A detailed look at interpreting expansionary and pre-recession layoff and unemployment signals

 

 - by New Deal democrat

This week, in addition to my usual look at jobless claims, especially in view of my post earlier this week breaking down the components of aggregate nonsupervisory payrolls,  I want to compare them with several other indicators of increased joblessness in terms of their expansion and pre-recession dynamics. 

First, let’s look at this week’s update. It is simply very hard for me to conceive of any recession being imminent as long as people aren’t getting laid off. The historical look at the 4 week moving average of claims shows that they have *always* trended higher before a recession begins, with the very least warning being 2.5 months in 1981:

Further, the monthly average of initial claims has almost always been higher by 10% or more YoY before the onset of recessions, with the exception of the oil shock of 1974 and the 2008 Great Recession:

Which means that this week’s data is a strong negative of any imminent recession, regardless of the copious amounts of other soft data. As I pointed out yesterday, it has been one of the three pillars holding up this expansion.

Initial claims declined -8,000 to 205,000, one of the lowest numbers in the past 50 years. The four week moving average declined -750 to 210,750. With the typical one week lag, continuing claims rose 10,000 to 1.857 million:

As usual, it is the YoY% change which is more important for forecasting purposes. So measured, initial claims were down -9.1%, the four week average down -7.9%, and continuing claims down -1.3%:

These are simply very positive numbers, totally inconsistent with any imminent recession.

Let’s do our typical look at how these compare with the unemployment rate. To back up a bit, here is the historical look at the 4 week average of claims compared with the unemployment rate, measured YoY:

Simply put, going back 60 years, initial claims have always started rising before the unemployment rate and always peaked before the unemployment rate, with the closest point being only 2 weeks during the 1980 recession.

Now here is the post-pandemic look:

Since last July, initial claims have been forecasting that the YoY comparisons in the unemployment rate would improve. Here is the same data in absolute terms:

Although the unemployment rate ticked up 0.1% last month, both initial and continuing claims still indicate downside pressure on that rate.

 Now let me expand this discussion to three other metrics of employment softness: layoffs and discharges from JOLTS, the number of newly unemployed by less than 5 weeks, and aggregate hours of nonsupervisory workers, both of which are from the monthly payrolls report. I included this last metric because, as I pointed out several days ago, it typically is the first component of aggregate payrolls to decline, with average wages holding up usually into the onset of recessions.

First, here is the historical look at each, broken down into two time periods because layoffs and discharges were not reported until 2001:

Now here is the post-pandemic view:

The short term unemployment less than 5 weeks metric is very noisy, so to extrude signal, can only be looked at on a 3 month moving average basis. Comparing the metrics, one 3 occasions short term unemployment turned up first; but on 3 other occasions initial claims turned up first. One time they turned up simultaneously. Meanwhile, the (inverted) number of hours worked always turned up last, frequently not until the onset of the recession.

Now let’s look at the same data YoY, first historically:

And now the post-pandemic view:

On a YoY% change basis, initial claims *always* turned up first, with the exception of 2001 when they turned up simultaneously with the three month average of short term unemployment.

So the first lesson is that initial claims are a much less noisy metric than short term unemployment, and are the more leading of the two.

Secondly, notice that while (inverted) aggregate nonsupervisory hours have always turned up last, they are the least noisy of any of the four metrics, and they have also turned up well before the onset of recessions.

In other words, when we compare all four metrics, the best thing to do is to look at initial claims, especially YoY, and then look for confirmation by aggregate nonsupervisory hours. Only when both signal is there the most reliable indication of a recession being close at hand. 

And at present neither are signaling. This pillar of the post-pandemic expansion remains firmly intact.

The impact of the Iran war oil price spike on stagflation

 

 - by New Deal democrat

Even before the Iran war started almost three weeks ago, the US economy was in something of a stagflationary scenario. Let’s take a look at how the war, and in particular the closure of the Strait of Hormuz, has impacted that, starting with the direct effects and then following the ripples out to the wider economy.

Most directly of course, the price of a barrel of oil has shot up from about $63 to about $95:

This is the highest price since August of 2022.

Unsurprisingly, this almost immediately caused a similar spike in gas prices. Normally I make use of the weekly information from the E.I.A., which shows the national average for a gallon of gas as of Monday at $3.72. But events have been moving so fast that the daily average from GasBuddy is more accurate, which as of the time I am typing this is $3.86/gallon:

This is also a three year high.

Although I won’t bother with a graph, keep in mind that as a share of disposable income this remains very low historically. This is not the equivalent of the 1974, 1979, 2008, or even 2022 oil price spikes.

The inflationary impact of these prices has shown up in both US Treasury rates and mortgage rates:

A closer look at daily mortgage rates shows they rose from 5.99% to 6.28% as of Monday:

This will likely put a damper on the “green shoots” slight rebound in the housing market I have been talking about for the past few months.

And according to Truflation, which attempts to measure consumer prices daily, using prices on the internet and other sources, YoY consumer prices have jumped from a low of about 0.68% in early February to 1.52% as of yesterday:

The broad economy has been kept afloat by AI data center-related spending, which shows up in three high frequency weekly data series. The first is consumer retail spending published by Redbook:

On a YoY basis, not only has consumer spending been holding up throughout the past year, but the comparisons have been increasing YoY. In fact, the last time the YoY% increase came in at under 5% was last July. As of this week’s report, it was up 6.4% YoY.

Secondly, new jobless claims have also been hovering near their 50 year lows:

Although they have trended slightly higher since the beginning of this year, that has been their pattern, even after seasonal adjustments, for the last three years. They remain lower YoY, which is an absolutely positive sign.

But the third metric, stock market gains, have been faltering:

The above graph is normed to 100 as of Election Day 2024. Both big selloffs since then have been due to actions by one man, first the tariff-related 20% selloff last spring, and now a modest 3% selloff (so far) from the Iran war.

The S&P 500 did make a new 3 month low last week, which takes it into neutral territory by my method. Note that it is also only higher by less than 2% from 6 months ago as well.

Finally, this morning we got updates from the Before Times (i.e., January and February) on two significant data points that are affected by tariffs and one of which is also impacted by oil prices.

The producer price index came in “hot” for February, with final wholesale demand prices increasing 0.7% for the month, and 3.4% YoY. Raw commodity prices rose 2.1% for the month, and 3.2% YoY. The increasing trend is apparent in commodities, and to a lesser extent - at least for the past 8 months - in final demand. The below graph also shows the CPI (red), which historically followed, but since the advent of “just in time” inventory methods has largely been coincident or only slightly lagging PPI:

Again, this does not take into account the big increase in oil and gas prices so far this month. It suggests at very least that we should not expect any disinflation in consumer prices with the likely exception of shelter.

Secondly, the final version of durable and capital goods orders for January showed the former unchanged and the latter up a small 0.1%. Their positive trajectory since mid-2024 remains intact, with the former up 10.3% YoY and the latter up 4.4% - but, again, remember this is through January:

To sum up the state of the economy based on the above, before the Iran war the main part of the economy was either on the cusp of, or actually in a mild recession with the tipping point being the government shutdown last autumn. This was counterbalanced by the AI building Boom, which spilled over into stock prices and wealth-effect related consumer spending by the affluent.

The war, and in particular, the resulting oil prices shock is unlikely to have any big effect on AI data center construction, certainly not directly. Hence (most likely) the mild reaction by the stock market so far. But the inflation is very much showing up at the gas pump, and considering producer prices already jumped in February, CPI for March and April are likely to point to intensifying stagflation as well. A renewed slump in housing would certainly not help. Which means that the lower part of the “K” shaped economy may finally outweigh the upper part.

Real aggregate nonsupervisory payrolls have continued to increase, negativing recession. Here’s why

 

 - by New Deal democrat

There’s no major economic news today, so let me take this opportunity in view of last week’s update to the CPI, to update one of my favorite labor market indicators: real aggregate nonsupervisory payrolls.

As a brief refresher, over the past 60 years this has been a very good and reliable “real” economic indicator. Basically, so long as average American households’ income is rising in real terms, they can sustain and expand their consumption, which largely drives the economic expansion. When it declines, usually households have to pull in their horns, triggering Keynes’ “paradox of saving.” What is good for the individual household causes an aggregate decline in consumption, followed by an economic contraction.

Let’s start with the absolute value of this indicator through February:

Although there were several stalls or near-stalls last year, the general trend was increasing. The gap is due to the omission of CPI reports for the period of the government shutdown. Although there was an assist from the way the Census Bureau kludged shelter costs during the shutdown, evne if they had not done so, the subsequent months would still show an increase.

So the bottom line is that, before the Iran war this indicator did not suggest a recession was imminent.

But let me break down the components of this index to show why that is. Real aggregate nonsupervisory payrolls is calculated by taking average hourly nonsupervisory wages (blue in the graphs below) x the number of hours worked (green teal), and then normalizing by dividing by the CPI (red). Below I show each of them on a YoY% change basis.

First, here is the period from the inception of the data series in 1964 through 1986:

And here is the subsequent period up until the pandemic:

There was a consistent pattern of each of the three measures during this entire 50+ year period. The inflation rate increased in roughly the year prior to the onset of each recession. Almost simultaneously, the number of hours worked started decelerating precipitously in the months before the onset of the recessions, frequently turning negative shortly after the recession began. Meanwhile average hourly wages remained steady or even increased a little on a YoY basis going into the recessions. It was only after the onset of recessions that wage increases were trimmed back.

So, what we are looking for is an uptick in inflation, and a downtrend in hours worked. With that in mind, here is the post-pandemic record:

Hours worked did gradually decelerate through 2023 and 2024, even turning negative for several months in 2025 before rebounding slightly. if you go back to the pre-pandemic graphs, a 1% YoY increase in hours worked was pretty pathetic. But there was no precipitous decline post-pandemic. Meanwhile, assisted by the disinflation in shelter costs as measured by the CPI, YoY inflation was also gradually decreasing. Note that *this* measure was affected by the shelter kludge after the government shutdown; without it there would have been no further deceleration in the CPI thereafter.

Finally, we see that while wage growth has also been gradually decelerating, it remains higher than the YoY inflation rate. If you go back and look at the pre-pandemic cycles, inflation (red) almost always exceeded wage growth (blue) YoY in the months before the beginning of recessions, although there were several exceptions, notably 2000-01, but also several occasions when inflation grew more than wages for several years late in expansions. This was due to the general deceleration of wage growth as the huge Boomer generation, and women, entered the labor force, which together held down wage growth even as two-income *household* income increased.

Of course, it could be that “this time it’s different,” like 2000-01, although I would still expect to see aggregate hours decline YoY. Additionally, it could be that the Iran war will finally cause a spike in consumer inflation that will result in it being higher than YoY wage growth.

But the bottom line is, through February the consumer economy has surprisingly been aided by an increase in real aggregate nonsupervisory payrolls. And very low new weekly jobless claims suggest that has not changed. At least not yet.

Industrial production increases again in February, but ex-AI related utilities has made little progress since last July

 

 - by New Deal democrat

Probably my biggest theme right now is that most of the economy is either recessionary or at least on the cusp of recessionary. But this has been counterbalanced by AI data center- related spending, and the stock market boom and wealth effect it gave rise to. 

Last month I highlighted how that had shown up in the utilities portion of industrial production, which is extremely noisy month over month, but in the longer perspective was increasing much more than other production. There was more of both indications this month.

Industrial production as a whole rounded up from +0.151% to 0.2% in February (blue in the graph below), and to a lesser extent so did manufacturing production, also up 0.2% (red). I also show production less utility production (gold), to show how that is in accord with both other metrics:

Now let’s take a look at utilities production (orange) vs. industrial production less utilities (gold) since just before the pandemic:

It’s easy to see how sharply utilities production has pulled away from everything else, albeit with a huge amount of month to month noise. This month’s -06% decline barely registers on the trend.

Note that the significantly increasing trend from the middle of 2024 in industrial production is also apparent in the graph of durable goods orders (blue) and core capital goods orders (red) over the same time period:

The front-loading of orders before “Liberation Day” last year is also apparent.

Finally, I’ve noted a number of times how most coincident indicators have stalled since the middle of last year, and there may have been a “mini-recession” during the government shutdown last autumn. The below graph demonstrates how industrial production ex-utilities (gold) fits into that (all series normed to 100 as of last July):

Ex-AI related production, just like real sales (blue) and nonfarm payrolls (red), as well as real personal income less government transfers (not shown) has barely budged during the eight months since then.

And of course, all of this data is from the “before times” that do not include the war with Iran and the oil shock that has been developing since.

Weekly Indicators for March 9 - 13 at Seeking Alpha

 

 - by New Deal democrat

I neglected to post this over the weekend, so let’s get it out of the way now: my “Weekly Indicators” post is up at Seeking Alpha.

Unsurprisingly, the big news of the week was the continuing spike in oil prices, that spread to gas prices, that caused a selloff in the stock market. A little more surprisingly, the “flight to safety” trade towards the US$ is very intact.

As usual, clicking over and reading will bring you up to the moment as to the state of the economy, and reward me a little bit for bringing it to you.

January personal income and spending: treading water, leading metrics sinking

 - by New Deal democrat

Before I get to the main event, a couple of quick comments on the other data released so far this morning:

 1. Real GDP as revised only grew at 0.7% annualized in the 4th Quarter of last year. This is often, but by no means always, recessionary. And since there was a government shutdown for over a month of that quarter, there will be something of a rebound this quarter.

 2. Durable goods orders are very noisy month to month. The unchanged readings for January in both headline and capital goods orders are obviously not good, but they follow an almost unbroken chain of increases dating back to late 2024, and especially the 2nd half of last year. So, one punk month, could mean something, could be just noise.

UPDATE: 3. The January JOLTS report was more of the same we have seen for over a year. While the only negative month over month metric was quits; the measures of job openings and hires remained in the same range they have been since late 2024, i.e., they were basically flat. Layoffs and discharges have declined sharply beginning in November, mirroring the excellent jobless claims reports that began then. Also, a flat quits rate (but one that has improved slightly in the last few months) implies flat to slightly improving wage growth, currently at 3.7% YoY.

Now on to the most important data release….

Personal income and spending are among the most important monthly indicators of all, because they give us a detailed look at consumption by the broad range of American households. And since consumption leads employment, they also give us an idea of what is likely to happen with regard to jobs in the near future.

This morning’s data was for January, so it is still several weeks later than usual. In January, nominally both personal income and spending rose 0.4%. But the PCE deflator increased 0.3%, both only increased 0.1% in real terms. Here is what they look like since the pandemic:

Note that real personal income has been flattening for months, and has been lagging spending, which becomes even more apparent on a YoY basis:

Real personal income is only up 1.5% YoY, the lowest in three years; while real spending improved to 2.4%. But the trend in both measures remains deceleration.

Once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income rose 0.2%:

On a YoY basis, this was up 0.6%. This was an improvement from last month’s initial look of 0.1% YoY, which has now been revised higher. Nevertheless, with only three exceptions — 2022 and 2013 (which was an artifact of a change in Social Security withholding), and one month in 1995 — such a low rate has only happened during recessions:

In 2022, the economy was saved by the hurricane strength tailwind of deflating producer prices, which enabled a continued Boom in consumer spending. Needless to say, with the war with Iran that is not going to happen now. While the 0.3% increase in PCE prices for the month cause the YoY change to decline -0.1% to 2.8%, the increasing trend remains intact:

The leading portions of consumer spending are also flashing red warning signals. Historically, the pattern has been that real spending on goods (red in the graph below) turns down in advance of recessions, and in particular spending on durable goods (orange), which tends to turn down first. Real spending on services (blue) has tended to rise even during all but the most prolonged or deep recessions. In January, while real spending on services rose 0.3%, real spending on goods declined -0.4%, and on durable goods declined -1.1%. The below graph shows the post-pandemic record, normed to 100 as of one year ago:

The trend in goods spending was flat all last year. To smooth out some of the noise, I have been tracking the three month average. That average was almost completely flat in the period from July through December, and made a six month low in January.

The updating of the PCE deflator also allows for an update to another important coincident indicator used by the NBER to consider whether the economy is in recession or not; namely, real manufacturing and trade sales, which is delayed by one additional month. These increased 0.8% in December, and were up 1.3% for all of 2025:

The three month average also increased, but keep in mind this has been a very volatile metric. 

Finally, one double-edged sword is that the personal saving rate - i.e., the portion of income left over after spending - increased sharply, from 4.0% to 4.5% in January:

On the one hand, this is good because it means that consumers are in somewhat less precarious position, after saving less in late 2025 than at any time since the turn of the Millennium except for the several years before the Great Recession and 2022. But on the other hand, a sharp retrenching by consumers is also something that typically happens just before the start of a recession.

To sum up, as of January real personal income was just barely improving, while real spending on goods, and in particular durable goods, have not just flatlined, but have declined. It is not likely that real sales of goods will continue to increase in such a scenario. Meanwhile, consumers increased their saving. 

Last month I concluded by writing that “Any further deterioration would be clearly recessionary — and a downturn in the stock market, which has delivered so much ‘wealth effect’ spending, could be just such a blow.” The leading portions of the report did turn down - and yesterday the stock market made a new three month low.

Batten down the hatches.