official data, in particular as to sales, income, production, and inflation, are absolutely necessary. But the private data we do have for the past month and a half warrants a yellow caution flag for sales of motor vehicles and other important durable and consumer goods.

In other words, the next shoe may have dropped.

Important thought for the day: lessons from SuperNanny

 

 - by New Deal democrat

From Avika M. Cohen, “Litigation Disaster tour guide”:

——-

Ppl need to understand what's happening here. The GOP response to the shutdown was: You're gonna cave, or we're going to hurt vulnerable people by shutting off SNAP. The Dems, unwilling to let that happen, caved. Having watched that, the GOP is now saying: "Give us what we want on abortion or we'll hurt people who need ACA subsidies.”

There is every reason to believe that the Dems will cave. And if they don't, Republicans will run on "we put up a bill to extend the subsidies, the Dems filibustered it because they want to kill babies, they own the expiration" Which will make vulnerable Dems even more likely to cave.

Thing is, when you teach a bully that they can get what they want by bullying, they don't just stop. They go back to that well over and over again.

There are certain fights that you need to either never pick in the first place or be certain you're willing to see all the way through. The shutdown was one of them.

How many clients have we had the "if you're going to do this you need to be willing to see it through, because here's what happens if you start it and then buckle, please factor that into your decision about whether you want to start" conversation with? We're lucky to have so many who get it.

https://bsky.app/profile/akivamcohen.bsky.social/post/3m5fev6mhpc22 

This was one of the constant lessons of SuperNanny. How often, following SuperNanny’s instructions, would the parents put a spoiled toddler to bed despite the child’s crying, and then after 15 or 20 minutes of continued shieking, mom (usually) couldn’t stand it any more, and run to the toddler’s bedroom door. Sometimes SuperNanny would have to physically intervene to talk them out of it, because it was the worst thing they could do.

The 4 shocks jolting the US economy towards recession

 

 - by New Deal democrat

This week the normal empty period for new data after the monthly jobs report is of course compounded by the government shutdown. There is no noteworthy new private data coming out until Thursday, so don’t be surprised if I play hooky tomorrow.

But today let me follow up on some macro analysis. 

A few months ago I pointed out that, going back 60 years, every US recession has been associated with a shock to the system. In other words, the normal progression of interest rates, building, sales, income, and jobs have caused waxing and waning in sectors of the economy, but haven’t by themselves been enough to cause it to contract. For that, you needed an economy that was vulnerable, and a shock administered to that vulnerable economy.

Sometimes it has been an oil shock (1974, 1979, 1991, and partly 2007). Sometimes it has been an interest rate shock (1969, 1974, 1979, 1981). Sometimes it has been a financial shock (2001, 2008). And of course in 2020, it was the Giant Flaming Meteor of Death a/k/a COVID. I don’t mean to suggest that these recessions have been monocausal, just that a shock to the system has always been a part of the equation.

Going into 2025, the US economy was certainly vulnerable. High interest rates had taken a toll on the housing market. Employment, especially in manufacturing, was waning. The post-COVID spike in vehicle prices, repairs, and insurance, was still making its way through the system.

But this year, at least 4 shocks have been administered to the system, some (likely) transitory, but some more chronic:

1. Tariffs

2. Medical cost increases.

3. The suspension of food stamp benefits.

4. AI-related layoffs.

Let’s briefly discuss each of these in turn.

1. Since “Liberation Day” at the beginning of April, almost $200 Billion in tariffs have been imposed, an increase of over $100 Billion since 2024. In Q3, this was roughly 3x the amount collected before this year, and 6x the amount collected just before the 1st T—-p Administration:

The evidence so far is that in the aggregate companies are bearing about half of the increased burden, and are passing on about half of the burden to customers. In October alone, $60 Billion in tariffs were collected. If customers paid half of that by way of price increases, that amounts to $50 for every man, woman, and child in the US. That may not be a significant burden for affluent households, but for lower income households it is going to have a real impact.

2. Medical cost increases. As part of the Big Bad Billionaire Bust-out Bill, Obamacare subsidies were ended. Since about 90% of all Obamacare enrollees make use of these subsidies, that means that 22 million people are directly affected:

These households are either going to have to pay (in some cases astronomical) increases for the cost of coverage, or drop medical coverage completely. If they pay, that is another shock to the household budget; if they don’t, it affects the coverage, and the profits of insurers and health care providers. The proposed ending of the government shutdown will make this effective immediately.

3. The suspension of food stamp benefits. As has been widely reported this month, about 44 million people in the US make use of food stamps:

To the extent meager household income has to be diverted to buy that food, needless to say it is not available for any other kind of consumption (including payment or rent or utilities). While the ending of the government shutdown should mean the resumption in payments, keep in mind that the proposed continuing resolution only lasts through January. In other words, in 75 days we are right back here, and the successful use of SNAP benefits as a fiscal weapon this time means it will surely be implemented again then.

4. Finally, as I noted on Friday, layoffs as counted by Challenger Gray were at their second highest monthly level since the COVID lockdowns, and the highest October level in a quarter of a century. Many of these were concentrated in tech companies, as live human beings were replaced (or, “replaced”) by AI algorithms:

While this hasn’t shown up in any appreciable increase in new jobless claims, as I noted yesterday the number of continuing claims is close to its highest level in over three years. If this continues, it seems very likely we’ll see it show up in an increase in initial claims as well.

So there you have it: four somewhat independent shocks to the US economic system that individually or collectively might be enough to push it over the edge into a recession. In that regard, let me re-post this graph of the likely combined impacts of tariffs and the Big Bad Billionaire Bust-out Bill on household incomes by percentile:

This only includes the first two of the 4 shocks described above.

Needless to say, the shutdown of official government economic data could hardly have come at a worse time. While we have reasonable proxies for the employment situation, alternative data for income, sales, and spending is spotty. In particular, how has spending on durable goods by companies and consumers held up during this period? Have they cut back, or have stock market gains and the wealth effect so generated more than overbalanced the above described shocks. We simply don’t know. Assuming government data releases resume shortly, I will be particularly focused on that information.

Tabulated state level jobless claims continue neutral trend

 

 - by New Deal democrat

As I have done since the beginning of the government shutdown, the unadjusted number of initial and continuing claims can be calculated based on reporting by the States, plus DC, and Puerto Rico. Then, by applying the same adjustment as was used for the same week last year, the seasonally adjusted number can also be estimated closely as well.

Indeed, since my forecasting method relies on the YoY% changes, it is almost never an affected by that seasonality. 

So tabulated, for the week ending November 2, unadjusted initial claims totaled 216,238 vs. 212,743 in 2024, an increase of 1.6%.  

Last year this week the seasonal multiplier was *1.0388. Applying it gives us an estimated seasonally adjusted number of 225,000.

We can similarly calculate the four week moving average, since the last four weeks of claims were 224,000, 230,000, and 220,000, as well as this week’s 225,000. That gives us an average of 224,750, which is -2,000, or -0.9% lower than the number of 226,7500 one year ago. Of note, this is the last week in which the 2024 comparison will be affected by the hurricanes that temporarily depressed claims for several weeks in October. Excluding that week, the average of the three last weeks this year is slightly higher.

Using the same methodology, unadjusted continuing claims for the week ending October 25 totaled 1,711,947 vs. 1,646,920 last year, an increase of 3.9%.

The seasonal adjustment for the applicable week last year was *1.14152. Applying it gives us an estimate of 1.954 million continuing claims, or -7,000 lower than one week ago. Still, continuing claims during the government shutdown have all been close to their highest levels since 2021, which was 1.968 million this past July. 

For graphic comparison, here are initial claims (blue), the four week average (red), and continuing claims (gold) all normed to 0 as of this week’s tabulation, compared with their readings in the past two years before the shutdown:

As with the past several weeks, absent hurricane distortions this continues the general neutral trend of initial and continuing claims, higher than one year ago but much less than 10% higher, forecasting a weakly expanding economy for the next several months.

Weekly Indicators for October 3 - 7 at Seeking Alpha

 

 - by New Deal democrat

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

This was the week that the 800 pound gorillas of Wall Street reported Q3 earnings, and - to use a World Series type metaphor - hit it out of the park. 

Meanwhile down in gruntland, the amount of goods being moved from ports to markets hit a major air pocket.

More signs of a “K shaped”, or bifurcated economy where Wall Street titans are doing well, fueling upper income spending, while down below there are signs of exhaustion.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy - with data almost entirely unaffected by the government shutdown - and reward me with a penny or two of lunch money for my efforts in collecting and organizing it for you.