Updating the long leading indicators: per capita real retail spending and real spending on goods

 

 - by New Deal democrat

So much of the changes to the economy has been dictated by the whims of the White House that it has not made much sense to throughly update the suite of long leading indicators in many months. After all, why chart their incipient effects when they are consistently being overtaken by new lurches in diktats?

With a few empty days of new economic data this week, I thought I would take a look at a few of them; in particular, those most closely tied to the “real” vs. financial, economy. Today, let’s revisit and update real sales per capita.

Real retail sales per capita have long been an element of my list of long leading indicators, because they typically turn down about a year before the actual onset of recessions. In the past several years I have added the very similar indicator of real consumption expenditiures on goods from the personal income and spending report. Like the less broad retail sales measure, their growth either turns down or at least stalls out many months before the onset of most recessions.

Since the data on both these metrics goes back many decades, I have split the data by historical sections. First I look at it in absolute terms, and then we’ll look at it YoY, which better shows the turndowns.

First, here are real retail sales per capita have (red) and real spending on goods per capita (blue) from 1959-82, 1983-2008, and 2009-present:

While both metrics are somewhat noisy month over month, it is obvious that both measures of consumer spending increase almost continually throughout expansions, but either turn down (real retail sales) or at least stall (real spending on goods) typically on the order of a year before the onset of recessions in the past 60+ years. There have only been two exceptions: 1966 for real retail sales, and 2022-23 for both metrics. 

Why did the indicators fail in 2022-23? Mainly as an artifact of comparison. The stimulus payments to consumers in 2020 and 2021 during the pandemic led to a lot of durable goods purchases in particular, often goods delivered to homes. Simply put, for some time consumer demand for goods, especially durable goods, was largely satiated. Secondarily, the big decline in the price of gas from $5 to $3 a gallon beginning in July 2022 freed up lots of consumer cash to be spent elsewhere, thus avoiding a consumer-centric economic downturn. 

Note that in the past year both metrics have essentially stalled. And insttead of a big decline in gas prices, consumers have been faced over the past six weeks with a big incrrease.

Now let’s look at the same historical series YoY:

Again, note how positive YoY improvements in real consumer retail spending, and spending on goods, have always correlated with continued economic expansions. With the exception of 1966, the only negative comparisons which did not correspond with the start of or oncoming recessions were sporadic months in 1987, 1994, 1996, and the near “double-dip” of 2002-03.

Now let’s look at the post-pandemic YoY record:

Again, we see the poor 2022-23 performance, which was a major false negative resulting in large part from poor comparisons compared to 2021. While the poor performance of real retail sales continued into 2024, it was not confirmed by the broader measure of real spending on goods. Both decelerated sharply in 2025, and both were negative during December. Which means they aren’t signaling an oncoming recession now, but the trend is not good. And the YoY comparisons will be challenging for the next several months: for retail sales, February was already -0.5% below last March, and -0.2% below last April.

Real retail sales will be updated for March tomorrow, and real spending on goods will be updated on the 30th.

Weekly Indicators for April 13 - 17 at Seeking Alpha

 

 - by New Deal democrat

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

The biggest news this week is how sharply oil prices backed off of their recent highs, as speculators figure that all will soon be back to (at least close to) the status quo ante in the Persian Gulf. Secondarily, the Empire State and Philly Manufacturing Indexes continued the theme of a rebound in that sector.

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 in lunch money for my efforts.

March industrial production mainly continues stagnant trend

 

 - by New Deal democrat

Since I didn’t get to it yesterday, let me say a few words about yesterday’s industrial production report for March this morning.

I used to call this “the King of Coincident Indicators,” but with the shrinking of manufacturing as a share of the US economy, that is no longer the case. Nevertheless, it is an important coincident indicator, with the emphasis on *coincident.* It doesn’t tell us where we are going, but is an important signpost about where we *are.*

And what yesterday’s release showed us, for the about the sixth month in a row, is that the coincident economy is stagnant (but not contracting!), with the big exception of AI-related spending.

In March total industrial production (blue in the graph below) declined -0.5%, although February was revised higher to +0.7%. Manufacturing production (red, right scale) declined -0.2% and was revised lower for the previous several months. Total production is only 0.2% higher than what it was last August, and manufacturing production is lower than it was during the entire July-September period:

Where AI-related spending shows up is in the utilities subindex (gold in the graph below, right scale). If we look at all industrial production less utilities (blue, left scale), then like manufacturing, production has made no headway since last summer, and indeed is slightly lower:

So as I started out above by saying, the message of industrial production was not one of contraction, but one of being stagnant with the exception of AI-related data center construction and support. 

Jobless claims continue to be the most positive metric in the array of economic indicators

 

  - by New Deal democrat

The new regime of lower jobless claims continued this week. Initial claims declined -11,000 to 207,000, while the four week moving average rose 500 to 209,750. Both of these remain within a stone’s throw of their recent 50+ year lows. Continuing claims, with the usual one week delay, rose 31,000 to 1.818 million but aside from that and one other recent week, is the lowest since May 2024:

The YoY% changes also continue to be lower, with initial claims down -4.6%, the four week average down -5.1%, and continuing claims down -3.1%.:

This continues to be very positive for the economy over the next several months. To reiterate, jobless claims are currently the most positive leading indicator of any across the board.

Since jobless claims lead the unemployment rate, let’s update that as well:

Jobless claims continue to indicate that the unemployment rate over the next several months should decline to the 4.2% or even 4.0% range.

Stock market at new highs, even with Strait of Hormuz still closed. What is Wall Street thinking?!?

 

 - by New Deal democrat

As I type this, there are two particularly salient facts:

 1. Although the US and Iran are not lobbing bombs at one another at the moment, the Strait of Hormuz is still closed.

 2. The US stock market is, on an intraday basis, at record highs:

Huh?!?

On almost no level does this make any basic sense. There is no way that the global economy is as well off, let alone better off, than it was before the Iran war started. And if there was a peace deal today, it would likely be several months before the oil flow returned to normal — and likely a year or more before the Gulf States are able to repair all the damage to their oil and gas pumping facitilities.

Let me back up a little bit and see if I can discern what the stock market is smoking.

To begin with, yesterday’s PPI showed all YoY comparisons higher:

Total final demand PPI (light blue) was up 4.0% YoY; for goods (dark blue), the number was 4.1%. Even services (gold) were up 3.7%. And raw commodities (red) were higher by 6.0%. Since commodity prices feed through into finished goods, here is a historical look at the PPI for raw commodities, normed so that a 6.0% YoY increase shows at the 0 line:

On most occasions in the past, increases this much or more have been associated with supply shocks (1974, 1979, 1990, 2007, and 2021-22). With the exception of the last case, all such supply shocks resulted in recessions very quickly. But let’s take a look at the entire series to see why not every big increase in commodities resulted in recessions.

First, let’s compare the YoY% change in commodity prices with YoY real GDP (blue). I’ve divided up the past 80 years into two sections to better show the relationship:

In the 1950s as well as the 1970s oil shocks, a big increase in commodity prices of 6% or more YoY pretty quickly correlated with a decline in the growth of YoY real GDP. The same was true in 1988, 1990, 2001, 2004, 2005 (post-Katrina), 2007, and during the “Oil Choke Collar” period of 2011-12.

The only exception was during 2001-04 and the 2009-10 period immediately after the end of the Great Recession. The latter is explained by  the fact that gas prices were at historic lows in early 2009. A surge in demand early in the recovery caused both real GDP and commodity prices to rise.

But 2002-03 stands out as the exception. Gas prices and other commodities rose in price, and real GDP accelerated. This was the quintessential “jobless recovery,” were jobs continued to be lost into the summer of 2003 due primarily to the “China shock” of manufacturing jobs being shipped overseas en masse. It was also the period when George W. Bush’s tax cuts kicked in.

Let’s do a similar exercise with corporate profits, since these ought to align more closely with stock prices:

Unsurprisingly, since corporate profits are a long leading indicator, typically they have led producer prices by one or several quarters, which is most apparent during the earlier slice of history above. Perhaps the biggest exception was during the Great Recession, when the two moved in opposite dirrections more or less in concert; but also during the earlier part of George W. Bush’s presidency, when they increased in tandem, again more or less simultaneously.

Now here is the current situation with real GDP:

Real GDP growth has been decelerating at a slow pace over the past serval years. And the current situation with corporate profits also shows a sharper deceleration in growth:

If the situation from the vast majority of similar episodes in the past holds true, both corporate profits and real GDP growth should slow further, if not turn absolutely negative. 

So why are stock prices surging? Wall Street most likely thinks this is an episode like 2002-04, where lower tax rates (from last years Bust-out Budget Bill) together with AI holding down employment costs, more than overbalance the negative effects of the oil price shock. 

In support of their position, let me offer the following graph of the last three years of YoY weekly retail spending from Redbook:

If anything, this shows that the top 10% of the income distribution has so pulled away from everybody else that even a financial shock administered to the bottom 90% is not enough to put a dent in the top tier’s spending.