The neutral trend in the most reliable long leading indicators in housing continues

 

 - by New Deal democrat

Let me start out this post with my updated overall conception of the long leading indicators. To begin with, most of them are financial — generally speaking, “the cost of money.” That applies to bond interest rates, the yield curve, real money supply, and bank lending. Recently, I’ve also indicated that fiscal policy should be added, as in, is there a major stimulus or austerity at work? But it is increasingly apparent that a recession does not occur until after the “real world,” non-financial long leading indicators also participate: corporate profits, real retail sales per capita, and - drum roll, please - housing permits and starts. 

Because although permits and starts are very much downstream of mortgage interest rates, they represent activity in the sector that constitutes the biggest consumer purchase of all, and through construction, landscaping, and furnishing, typically take around 2 years to fully filter through into the broader economy.

So let’s look at the numbers. To begin with, I no longer measure against the big 2022 interest rates hikes, because those have fully worked through the system. Thus almost all the graphs below are limited to the last three years. In the last several months I have written at length about how the entire housing market had reached an equilibrium, where almost all of the metrics were more or less flat.

This morning’s data on housing permits, starts, and units under construction for July continued that trend. Housing permits (blue) issued rose 69,000 to 1.443 million annualized, while the much more volatile number of starts (gold) declined -176,000 to 1.239 million annualized. Single family permits (red, right scale), which are the least volatile metric conveying the most signal, rose 22,000 to 894,000 annualized. The below graph shows each of them in comparison with their high water marks of the last several years, January and February of 2024:

Since that time, permits are off -8.1%, single family permits off -13.7%, and the three month average of starts off -17.8%. But perhaps more importantly, the stabilization of permits and starts slightly lower than their 2023-24 levels in the past 12 months is apparent.

In that vein, for me to consider housing recessionary, I would expect to see all three off at least -10% from recent highs, but also as the below historical graph shows, down -10% or more YoY:

Note that single family permits has turned positive YoY no later than 5 months after the end of any recession in the past 50+ years. 

But as the below graph of the last three years shows, not only are these metrics no longer down more than -10% YoY, but two of the three are positive, as permits are up +3.1% YoY, single family permits up to+1/1%, and only starts down -13.8% (-6.4% for the three month moving average:

This is no longer recessionary.

Last year I was calling housing units under construction the “last shoe to drop;” and after a plateau in 2022-23, it had been dropping like a rock, as shown in the graph below. But then it too started to stabilize, as this series has been virtually unchanged for the past seven months:

And the below historical graph is what really grabbed my attention, because in the past it has only flattened out, and started to improve on a YoY basis, only at the end of recessions and beginnings of expansions. And that is exactly what the YoY comparison shows now:

Units under construction are still down -6.0% YoY, but this is the best YoY comparison in 24 months. This is most consistent with a rebound after a recession.

To sum up, residential construction metrics in July continued the sideways trend, of a subpar housing equilibrium — but an equilibrium that nevertheless means this long leading indicators for the economy is no longer recessionary, but neutral.

Of inflation and corporate bond spreads

 

 - by New Deal democrat

Over the weekend, in response to my “Weekly Indicators” post, a commenter wanted to know why I was concerned about inflation. After all, hadn’t core CPI just tied its post pandemic low?

And it is true: core inflation (blue), at 2.5% YoY, is equal to its post-pandemic low. Further, CPI less energy (red), a measure I used to cite monthly before COVID stimulus-induced house price inflation dwarfed everything else, did make a new post-pandemic low YoY through July:

But in reply, I noted that not only was headline inflation still elevated, but pipeline price pressures were manifest in both the ISM monthly reports and the various Fed regional reports, one of which - the New York Fed’s Empire State manufacturing survey - was updated for this month this morning, and it showed continued widespread increases in both prices paid (blue) and received (orange). In the graph below, I also show the latest Philadelphia Fed readings (light blue and light orange) through last month:

Interestingly, although prices paid if anything have become more widespread in the last few months, relatively speaking producers are having a difficult time passing them all on. This is going to squeeze profit margins, and that tends to lead to cutbacks.

And gas prices through the first half of August have increased compared to July:

And of course the Strait of Hormuz is still closed, Wall Street futures traders notwithstanding. 

So yes I continue to believe that inflationary pressures have been building.

Which brings me to a second point that I made in my piece over the weekend: namely, that the increase in yields on bonds at longer maturities is a negative sign. That point was reinforced with another piece of information that was posted by Apollo Research via Carl Quintanilla, pointing out that yields on speculative corporate credits have - at least somewhat - blown out.

To wit: below is a graph of the last three years of bond yields for CCC grade speculative debt (blue), BBB debt (gold), BAA debt (red), and 30 year Treasurys (black):

Note that I’ve subtracted -5% to CCC yields better to show the comparison in trends. There’s no doubt that there has been some spreading.

Unfortunately, B of A only allows FRED to post the last three years of data. So here is a graph of CCC vs. BB corporate debt going back 30 years:

Whenever bond traders get worried, the speculative high yield CCC debt blows out first and worst. In comparison, the current relative increase in CCC debt is not that significant - at least not yet. Also, when the economy weakens, banks become more wary about extending loans for speculative debt, as shown in the relevant metric of the Senior Loan Officers Survey, which was just updated two weeks ago:

Through Q2 of this year, there was no such wariness yet.

As I’ve written a number of times recently, the current situation is best described as an inflationary expansion. Before it ends, among other things I would expect banks to tighten credit, high yield CCC debt to blow out considerably more against more creditworthy B-grade corporate debt, and I would expect even better rated corporate debt to increase in yield as well.

 

Admiral of the Fleet T—-p, meet Admiral of the Fleet Wilhelm II

 

 - by New Deal democrat

You probably recall that a number of months ago T—-p decided that, Pearl Harbor notwithstanding, it was time to bring back battleships in a new class not coincidentally to be named after himself.

Now this weekend we have been treated to the news that T—-p had decided he is an expert in the design of aircraft carriers. In case you’ve missed it, on Friday we learned that he has ordered the navy to ditch its modern, magnet-based aircraft launching system and return to old-fashioned steam catapults.

 

 Then, this morning, we found out that he also wants new aircraft carriers to look like their WW2 ancestors. Notwithstanding all the, you know, technological and efficiency improvements in the past 75 years.

Which brought to mind a post I wrote here eight years ago, in which I went in to great detail about how T—-p’s personality is almost exactly the same of another infamous narcissistic idiot of a ruler, Kaiser Wilhelm II of Germany 100+ years ago, calling T—-p the “doppelgänger” of the latter.

By the way, I am not the only one who arrived at the same conclusion during T—-p’s first term. Here, for example, is David E. Banks in The Independent, making a similar piont:

“Like Trump, the Kaiser was an insecure and aggressive narcissist who allowed his mood to dictate many of his policy decisions, and while the domestic effects of these traits could be limited by the quasi-democratic institutions of the German Reich, in the foreign policy arena his personality wreaked havoc.”

What brought the comparison back to mind this weekend is the following passage from the book "George, Nicholas, and Wilhelm," by Miranda Carter, that I highlighted in that post back eight years ago:

"Wilhelm considered himself an expert on many things and was not shy about saying so…..

"[In 1889 in an attempt to smooth over some family difficulties, Queen Victoria had awarded Wilhelm an honorary admiralty of the Royal Navy. Afterward,] Wilhelm fell upon his new title as if nothing had ever given him so much pleasure in his whole life..... Even Phillip zu Eulenburg noted disappointedly that he was "like a child over it [the British naval uniform]." Wilhelm told Herbert von Bismarck that his British naval title meant that "he would have the right as admiral of the Fleet, to have a say in English naval affairs and to give the Queen his expert advice... [He] was perfectly serious in what he said."

"...[Later that year,] Wilhelm put on his admiral's uniform, flew the pennant of a British navy admiral, and invited himself -- as a real admiral would -- to inspect the British squadron anchored [off the Greek coast].... In December, he sent [Victoria] a plan for the reorganization of the Royal Navy.... In 1891 he sent more "humble suggestions...." 

He really is Wilhelm’s doppelgänger. Let’s hope the war he has blundered us into (so far) does not turn out to be the generational catastrophe that World War I was. 

Weekly Indicator for August 10 - 14 at Seeking Alpha

 

 - by New Deal democrat

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

It is surprising how large a majority of the high frequency data is positive, despite all of the chaos that has been thrown at the economy. Still, the bond market in particular has not been fooled by the consequences of the Big Bad Bust-out Budget Bill, as 10 and 30 year yields are at or close to 20 year highs. As a result, the US will have to devote more and more of its budget to interest payments on its debt. It is - or at least may be - the beginning of the dreaded “hockey stick.”

In any event, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a little bit of pocket change.

July retail sales lay en egg; a hangover after a spring Budget Bust-out Bill binge?

 

 - by New Deal democrat

Let me start out this post with two comments: (1) real retail sales is one of my favorite economic indicators, because it tells us so much about consumer spending, which is about 70% of the economy, and also because, with a lot of noise, consumption leads employment; and (2) about once a year, it lays an egg. That’s basically what happened in July.

To the numbers: nominally, total retail sales declined a sharp -0.6% in July. Since consumer prices barely rose in July, the real inflation adjusted number rounded to -0.6% as well. Here’s the post-pandemic look at the absolute numbers:

Since gas prices have been a major driver of inflation - and deflation - in the past few months, here’s a look at the monthly % changes in nominal retail sales excluding gas stations (orange) vs. total retail sales (blue). And like all the other metrics this month, real retail sales excluding-gas also declined -0.6%:

So gasoline sales weren’t the main culprit. Rather, the weakness was widespread. Like I said, about once a year retail sales lay an egg, so maybe it was July’s turn this year.

On a YoY basis, nominally retail sales were up 5.0%, but since consumer inflation is up 3.3%, real retail sales rounded to 1.7% higher YoY. For comparison purposes, I also show the YoY% change in real personal consumption (orange) which won’t get reported until the end of this month: 

This is in accord with the weekly YoY% change in retail spending as measured by Redbook, which also backed off substantially YoY in the past five weeks:

There has been some speculation that the surge in consumer spending in the last few months was driven in part by larger tax refunds to upper income recipients due to the last year’s Budget Bust-out Bill. If so, that such added spending might be tailing off would also be a likely explanation for the July downturn. But per my opening comment, unless there is further erosion next month, I am treating this as a one-off downdraft.

Finally, since consumption leads employment, here is the update of YoY real retail sales and real personal consumption (/2 for scale) together with employment (red):

Two months ago, I wrote that “this suggests that on a YoY basis the rebound we have seen in the last three jobs reports is likely to continue in the next several months.”  I continued that position after the relatively poor June jobs report. 

After July’s even worse jobs report, showing an actual decline, maybe not so much. But as I wrote above, the leading/lagging relationship is a somewhat noisy one; but the fact remains that with the increase in consumer spending this year, employment should still follow suit.