Looking at historical “mid cycle indicators” - what do they say now?

 

 - by New Deal democrat

About 10 years ago, I went looking for what I called “mid cycle indicators.” In other words, I wanted to go beyond leading or lagging indicators to find at least a few that tend to peak somewhere near the middle of an expansion.

That synapse was jangled when I read the title of a recent update by financial analyst Cam Hui, “Relax, it’s just a mid-cycle expansion.” 

Since I hadn’t looked at the mid-cycle indicators I identified last cycle* during this one, I thought I’d take a look. So here we are. (*incidentally, those peaked in 2014, about 5 years after the expansion’s start, suggesting the next recession would occur in about 2019 or so…Hmmm, I don’t think they foretold a pandemic, but still ….)

Anyway, there were 4 such mid-cycle indicators I identified back then, some with more noise than others. They were:

 - YoY% jobs growth

 - YoY% growth in nominal wages

 - YoY% growth in real retail sales vs. real personal consumption expenditures

 - a sharp decline in the personal saving rate adjusted for inflation

Let’s take a look at each in turn.

YoY% jobs growth

HIstorically his series has tended to be quite smooth and to peak near the midpoint of economic expansions, except in those cases like the 1980s and 1990s, when the Fed goes through two loosening and tightening cycles:

In this expansion, YoY employment growth peaked in March 2021 (one year after the sudden lockdowns due to the pandemic). It’s pretty clear that is a false positive. But if we look further out, after virtually all laid off employees were recalled to work, YoY payrolls growth peaked in February 2022:

YoY% growth in nominal wages

This indicator (blue in the graphs below) was a lot noisier, and might be thought of more as a long leading indicator, because it often has peaked about 3/4’s of the way through an expansion, but it was useful enough to group with the series. Here’s the historical look:

Because in the past several years I have discovered that real aggregate nonsupervisory payrolls have been an event better indicator, I’ve included their nominal YoY% growth (red) as well.

Here’s what the current expansion looks like:

Again, both of these appear to have peaked in early 2022.

YoY% growth in real retail sales vs. real personal consumption expenditures

Ten years ago I identified a consistent pattern whereby retail sales grew faster than the broader category of personal consumption expenditures early in an expansion, but slower later in an expansion.  Retail sales constitute about 50% of PCE's and are more volatile, but as the graph below comparing the YoY% growth in the two, they vary in a very specific and non-random way:

Real retail sales are always decelerating, and lower than YoY PCE's before the economy ever tips into recession. That's 11 of 11 times in over 50 years. Further, in 10 of those 11 times (1957 being the noteworthy exception), the number was not just negative, but was continuing to decline for a significant period before we tipped into recession.

Essentially these graphs tell us that, in the later part of a business cycle, consumers cut back on discretionary purchases of goods to preserve other recurring spending on services.

Here’s what the current expansion looks like:

In the past 10 years, I’ve refined my analysis somewhat, because real retail sales and real personal consumption on goods tend to follow nearly identical trajectories. Thus the big difference is spending on goods vs. services. Here’s what that historical graph looks like:

And here is the current expansion:

Once again, the dividing line appears to be in 2022, in this case summer of 2022.

The real personal savings rate

This is essentially a measure of economic confidence. How much of their paychecks do consumers feel they need to save over and above the rate of inflation? This has also been a noisier and less reliable indicator.

Here is the historical look:

Note that in every single economic expansion prior to the last one, except the 1980-81 double-dip, at some point from about the middle to 3/4 mark, there is a steep decline in the real personal savings rate from its peak of about 5%.  Further note that in every single recession, the real personal savings rate increases as consumers seek to buttress their balance sheets.  Generally speaking, as an economic expansion goes on, consumers expose themselves to too much risk, either due to overconfidence, or the need to stretch their finances to keep up. In the last expansion, there was no clear signal before the pandemic hit.

Here is the current expansion:

There was a big dip in the real savings rate in 2022, followed by a rebound and recently a renewed fade. The point is, that consumers are much more vulnerable to an economic shock now than they were in either 2021 or 2023.

IN CONCLUSION, our mid-cycle indicators seem to be unanimous in picking out 2022 as the most likely midpoint of this expansion. That would suggest that the next recession is probably pretty near at hand.

Given the distortions introduced by fiscal and monetary stimulus to counter the effects of the pandemic, and the clogging and un-kinking of supply lines that took place over 2020-23, all of this has to be treated with several extra helpings of salt.

But there they are.

Coronavirus dashboard, 4 years into the pandemic: all-time low in hospitalizations, deaths likely to follow

 

 - by New Deal democrat

On Friday the CDC updated its COVID death statistics through March 31, which means that we now have 4 full years of data. It also updated its hospitalization data through April 20, and to cut to the chase, last week saw a record low hospitalizations for COVID - 5,615 - since its onset. So this is a good time to look at the state of the now-endemic pandemic.

When it comes to both hospitalization and death statistics, the first two years and the last two years look entirely different by scale. 

Let’s start with hospitalizations. Here are the first two years:

The worst hospitalizations ever were just over 150,000 in the week of January 15, 2022 during the original Omicron BA.1 wave. The lowest week until the end of the first two years was 12,821 during June 2021. At the very end, in the week of April 2, 2022, a new all-time low of just over 10,000 was set.

Now let’s look at the last two years:

Note the complete difference in scale. The same week of April 2, 2022 is nowhere near the lowest number, which as I wrote at the outset, was set last week at 5,615. The worst week was just under 45,000 in July 2022.

And it isn’t just the extremes that were lower. Below is the 52 week cumulative average of hospitalizations for the last 3 years (since the CDC didn’t start reporting this data until August 2020, I’ve excluded the first year:

4/1/21-3/31/22 2.660 million

4/1/22-3/31/23 1.150 million

4/1/23-3/31/24 0.855 million

The trend of declining hospitalizations YoY has been continuing throughout the past year. Here are some of those numbers:

10/1/22-9/30/23 1.020 million

1/1/23-12/31/23 0.910 million

2/1/23-1/31/24 0.880 million

3/1/23-2/29/24 0.850 million

This is a story of almost relentless decline.

And it’s the same story with the data on deaths. Here are the first two years:

There were almost 26,000 deaths in the first week of January 2021 alone, the worst week of the entire pandemic. The lowest number were 1,543 in the first week of July 2021 (when we all hoped that mass immunization might work to end the pandemic). During the week ending April 2, 2022, there were still just over 1,900 deaths.

Now here are the last two years. Once again, notice the complete difference in scale:

April 2 of 2022 was a comparatively high week. The highest number of deaths were 3,869 during the week of January 7, 2023. The lowest were 491 during the week of July 7, 2023. As of March 30 of this year (the last week of complete data), there were 648. As I’ll describe further below, we will probably set a new all-time record low for deaths as well once all of April’s data is in.

The same pattern of ever fewer deaths YoY appears as we saw for hospitalizations:

4/1/20-3/31/21 504,000

4/1/21-3/31/22 433,000

4/1/22-3/31/23 128,000

4/1/23-3/31/24 64,000

Once again, the deceleration has been ongoing in the past year. Here are YoY cumulative deaths for some of the last 6 months:

10/1/22-9/30/23 83,000

1/1/23-12/31/23 75,000

2/1/23-1/31/24 70,000

3/1/23-2/29/24 67,000

Because COVID expresses seasonality, with worse waves during the cold weather and generally lower numbers during warm weather, below I’ve divided deaths into two 6 month periods. 

Here’s the cold weather period:

10/1/20-3/31/21 353,000

10/1/21-3/31/22 267,000

10/1/22-3/31/23 66,000

10/1/23-3/31/24 40,000

And here’s the warm weather period:

4/1/20-9/30/20 211,000

4/1/21-9/30/21 166,000

4/1/22-9/30/22 62,000

4/1/23-9/30/23 23,000

As you can see, in each year there are more deaths during cold than during warm weather. And the pattern of YoY improvement is apparent for each period.

This is all good news.

So where do we go in the near term? The trends continue to be positive. Recall that wastewater counts lead hospitalizations by several weeks, which in turn lead deaths by several weeks.

So here is the latest wastewater count from the CDC:

Wastewater particles are down 87% since their Holiday season peak, and continued to decline last week. This means that both hospitalizations - as of last week down 84% from their Holiday peak - and deaths - as of March 30 down 75% from their post-Holiday peak - should both continue to decline.

And if deaths decline to a number 87% below their post-Holliday peak, that would mean only 333 deaths in a few weeks.

Finally, how does this compare with the flu? Well, the typical flue season gives rise to about 35,000 deaths +/-10,000. So even at 64,000 COVID is presently the equivalent of a very bad flu season. If the trends of the past several years continue, then in 1 or 2 years we will be down in the vicinity of 35,000 deaths per year.

I am cautiously hopeful that is where we are headed. Because every single variant in the past 2+ years has been a descendant of the original Omicron BA.1 strain - including BA.2, BA.2.12.1, BA.4, BA,5, XBB, JN.1, and the newest variants, KP.1&2. So long as that remains the case, I will remain optimistic.

Weekly Indicators for April 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

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

Not much churn in the short leading or coincident timeframes this week. But one of the long leading indicators joined the “less bad” parade. This is what I would expect to see coming out of a recession, before growth in the shorter term improves. Just one week, but still . . .

As usual, clicking over and reading will bring you up to the virtual moment as to the economy, and bring me a little pocket change for the week as well.

Another strong personal income and spending report, but beware the uptick in inflation

 

 - by New Deal democrat



Personal income and spending has become one of the two most important monthly reports I follow. This is in large part because the big question this year is whether the contractionary effects of Fed tightening have just been delayed until this year, or whether the fact that there have been no rate hikes since last summer mean that the expansion will strengthen.

Because real personal spending on services for the past 50 years has generally risen even during recessions, the more leading components of this report have to do with spending on goods. Additionally, there are several components that form part of the NBER’s “official” toolkit for determining when and whether a recession has begun, including real spending minus government transfers, and real total business sales. 

Let’s look at each of them in turn. Note that in all graphs below except for YoY comparisons, and the personal saving rate, is normed to 100 as of just before the pandemic.

Real income and spending

In March, nominally income rose 0.5%, while nominal spending for the second month in a row rose a sharp 0.8%. Prices as measured by the PCE deflator increased 0.3% for the month, meaning that in real terms income increased 0.2% and spending rose 0.5%. Since just before the pandemic real incomes are up 7.2%, and spending is up 11.3%:

On a YoY basis, the PCE price index is up 2.7%, the second monthly increase in a row from January’s three year low of 2.4%. While n the previous 16 months, the YoY measure had been declining at the rate of 0.25%/month, suggesting that it would hit the Fed’s 2.0% target this spring, that trend has stopped:

The issue going forward is going to be if this was a temporary pause, a stalling of progress towards the Fed’s goal of 2.0%, or an outright reversal of trend. Suffice it to say, the Fed is not going to cut rates in the near future under either of the two latter scenarios.

As I indicated in the intro, for the past 50+ years, real spending on services has generally increased even during recessions. It is real spending on goods which declines. Last month real services spending rose 0.2%, while real goods spending rose a sharp 1.1%:

Further, real durable goods spending tends to turn before non-durable goods spending. The former rose 0.9% for the month, and the latter 1.3%. Both of these have now totally or almost totally reversed previous months’ sharp declines:

Savings

Another important metric for the near future of the economy is the personal savings rate. In February it declined a sharp -0.5%. In March it declined another -0.4% to 3.2%. This longer term look shows how the present compares with the all time low rate of 1.4% in 2005:

On the positive side, the declining trend in this rate since last May indicates a lot of consumer confidence. But on the negative side it is close to its post-pandemic low of June 2022 of 2.7%, as well as its previous all-time low range, indicating vulnerability to an adverse shock. One of my forecasting models uses such a shock as a recession warning indicator. In any event, there is no such shock indicated at the moment.

Important coincident measures for the NBER

Also as indicated above, the NBER pays particular attention to several other aspects of this release. Real income excluding government transfers (like the 2020 and 2021 stimulus payments) rose 0.2% for the month, continuing its consitent increasing trend since November 2022:

Finally, the deflator in this morning’s report is used to calculate, with a one month delay,  real manufacturing and trade sales. This rose 0.5% in February, but is still below its November and December 2023 readings:

Summary

I had described January’s report as being pretty close to “Goldilocks,” and last month’s as something of “anti-Goldilocks.” In March we were closer to Goldilocks than not. Real Income, including real income less government transfers, and spending both rose, and spending on goods rose sharply. Real manufacturing and trade sales also rose. The saving rate shows near term confidence, but is a longer term concern. Aside from that the only significant negative was the second straight increase in YoY PCE inflation.

The consumer remains healthy, but is digging into their savings to support much of the increase in spending. In addition to the price of gas, which has recently been rising again, but if this renewed sharp increase in spending is feeding through into a renewed increase in the inflation rate as well (and it may well not be), that would not be good. Because if that’s the case, the Fed is going to consider not just not lowering interest rates, but possibly another increase as well. 

Leading indicators in the Q1 GDP report are mixed

 

 - by New Deal democrat

Most of the commentary you will read about Q1 GDP that was released this morning will be about the core coincident components. For that I will simply outsource to Harvard’s Prof. Jason Furman:

“much of the slowdown was in non-inertial items like inventories (-0.35pp) and net exports (-0.86pp). The better signal of final sales to private domestic purchasers was 3.1%.”

I agree.

With that out of the way, as usual, my focus is instead on what the leading indicators contained in the report can tell us about the months ahead. There are two such long leading indicators: private residential fixed investment (basically, housing) as a share of GDP, and deflated corporate profits.

Let’s look at each one in turn.

Nominal private residential fixed investment increased 3.5% during the first quarter. Real private residential fixed investment increased 3.3%. Since both of those were bigger increases than the % change in nominal and real GDP for the quarter, respectively, both improved as a share of GDP, as shown below:

Not strong improvement, but improvement nevertheless. 

Since corporate profits for the Quarter aren’t reported in the first release, we turn to the proxy of proprietors’ income. The proper measure deflates by unit labor costs, but those won’t be reported until later either, so the GDP price deflator is a good proxy. Going back 50+ years, our substitute typically turns coincident with or one quarter later than the official leading indicator.

Nominally proprietors’ income rose 0.5% in the quarter. But since the GDP deflator increased 0.8%, their deflated income declined slightly (blue in the graph below):

Real proprietors’ income has been essentially flat for the past two years.

It’s worth noting that (nominal) corporate profits as reported to Wall Street, updated through last week, with the exception of Q3 of last year haven’t gone anywhere in two years either:

When profit growth stalls, companies start looking around for costs to cut, and usually that includes employees. So that’s not good.

So our leading indicators from the Q1 GDP report score as one positive and one neutral. Several other of the long leading indicators have gotten “less bad” in the past half year. Once Q1 bank lending conditions are reported in a week or two, I will update my top-of-the-line long leading forecast through the end of the year.

Jobless claims continue their snooze-fest

 

 - by New Deal democrat

[Note: I’ll put up a post discussing Q1 GDP later today.]

Initial and continuing claims continued their snooze-fest this week.

Initial claims declined -5,000 to 207,000, continuing their nearly 3 month long range of between 200-220,000 per week. The four week average declined 1,250 to 213,250. This average has remained in the 200-225,000 range for over half a year! Finally, with the typical one week delay, continuing claims declined -15,000 to 1.781 million:

As per usual, for forecasting purposes the YoY range is more important. Here, initial claims were down -1.0%, the four week average down -1.8%, and continuing claims higher by 3.4%, still the lowest comparison for continuing claims since February 2023:

Needless to say, this is potent evidence that we can expect the economy to continue to expand in the next few months.

As you also might expect, with initial claims lower YoY for the month of April so far by -2.9%, this also suggests that the unemployment rate will trend lower YoY over the coming months, towards 3.7% or even 3.6%:

Since initial claims (and to a lesser extent continuing claims) lead the unemployment rate, the Sahm rule for recessions is not going to be triggered.