Jobless claims indicate employment market continues to weaken, but still not recessionary

 

 - by New Deal democrat

Jobless claims continue to tell us two things: (1) the jobs market continues to slowly weaken, but (2) it is not recessionary.

This week I’ve changed my graphing scheme slightly, to emphasize the less noisy four week moving average of initial claims, to better show the residual post-COVID seasonality, and to put the recent increase in continuing claims in better context.

With that said, initial claims declined last week by -10.000 to 236,000, and the four week average declined -750 to 245,000. With the typical one week delay, continuing claims rose another 37,000 to 1.974 million, its highest level in almost 3.5 years (see extreme left in graph below):

Also note that beginning with the end of 2022, we have seen a pattern where initial claims rise into the summer, then fall back into the winter, a pattern which has continued this year so far.

This residual seasonality makes the YoY% comparisons, which are more important for forecasting purposes, all the more salient.So measured, initial claims are up 1.3%, the four week average up 4.3%, and continuing claims up 7.0%:

This is well within the trend of the YoY comparisons averaging 5.0% +/-5% which we have seen since last October.

Finally, since the 4th of July is Friday next week, the June employment report will be released Thursday, which means this will be our last advance look at what jobless claims are suggesting about the unemployment rate. Here is the YoY% change in both measures of claims as well as that of the unemployment rate:

This suggests about a 4% (percent of a percent) increase in the unemployment rate YoY in the next several months.

Since the unemployment rate was 4.1% last June, rising to 4.2% for several months thereafter, this suggests that the unemployment rate is likely to rise to 4.3% or possibly even 4.4% in the next several months:

We’ll find out a week from today. In the meantime, the message - expecially from continuing claims - is that while new jobs are harder to find, layoffs are not increasing that significantly. Remember that my model requires a 10% YoY increase in jobless claims just for a recession “watch,” let alone a “warning.”

May new home sales decline, but prices firm, more evidence suggesting rebalancing

 

 - by New Deal democrat



This morning gives us the last of our three measures of home sales, prices, and inventory, new home sales. These are the most important of the three because while they are very noisy and heavily revised, they are the most leading of all housing metrics, and so they can tell us about the underlying upward or downward pressure on the economy going forward one year or more. Additionally, the construction of new homes has a much bigger impact than the sale of existing homes. 

In May, new home sales declined 99,000 to 623,000. April’s initial number of 743,000, which had been a 3 year high, was revised downward by -21,000. In the below graph I also show single family permits (red, right scale), which lag slightly but are much less noisy:

Both have until now been rangebound. New home sales this month were close to the bottom of that range, while permits made a new 2 year low. 

Over the same 2.5 year period of time, prices also stalled, and then began a very slow deflation on the order of -1% -5% YoY. In absolute terms that trend continued last month. While the median price of a new single family home increased 15,200 to $426,600 in May, that is average compared with the last 2.5 years:

On the other hand, this was the second highest YoY% increase in the median price of new homes in the past 2 years, up 8.1%, suggesting that the deflating trend may be ending. The below graph compares the one month and quarterly average of the YoY% change in new homes compared with the YoY% change in the FHFA and Case Shiller Indices, which were reported yesterday:

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Before 2018 (not shown), typically the series moved in tandem. Since then, as you can see, with the exception of 2021-22, the median price of existing homes has increased substantially more than that of new homes. For a rebalancing to occur, these should start to converge - and that may be happening.

Finally, after a slight decline in April, the inventory of homes for sale rose 7,000 to 507,000, another post-pandemic high:

This is significant because in the past recessions have happened after not just sales decline, but the inventory of new homes for sale (red, right scale) - which also consistently lag - also decline (as builders pull back:

To summarize, new home sales, while weak in May are not signaling recession, and in fact the relative firmness in prices this month, compared with the continued deceleration of price increases in existing homes, is most consistent with an ongoing rebalancing of the market.

Repeat home sales through April confirm housing market is well on its way to rebalancing

 

 - by New Deal democrat

Yesterday the existing home sales report showed continued deceleration in YoY price increases to 1.3%, along with an increase in inventory of houses for sale, indicative of the ongoing rebalancing of the housing market. This morning’s repeat home sales reports from the FHFA and S&P Case Shiller strongly confirmed that deceleration and ongoing rebalancing.

On a seasonally adjusted basis, in the three month average through April, both the Case-Shiller national index (light blue in the graphs below) as well as the FHFA purchase only index (dark blue) showed a declines of -0.4%, the steepest such declines since the summer of 2023:

On a YoY basis, price gains in both indexes not only continued to decelerate, at 2.7% for the Case Shiller index, and 3.0% for the FHFA index; but these were the lowest YoY% increases since 2012 for both indexes excluding 7 months in 2023 for the Case Shiller index:

These are of a piece with yesterday’s very low YoY% gains in prices in the existing home sales report:

(Graph by Calculated Risk)

Further, because house prices lead the measure of shelter inflation in the CPI, specifically Owners Equivalent Rent by 12-18 months, here is the same graph as above (/2 for scale) plus Owners’ Equivalent Rent from the CPI YoY (red):

As I wrote last month, the last time the Case-Shiller and FHFA Indexes were in this range YoY (2019), Owners Equivalent rent gradually declined in the 12-24 months thereafter to the +2% YoY level.

All of this is good news, showing that the existing vs. new homes market is well on its way to rebalancing, and that we can expect further good news in the very large shelter component of the CPI in the months ahead; with the sole - significant - exception of the effects of tariffs.

May existing home sales show prices stabilizing, inventory continuing to increase towards its historical range

 

 - by New Deal democrat

The first part of this week is all about more housing data. This morning started out with  existing home sales, which although they typically constitute about 90% of all sales are the least important for forecasting purposes, since the main thing that happens is only a change in ownership, and therefore they have much less economic impact than new home sales.

And this month the level of sales themselves was far less important than what the median price for an existing home and inventory are telling us about the ongoing rebalancing of the housing market.

Sales of existing homes, just like new homes, have been rangebound for the past 2 years, in reaction to mortgage rates remaining in the 6%-7% range. In May they remained within that range, increasing 0.8% to 4.03 million annualized on a seasonally adjusted basis (although on a YoY basis there was a slight -0.7% decline). The below graph shows the last 10 years, showing both the immediate post-COVID surge and the low but rangebound trend since:

But as I wrote above, prices and inventory were more important this month. 

Let’s start with inventory. As I have pointed out repeatedly, the secular decline in inventory began well before onset of the pandemic, reaching a nadir in 2022. Unlike sales, this series is not seasonally adjusted, so it must be looked at YoY, and in May inventory continued to climb, to 1.540 million units, a 20.3% YoY increase, and only 1,000 units lower than May 2020 (May data not shown):

Nevertheless inventory is still below its pre-2014 levels, which typically were in the 1.7 million to 1.9 million range, which means that although it is lessening the chronic shortage still exists.

Finally, let’s look at prices. Builders of new homes are much more able to respond to market pressures, and - leaving the effects of tariffs on building materials aside - this has continued to make new homes relatively much more attractive than the constricted existing homes market, which has had strong upward pricing pressures right through the end of last year.

There was already strong evidence that this upward pricing pressure was abating. And this month added yet more such evidence. Like inventory, this data is not seasonally adjusted and so must be looked at YoY, as in the graph below of the last 10 years (May data not shown):

In the immediate aftermath of the pandemic in 2021-22, prices increased as much as 15% or more YoY. After the Fed started its sharp hiking regimen, prices briefly turned negative YoY in early 2023, with a YoY low of -3.0% in May of that year. Thereafter comparisons accelerated almost relentlessly to a YoY peak of 5.8% in May of 2024, before decelerating to 2.9% in September.

Here are the comparisons since:

October 4.0%

November 4.7%

December 6.0%

January 4.8%

February 3.6%

March 2.7%

April 1.8%

In May this deceleration continued, with a YoY% gain of 1.3%, the lowest such gain since earnly 2023.

In summary, this month’s existing home sales report tells us that the rebalancing of the housing market is continuing. Although seasonally adjusted sales remain rangebound, price increases have abated dramatically, and inventory is increasing at a big YoY clip. Although inventory is still low by historical standards, it is possible that by July’s report it could reach the 1.7 million level, i.e. the bottom of its pre-2014 historical range. 

“Economic expansions don’t die of old age; they are murdered” usually by domestic or geopolitical exogenous shocks

 

 - by New Deal democrat

There is an old saying that “economic expansions don’t die of old age. They are murdered.” 

I have been writing about the economy, and examining all sorts of leading, coincident, and lagging indicators, for 20 years; and the longer time goes on, the truer that saying appears.

My most recent examination has been based on the data showing that despite the blows inflicted on the economy by the likes of Tariff-palooza!, it just keeps powering along. It simply takes an awful lot of hits to sink a US expansion.

Which got me thinking about all the past recessions I have experienced, and that fact that, going back over 50 years now, every single one of them featured important and sometimes decisive shocks, usually geopolitical or domestic political shocks. Let’s take a brief look:

1974 - Arab oil embargo, brought about by the 1973 Yom Kippur War.

1979 - Iranian Revolution brings about another doubling in the price of oil

1981 - Paul Volcker raises interest rates from 9% to 19% to deal with the inflationary fallout from the 1979 stagflation.

1991 - Another oil shock brought about by Saddam Hussein’s invasion of Iraq

2001 - a combination of the “China shock” as manufacturing jobs flee the US for China, the 9/11 terrorist attacks, and the bursting of the internet bubble

2008 - As well as the bursting of the housing and mortgage lending bubble, there was another oil shock, as gas prices rise from $2.25 in early 2005 to $4.10 in mid-2008.

2020 - COVID

The above list isn’t to downplay cyclical events, but rather that an economy that was already vulnerable was finally knocked over by some exogenous event; or at least the exogenous event contributed. Even those recessions with the most “cyclical” or financial components - 1981, 2001, and 2008 - had at least some deliberate decision-making involvement, whether Volcker’s deliberate choice to bring about a recession in order to kill inflation, or the accession of China to regular trading status, in combination with terrorist attacks, or Greenspan’s enabling of reckless lending practices as well as the first time oil went over $100/barrel.

We entered this year with a weak if expanding economy. The most recent QCEW - an actual *census* of US employment rather than the monthly estimate - suggests that in all of 2024 only about 0.8%, or 1.25 million, new jobs were added, less than the likely population growth last year. And this year we have already had 2 exogenous political shocks: Tariff-palooza!, and now the war with Iran. The GOP tax bill is set to be a 3rd major political shock.  Will those blows be enough to sink the economy? We’ll find out soon enough.