Long leading indicators in Q1 GDP point in absolutely opposite directions

 

 - by New Deal democrat

The advance report for Q1 GDP was a study in contrasts, both in terms of the leading indicators and also the sources of strength.

Let me start with the general information: on a nominal basis, GDP in Q1 increased a mediocre 1.4% at an annual rate (blue). After adjusting for inflation, in real terms it only grew 0.5% annualized (red):

This is one of the poorer performances since the pandemic. On the other hand, since Q1 of last year was even worse, on a YoY% basis, growth in the GDP improved a little both nominally and in real terms:

But GDP growth was even more mediocre than the top-line measure makes it look, because in Q4 we had the lengthy government shutdown. That spending resumed in Q1, so government spending bounced back sharply:

Only in four quarters in the past five years did government spending grow more sharply than in Q1. Had the spending growth only been at “normal” post-pandemic levels, real GDP growth in Q1 would have been basically *0%*.

But wait, there’s more!

I’ve been writing for many months that the housing sector has been outright recessionary. That was further confirmed in this report. In nominal terms, private fixed residential investment (the GDP version of housing) declined -0.9%. In real terms it declined -2.1%. The best way to look this as a long leading indicator is as a share of nominal (blue) or real (red) GDP:

Either way, this was the lowest contribution to GDP since the recession. To beat this particular dead horse one more time, it was recessionary.

So, in addition to the rebound in government spending, what saved Q1 GDP? Corporate spending and profits. 

As per usual, corporate profits (red) aren’t reported in the first advance GDP report, but a reasonable proxy, proprietors’ income (blue) is, and that income rose 1.8%:

Only three times in the past five years did it increase more on a quarterly basis:

This strongly suggests that corporate profits in Q1 rose sharply as well, something that has been apparent in the quarterly corporate profit reports to Wall Street:

And the GDP report showed that the type of spending associated with the construction and operation of AI data centers, information processing equipment and intellectual property products, both increased sharply, with the former at a near record increase:

Update: The surge in corporate spending was also apparent in the final March report for manufacturers’ spending on durable goods orders (blue), capital goods (red), and consumer goods orders (gold), which increased 0.8%, 3.4%, and 2.4% respectively, the core capital goods segment to an all-time record high:

To sum up, Q1 GDP likely would have been all but flat were it not for the rebound in government spending. Further, the two long leading indicators in the report, residential investment and corporate profits, pointed in starkly opposite directions. The former was recessionary and the latter showed a Boom. 

The rebound in government spending will not be repeated in Q2. The direction the economy takes from here will depend on how long the corporate-led AI data center Boom can continue, vs. how battered consumers are by higher inflation.

Weekly Indicators for April 27 - May 1 at Seeking Alpha

 

 - by New Deal democrat

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

It is surprising how positive most of the high frequency data is, despite the continued shutdown of the Strait of Hormuz and all of the impending shortages in energy and other important commodities have failed to make a dent in most of them. Even mortgage applications have rebounded somewhat.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and bring me a penny or two for my efforts in putting it all together in a coherent format.

April ISM manufacturing: how long can the AI manufacturing Boom keep exploding prices from creating a consumer implosion?

 

 - by New Deal democrat

April data started out as usual with the ISM manufacturing index. There was some good news, but mainly bad news.

The good news was that the headline ISM number (blue in the graph below) remained positive, and was unchanged at 52.7 (recall that any number above 50.0 indicates expansion). The more leading new orders subindex (gray) did rose from 53.5 to 54.1, suggesting the modest Boom - probably 90% of which is related to AI data center construction - will continue. The three month averages, which smooth out a little volatility, were steady at 52.6 and slightly lower at 54.5, respectively:

I am convinced that all of the activity surrounding AI data center construction and operation, and the affluent consumer spending secondary to the (narrow) stock market Boom associated with it are the only things keeping the US economy from being in recession at present. In any event, this number suggests continuing expansion in the goods producing sector for the next few months.

That was the good news. Now here’s the bad news.

First, the “less bad” trend in goods producing employment over the past few months reversed in April, with the employment subindex declining -2.3 to 46.4, the lowest number in four months:

Further, as the above graph shows, the longer term downtrend in manufacturing employment may have reasserted itself.

But that wasn’t even the worst news, which was in the prices paid subindex, which rose sharply, by 6.3, to 84.6, the highest number since  May of 2022, and one of the 6 highest numbers in the entire past decade:

This is a very sharp inflationary pulse, which is going to pass right through into consumer prices for goods.

With this kind of inflationary pressure, I am skeptical of how long the AI Boom can continue to resist a possible consumer implosion.

Blockbuster initial jobless claims report suggests unemployment could decline all the way to 4.0%

 

 - by New Deal democrat

I wasn’t able to get to either the GDP report or the jobless claims report yesterday. I’m going to hold off on the GDP report until next week, because there was a lot going on, but this morning (before the ISM manufacturing Index comes out) let’s take a look at jobless claims.

Yesterday’s report of only 189,000 people making new jobless claims last week really deserves its own special mention. Why? 

Well, not only is it the lowest - by 1,000 - of the entire post-pandemic period (note below graphs subtract 189,000 so that the current number shows at 0):

It is also the lowest since September 1969, almost 60 years ago!:

That’s pretty wild.

The four week moving average declined to 207,500, which while very low, is still above several weeks earlier this year and also in January 2024. Continuing claims, with the typical one week delay, declined to 1.785 million:

Here is the YoY% view most important for forecasting purposes:

Initial claims are down a whopping -20.9% YoY, while the four week average is down -8.1%, and continuing claims are down -6.3%.

This is very positive - indeed the most positive datapoint in the entire economy.

As per usual, let’s update what this suggests about what will happen with the unemployment rate in the next several months, which will be reported next Friday for April:

One year ago the unemployment rate was 4.2%. The big downdraft in initial and continuing claims suggests that the unemployment rate, which was 4.3% last month, will decline, possibly all the way to 4.0% in the next few months.

Stagflationary real personal income, real spending on durable goods were recessionary in March, but consumers and manufacturers haven’t retrenched

 

 - by New Deal democrat

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 for March was the first that represented activity including at least part of the Iran war oil shock. 

In March, nominally personal spending rose 0.9%, while personal income rose 0.6%. Since the PCE deflator increased 0.7%, however, spending was only higher by 0.2%, while real income declined by -0.1%, the second decline in a row, taking the absolute number down to its lowest since last July:

Further, on a YoY% basis, real income was only up 0.2%. Aside from months where it was affected by tax law or stimulus programs, such a low increase has only happened during recessions. Real spending was up 2.1%, the lowest in over two years except for December:

Once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income also declined less than -0.1% to the lowest level since last July:

On a YoY basis, this was now down -0.1%. Again, aside from comparisons distorted by tax law changes or stimulus programs, this has only happened during recessions:

Another important component of the data is spending on goods, and in particular durable goods, which is a leading indicator. 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. These have been flashing red warning signals. 

In March, real spending on services rose only 0.1%, but real spending on goods rose 0.6%, and on durable goods rose 0.9%. The below graph shows the post-pandemic record, normed to 100 as of March of last year:

Keep in mind that gasoline is a good, explaining the substantial increase in goods spending in March. Nevertheless, on a YoY basis real spending on goods was only up 0.7% and real spending on durable goods *declined* -0.6%:

Once again, this last number was recessionary.

The Iran war came a-callin’ for PCE inflation, as the deflator increased 0.7%, causing YoY PCE inflation to rise to 3.5%:

Meanwhile, the personal saving rate - i.e., the portion of income left over after spending, declined -0.3% further in March, to 3.6%, the lowest such rate in over three years, and a low rate which has only been exceeded during the 2005-07 period and during 2022:

Basically, in order to deal with the spike in gas prices, consumes got further out over their skis, leaving them vulnerable to any further shock, but explaining why the economy did not contract last month, as typically sharp retrenching by consumers is also something that happens just before the start of a recession.

Finally, 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 0.6% in February to another new all-time high:

This is of a piece with the recent rebound in manufacturing data we have seen in things like durable and capital goods orders as well as manufacturing production. 

There are two very big trends in this data. First, the consumer is in real trouble, as real income is faltering, as is spending on goods (ex-energy), and in particular on durable goods. As I noted above, this is recessionary, although consumers have not (yet) started to retrench. On the other hand, manufacturing — likely aided by AI data center construction, and as of March likely also aided by oil company profits — continues to Boom. It is likely only this that has kept the economy technically out of recession.

The quandary of housing: almost all signs are classically recessionary; so why hasn’t there been a recession?

 

 - by New Deal democrat

As I reiterated the other day, housing is the one long leading signal of the economy that has been soundly negative - indeed frankly recessionary - for the past year. That trend continued in March, although there are signs of it bottoming out. Without having caused a recession. 

Let me start with mortgage rates (blue, left scale) compared with single family permits (red, right scale). Typically housing permits and starts follow mortgage rates, and for most of the past several years they had been declining from their post pandemic high of over 7%. In February they made a new 3+ year low of 5.99%. The decline was sufficient to reverse the trend in single family permits (red, right scale), which began to rise from their bottom early last summer:

Of course mortgage rates did rise in March, and this appears to have put a damper on permits (blue in the graph below) which declined -166,000 to 1.372 million annualized, the second lowest reading since 2020. On the other hand, the more noisy starts (gold) rose 146,000 to 1.502 million annualized, the highest in 15 months. But the metric that is the least noisy of all and conveys the most signal, single family permits (red, right scale), declined -35,000 to 895,000 annualized, nevertheless continuing its general uptrend since the beginning of last summer:

On a YOY% basis, starts are (noisily) up 10.8%, while permits are down -7.4% and single family permits are down -7.9%. Typically all three have been down 20% or more at the onset of recessions in the past, although in the 1991 and 2001 recessions, they were only down about -10%:

Note that the downtrend has not been worsening for many months. Further, there have been a number of times, for example 1966, 1987, and 1995, where construction has been down -10% or more YoY without a recession occurring.

Let’s turn next to the number of housing units under construction. As I have written many times in the past several years, it is the best “real” measure of the economic impact of housing (blue in the graphs below). In March they were unchanged at their five year low of 1.264million annualized. They are also down -26.3% from their peak:

The above graph shows how they have followed single family permits (red), as expected. More often than not in the past by the time a decline in units under construction had declined by this much, a recession had already begun. The only two exceptions were the late 1980s, where the pre-recession decline was -28.2%, and 2007, where the pre-recession decline was -25.6%. 

Now let’s compare housing units under construction with the typical final shoes to drop before recessions, houses for sale (gold) and residential construction employment (red), all normed to 100 as of their respective post-pandemic peaks. Uniquely, employment in residential construction has risen slightly since last August, even though the number of units under construction has continued to decline. Meanwhile housing units for sale have continued to decline:

Now here is the same data presented in YoY% change format:

In the past 40 years, houses for sale and employment in residential construction had turned down YoY before the recessions had begun. After making a trough at -1.4% YoY, residential building employment is now only down -0.4%; while housing units for sale are down -4.0%, the weakest YoY reading since summer 2023.

So we end with a quandary. With the sole exception of employment (which may be reflecting, and distorted by, the ICE raids on construction workers), all of the indicators in the housing sector are giving classic signs that a recession should be underway — and they have been since late last year.

And yet there are a number of signs that the situation has been bottoming, without a recession having occurred. As I wrote in my note earlier this morning about new capital goods orders, this may be because the Boom in AI data center construction and operation has more than overbalanced declines in things like real income, or real personal spending on goods, and the complete stall in employment growth since early last year. We should get more information about this tomorrow from the release of personal income and spending in March, as well as Q1 GDP.

Capital goods orders rise to a new all-time record high in March

 

 - by New Deal democrat

There was some important housing data this morning; but first I wanted to drop a brief note on the advance report on manufacturing that also was released, because it is yet more confirmation of the (surprising) strong positive trend in that sector.

This report covered March, so included the first few weeks of the Iran war. While overall manufacturers new orders rose 0.8% (blue), the real surprise was in core capital goods orders, which importantly excludes the defense sector (red), which rose a sharp 3.3% to a new all-time high:

Suffice it to say, the impact of tariffs has been completely absorbed by the system. There are two important factors to note: (1) much of this probably reflects the Boom in AI data center construction; and (2) I saw a note last week suggesting that the closure of the Strait of Hormuz was causing manufacturers’ to speed up new orders in order to try to have supplies on hand before the delivery pipeline shut down. Needless to say, both of these suggest that there is likely to be a rapid reversal, because in the first case exponential growth must eventually end; and in the second hoarding is just front-running.

But for now, a very positive short leading sign in the manufacturing sector.