Economic cycle indicators update: the Autumn Shutdown Stall

 

 - by New Deal democrat

Now that we have the very important personal income and spending data through November, here is a look at the widely acknowledged monthly indicators that the NBER has highlighted in determining whether the economy is continuing to expand, or is contracting.

The below link includes nonfarm payrolls (blue), industrial production (red), real personal income excluding government transfers (gold), and real manufacturing and trade sales (dark green, through October). Also included are manufacturing production (light red) and real disposable personal income (yellow). All are normed to 100 as of last July: 

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QOJF&height=490 

It’s fair to say that all of these stalled through October, with only real personal income higher by 0.1%; and to some extent through November, with industrial production higher by 0.1% and real personal income higher by 0.2%. At the same time, there clearly was not any significant downturn that would warrant a recession declaration.

So call it the Autumn Shutdown Stall.

Through December, we only have the jobs data, which continued to stall, and industrial production, which rose to 0.4% higher than July, primarily on utilities (likely data center construction for AI purposes). Although it isn’t included in the above, as indicated yesterday real personal spending continued to increase at a solid pace through November. An update for manufacturing and trade sales is scheduled for next week, but personal income and spending for December isn’t scheduled to be released until late February.

No mini-recession during the government shutdown, as consumers raided their piggy banks to spend

 

 - by New Deal democrat

The news from this morning’s personal income and spending report for October and November was almost all good - with one major exception.

To cut to the chase, real income rose slightly, but real spending rose substantially. Which, if you are following basic math, means that consumers dipped into their savings in a very significant way in order to make it happen - which is not a good sign for the future.

Let me start with that last statistic. The personal saving rate for Americans declined -0.3% in October and another -0.2% in November, down to 3.5%. As shown in the graph linked to below, this is the lowest saving rate in the past 60+ years outside of parts of 2022 and 2005-07, plus two months after the 2001 terrorist attacks:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QMYv&height=490

Nominally, personal income rose 0.1% in October and another 0.3% in November. However, because the PCE deflator increased 0.2% in each month, the net result was a real increase of only 0.1% at the end of the two months. Further, once we exclude government transfers, the numbers for the two months are 0.0% and 0.1%, for a similar tepid increase:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QMYP&height=490 

This is only a 0.2% on net since July, and it remains -0.2% below its peak in April. By itself, this statistic would be consistent with a recession starting last spring.

But the story is completely different as to spending. Nominally that rose 0.5% in each month, which after accounting for the 0.2% deflator for each month, means real personal spending rose 0.3% in each month.

Further, the spending was not limited to services, which tends to rise even during most recessions. Rather, the figures for both total goods spending and durable goods spending were also strong, at 0.3% and 0.% respectively in October and 0.6% for both in November:

https://fred.stlouisfed.org/graph/fredgraph.png?g=1QMZ9&height=490 

Finally, although I won’t bother with the graph, the 0.2% increase in the deflator for each month means that the YoY% increase for the PCE deflator was 2.8%, in line with most of its readings over the past 12 months. In other words, so measured inflation is not decelerating any more, but is has not been accelerating either.

The takeaway for this very important set of statistics - virtually equal in my view to the monthly jobs report - is that there was no mini-recession during the government shutdown, but that was largely due to consumers reducing their savings (likely another manifestation of the “wealth effect” of sharply rising stock prices) in order to spend on both goods and services. But this doesn’t mean that the economy was doing well. Rather, it was figuratively keeping its head above water as consumers exposed themselves to more risk from an adverse shock by raiding their piggy banks.

More evidence of a positive “regime change” in jobless claims: is it tied to the immigration crackdown?

 

 - by New Deal democrat

We will get the very important personal income and spending updates for the government shutdown months later this morning, which should finally tell us whether or not there was a mini-recession during that time. In the meantime, let’s take our regular weekly look at jobless claims, as to which, to reiterate, there appears to have been a positive change of regime starting half a year ago - and which continued this week.  

To wit, initial claims rose 1,000 to 200,000 for the week, still among the lowest numbers in the past 50 years, The four week average declined -3,750 to 201,500, except for several weeks in 2022 and one week in 2024, the lowest number since the 1960s (tied for one week in 2019). Continuing claims also declined -26,000 to 1.849 million, the 2nd lowest number since last April:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QMv0&height=490 

The above graph includes the last three years, since there still appears to be unresolved post-pandemic seasonality, whereby even after adjustment, claims have risen during the first half of the year, and declined in the second half towards a nadir in January.

This issue is even more apparent in the YoY% changes, in which initial claims were down -9.9%, the four week average down -5.5%, and continuing claims down -2.1%:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QMvb&height=490 

Initial claims and the four week average are virtually identical to what they were two and three years ago. In other words, the issue may be a relative increase in claims one year ago. It has been suggested that this may have to do with the wildfires in Los Angeles last January - but claims only spike for one week (January 18) one year ago in California, so that does not appear to be the main explanation.

More importantly, as I’ve noted several time in the past month, initial claims have been negative YoY most weeks since the end of last June. This suggests that there is more going on: a “regime change” as I’ve called it. My best speculation, and it is only that, is that it has to do with the push for massive deportations that has been undertaken during that time. If many thousands of immigrants (including those legally here) have quit or simply stopped showing up for work, then that would mean a large decline in the number of new unemployment claims.

In any event, if the big decline in claims lasts another week or two, that will put it well beyond the range for which Holiday seasonality could be an explanation.

Finally, this is also a positive for the unemployment rate going forward for the next month or two, as shown in the graph linked to below:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QMvA&height=490 

The sharp decline in jobless claims since last summer’s peak strongly suggests that the 4.5% unemployment rate in December was also the peak for that number. A rate steady at 4.4% or even moving down towards 4.0% appears more likely.

Stale data watch: construction spending for October — more “green shoots”?

 

 - by New Deal democrat

Originally housing permits and starts through December were supposed to be updated this morning, but that has now been put off another week. In the meantime, we did get some data, albeit stale, about the important leading sector of construction, in the form of the construction spending report through October. And it added to the very small patch of evidence suggesting that some “green shoots” may be forming.

To wit, as shown in the graph linked to below, in October nominally total construction spending rose 0.5%. More importantly, the long leading sector of residential construction spending rose 1.3%. Since the cost of construction materials in the last PPI report declined -0.2%, in real terms spending rose 0.7% and residential spending rose 1.5%:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QKCy&height=490 

In absolute nominal terms, both series rose to close to 10 month highs:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QKBO&height=490 

In real terms, residential construction also made a 9 month high:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QKFw&height=490 

Keep in mind that construction spending is one of the latter housing series to turn, although it generally turns before housing units for sale and residential construction employment. Across almost all the more leading housing data, the trend in the past few months has been a leveling out or even some small improvement. Even prices (which follow sales) may be leveling out.

All of this is downstream of the 3 year lows in mortgage rates. Of such small things are “green shoots” made (subject, of course, to longer term interest rates blowing out to the upside due to T—-p’s blowing up NATO).

Record low labor share: corporate profits are at their most extreme levels ever compared with nonsupervisory payrolls

 

 - by New Deal democrat

An I’ve read a few takes in the past week or so about the declining “labor share” of GDP. To cut to the chase, here’s a link to that exact graph: 

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QGJI&height=490 

In case you are confused as to what this means, the labor share is defined as the total amount of compensation of employees and proprietors, divided by the value of the output of businesses. A lower labor share means that more of the revenue earned by businesses is going to other items; those items may be things like capital improvements, or more to the point they may be paid out as profits to shareholders. 

What the above graph shows is that labor share was gradually declining by roughly 2%-5% from 1960s until China was admitted to full regular trading status with the US in 1999. Thereafter it immediately plummeted by another 7.5%-10% in the 2000’s as high (and even average) paying manufacturing jobs were vacuumed overseas, primarily to China. After the end of the Great Recession, it stabilized during the 2010’s expansion at about 87.5% of its share in the 1960s. But following COVID, it declined another 2% — and finally, in 2025, it declined 1%, so that at the end of Q3 labor only received about 83% of the benefits of productivity that it did in 1960. 

An even more descriptive way to show this is in the graph linked to below, with norms the nominal values of GDP, corporate profits, and the aggregate payrolls of all nonsupervisory workers to 100 as of 1964, when the lattermost series started (note: shown in log scale so that each relative increment shows equally):

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QGFV&height=490 

While there were some fluctuations, corporate profits and aggregate payrolls stayed in a reasonably stable relationship until the 1990s, when the tech boom together with a weak labor market skewed it towards profits. Even then, by 2000 the two series had converged again. Thereafter, profits have consistently blown out to the upside compared with nonsupervisory labor compensation. As of Q3 2025, corporate profits are almost double their level relative to labor compensation compared with what they were in 2000. Over time, this amounts to $Trillions(!) that have gone into the stock portfolios of the wealthiest sectors rather than average American households.

It’s no wonder, then, that the other day I saw a graph (sorry, don’t recall the link) showing that the richest Americans relative to all other Americans, now own multiples of wealth even compared against the most concentrated years of the Gilded Age.

It isn’t just in political terms that the US has largely turned into a Banana Republic; in economic terms it already is.

A powerful new tailwind behind the economy: the “real” price of gas

 

 - by New Deal democrat

There’s no new data of note today or tomorrow, so in the meantime (aside from observing Martin Luther King’s birthday) let me take a look at a very important, if small piece of economic data: the “real” price of gas.

Gas price shocks have been important precipitants of a number of recessions in the past 50 years. Conversely, sharp declines in the price of gas (most notably at the end of 2008) were important factors in the bottoming out of recessions and the beginning of recoveries. This also includes summer of 2022, when gas prices declined from $4.93/gallon in June in the aftermath of Russia’s invasion of Ukraine, to $3.70 in September (and ultimately $3.21 in December). When almost all of the other signs of oncoming recession were flashing warning’s the sharp declines in commodity prices, including for gas, completely overwhelmed the negatives, and the robust economic expansion plowed ahead.

But $3/gallon gas means something entirely different in 2026 than it meant the first time it breached that threshold in 2005 in the aftermath of Hurricane Katrina. That’s because incomes are vastly different. In September 2005 the average hourly wage for nonsupervisory workers was $16.19/hour. As of last month it was almost double that, at $31.76.

Which means that the “real” cost of gas was much lower in 2025 than it was in 2005. And in the last two months it has declined significantly again. Throughout most of 2025 it ranged between $3.00 and $3.20/gallon, but as of last week it was $2.78.

And although the mal-Administration in Washington has done many things that have sabotaged the economy, this is a strong countervailing force. How strong? Here’s a link to the long-term “real” price of gas, i.e., gas prices divided by average hourly nonsupervisory wages, going all the way back to the beginning of the 1990s:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QGuV&height=490 

As of December (the last available period for wages), when gas prices averaged $2.89/gallon, it took just over 9% of an hour, or just over 5 minutes, for workers to earn enough to buy a gallon of gas. That is lower than at any point since the start of the Millennium except for the immediate aftermath of the 2001 recession and the pandemic lockdowns, and briefly in 2016.

And so far this month, the price of gas has declined even further, to $2.78 as of last week. While of course I have no crystal ball with which to forecast the future price of gas, should the new even lower range be sustained, that is going to put yet another powerful tailwind behind the consumer economy (in part because we know that consumers pay a lot of attention to the very noticeable price of gas), possibly saving it one more time from going into recession.