August housing construction: even more recessionary than before

 

 - by New Deal democrat

A puzzling relationship this year has been that the housing data has been classically recessionary for a number of months, and yet the economy has not rolled over. And this morning’s dismal report on housing construction was even more recessionary. 

Let’s start with the most dismal number of all: permits (gold in the graph below) declined -50,000 to 1.312 million annualized. Excluding the immediate COVID lockdown months of April through June 2020, this was the lowest number since June 2019. The more noisy starts (blue) also declined by -122,000 to 1.307 million annualized. And the metric that is the least noisy of all and conveys the most signal, single family permits (red), declined -19,000 to a 3+ year low of 856,000 annualized:

From the post-pandemic peaks, starts are down 28.2% from their peak, permits 31.7%, and single family permits 31.1%. Although I won’t bother with the graph this month, all of those have been typical readings for the onset of most of the recessions of the past 50+ years, although in two cases - 1991 and the Great Recession - they were down by over 50%. 

On the other hand, on a YOY% basis, starts are down 6.0%, permits are down -11.1% and single family permits are down 11.5%. 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 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 August they declined -20,000 to a new four year low of 1.317 million annualized. They are also down 23.2% 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 update housing units under construction with the typical final shoes to drop before recessions, houses for sale (gold) and residential construction employment (red), in comparison with units under construction, all normed to 100 as of their respective post-pandemic peaks. As I noted in the past month, after revisions both the number of employees in residential construction and new one family homes for sale peaked in March and have declined almost uniformly since:

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

Note that with the exception of 1974 and the COVID recession, houses for sale and (once available) employment in residential construction had turned down YoY before the recessions had begun. By contrast, at present these metrics are higher by 8.1% and 1.5% respectively. But at their present rates of decline, both could be negative YoY by January.

Finally, as I discussed last month, one reason why the steep decline in housing has not caused a recession yet is that other durable goods purchases, and in particular motor vehicle purchases, have not followed suit. Since then we did get an update on both passenger vehicle (gold in the graphs below) and heavy truck sales (red). Here’s the historical pre-pandemic record, averaged quarterly to cut down on noise:

Note that both types of vehicle sales were lower YoY, with truck sales typically down over 10% YoY.

Here is the monthly post-pandemic view:

While truck sales are down -15.8% YoY, passenger vehicle sales are higher by 6.2%. But as the graph below shows, in their present range passenger vehicle sales (gold) could easily turn negative YoY as early as next month:

Meanwhile, even with yesterday’s increase, nominal retail sales of motor vehicles remain in their range since last November.

To sum up, today’s housing construction report for August was very much recessionary, although in some YoY comparisons, I would expect further damage before the actual onset of one. But that could easily occur within the next four to six months. The next big datapoint to watch for will be the update on persona spending on durable and consumer goods.

August industrial production: overall neutral trend continues

 

 - by New Deal democrat

So much is imported that industrial production is much less central to the US economic picture than it was before the “China shock,” but it remains an important if diminished economic indicator. It has been trending generally sideways this year, and that trend continued in August.

Headline industrial production (blue in the graph below) rose 0.1%% in August, but after revisions to prior months, the net was a decline of -0.1% compared with the initial reading last month for July. Manufacturing production (red) increased 0.3%, but after revisions was up 0.2% compared with the initial reading for July:

Total production has not exceeded its post-pandemic high in June, but with its increase this month manufacturing production is now the highest since early 2019.

Updating my graph from yesterday, mixing production (gold, left scale) increased 1.1% for the month, but remains below its June peak, while utility production (yellow, narrow, right scale) declined -0.8%:

The overall trend in the past six months remains flat to slightly increasing, after strong increases in 2024 into the beginning of this year.

Nevertheless, my conclusion this month remains the similar as it was last month, when I wrote: “Along with retail sales, this is the second coincident positive for the economy this morning.”  Because after revisions total industrial production declined -0.1% this month vs. July, they are neutral vs. positive, but the net of both is that, unless and until consumers pull back, there is no recession.

Consumers say “hold my beer” to DOOOMing about sales

 

 - by New Deal democrat

Retail sales is the first of two very important indicators we got this morning. Per yesterday, with employment growth “dead in the water” since April, consumer spending - which leads future employment - is the single most crucial element of a turning point. 

 It really is incredible how it takes a major shock for American consumers to cut back on spending. Because in August nominally retail sales rose 0.6%, confirming the very positive weekly data that has recently shown up in Redbook. Additionally, July was revised 0.1% higher, from 0.5% to 0.6%. After taking into account consumer inflation in August, which rose 0.4%, real retail sales rose 0.2% for the month, after a 0.4% increase in July.

This means that real retail sales are now at their highest since January 2023, as shown in the graph below (blue):

The above graph also shows real personal spending on goods (gold, right scale), which is a broader measure and tends to trend similarly to retail spending, but won’t be reported until the end of this month.

Further, with several exceptions, most notably in 2022-23, in the past 75 years whenever real retail sales turned negative YoY, a recession was about to begin or had just begun. If it was positive and not sharply decelerating, a recession was unlikely in the immediate future. At present real retail sales are higher YoY by 2.1%, so there is no sign of any imminent downturn in the economy:

Finally, because consumption leads employment, here is the updated graph of real retail sales YoY, together with real personal consumption of goods compared with nonfarm payrolls (red):

Based on historical experience, after the last two good months, real retail sales now suggest that YoY jobs growth will not roll over, but remain in a similar weakly positive range for the next several months.

The big question continues to be whether the continuing chaos of the imposition of tariffs at the highest rate since Smoot Hawley in 1931 creates enough of a shock to derail consumers. So far, (at least perhaps at the top end)  it most emphatically has not.

Employment growth is dead in the water; tomorrow we will find out about production and sales

 

 - by New Deal democrat

With no news today, let’s take a look at why two releases tomorrow are especially important.

Let me begin with employment, which is “dead in the water.”  I’ve written before about how manufacturing and construction employment, and now the entire leading sector of goods-producing employment, is down. But today let me point out how narrow the poor situation in services as well. [NOTE: all FRED graphs in today’s post are normed to 100 as of April of this year].

Below is the graph of total employment (blue), total employment excluding health care (red), and services sector employment excluding health care (gold):

Not only is total employment down by more than -100,000 since April excluding healthcare, but even in the services sector (which is everything except goods production), employment in every other job except health care is up by a grand total of 2,000. Total employment in *all* sectors is up only 107,000 - and it’s all healthcare.

Domestic goods production looks shaky as well. Below is total industrial production (blue), manufacturing production (red), mining (gold), and utilities (right scale, narrow, orange):

Since March nearly all forms of production are either virtually flat or down. Only utilities (probably due in great part to AI data mining operations) are significantly higher. Tomorrow we will find out if this continues or not.

If employment is flat, and if production is also close to flat, what has really been keeping the economy growing has been consumer spending. 

One measure I keep track of weekly is Redbook’s consumer spending report, which is nominal and is only reported YoY:

In the past few weeks there have been strong grains of 6.5% YoY or more.

But more importantly, below are real personal spending on services (blue) which almost always grow even during many recessions, real personal spending on goods (gold) which tend to turn down shortly before recessions, and real retail sales (red) which also turn down prior to recessions, and while similar to goods spending are more sensitive to the downside:

Real retail sales are down from their tariff front-running March peak. Tomorrow they will be reported for August. Keeping in mind that consumer inflation was 0.4% last month, unless there has been strong nominal growth, real sales are likely to be negative.

Weekly Indicators for September 8 - 12 at Seeking Alpha

 

 - by New Deal democrat

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

While job growth has almost completely stalled, and inflation shows signs of picking up, both consumer spending and the stock market continue to plow forward at full speed. It’s an odd situation that may be powered almost exclusively by people at the top end of the income distribution.

In any event, clicking over and reading will bring you up to the virtual moment as to the economic data, and reward me with a penny or two for collecting and organizing it for you.

August real average wages and nonsupervisory payrolls: some signs of flagging but no recession signal yet

 

 - by New Deal democrat

Now that we have the consumer inflation number for August, let’s take a look at real wages and income for ordinary workers.

In the jobs report last Friday, we learned that both average hourly earnings and aggregate payrolls for nonsupervisory workers increased 0.4% in August. Yesterday we learned that consumer inflation also rose 0.4%, so unsurprisingly growth in both real average wages and aggregate payrolls rounded to zero.

First, here is the historical pre-pandemic graph of real average hourly wages, both YoY (red, left scale) and in absolute terms (blue, right scale). As you can see, a decline in YoY real wages has been a decent - though far from perfect - antecedent to recessions:

The metric is badly complicated by gyrations in the work force itself. In particular, from the early 1970s through the mid-1990s, with the entry of the huge Baby Boom generation, as well as the majority of women, into the workforce, real wages underwent a generation of depression. Once entry of the last Boomer and woman was digested, real wages started rising again. Even during that period, when wages declined more than trend, it was a warning signal.

Now, here is the post-pandemic record:

Somewhat with fits and starts, real average hourly wages have been rising since June 2022, the inflection point when gas prices fell from $5 to $3/gallon, and the supply chain un-kinked. 

The increase in real average wages stands at +1% YoY, with no significant sign of decoration at this point. 

The much more reliable indicator is that of real aggregate nonsupervisory payrolls. This tells us how much the vast majority of consumers have to spend. When it rolls over, consumers pull back, and a recession almost always begins.

Here is the historical, pre-pandemic record:

This indicator is almost flawless. If real aggregate payrolls are rising (blue line) the economy is not in recession. With one exception (2002-03), shortly after it peaks, a recession has always begun, typically within two months of when the YoY% change crosses the zero line (red).

Post-pandemic, this indicator has held up as well, with several periods of weakness (late 2022, the beginning of 2024) but never crossing the zero line:

Currently YoY growth is at 2%.

Finally, as the below graph, normed to 100 as of this March shows, we appear to have entered our third period of weakness in real aggregate payrolls (thick, red line):

These have risen only 0.3% in the five subsequent months, for an annual rate of 0.7%. Meanwhile real average hourly wages (thin, orange line) have increased 0.4%.

It would be wrong to project either of these forward, since needless to say, they don’t forecast their own future trajectory. What we can say is that, if weak job growth translates to weaker nominal wage growth, and if tariffs and the weaker US$ result in higher inflation, real aggregate payrolls could cross the zero threshold, signaling recession, by early next year.