No, we are not DOOOMED: real usual weekly earnings edition

 

 - by New Deal democrat

As widely reported in the past week, real weekly earnings declined a sharp -2.1% in Q3. For example, here is Menzie Chinn at Econbrowser:

And here, more histrionically, is Mike Koncxal on X:

Is this an important danger sign?

No. Why? To cut to the chase, because even after seasonal adjustment it is the noisiest wage earnings metric there is (light blue in the graph below), and specifically in comparison with average weekly earnings as measured in the monthly jobs report (dark blue), and even more importantly in comparison with the quarterly employment cost index (red). Here’s what they look like since before the onset of the pandemic:

You can easily see that the blue bars not infrequently have both upside and downside quarterly swings well in excess of average weekly earnings, and positively wild swings in comparison with the employment cost index. Note, for example, that real weekly earnings had an outsized increase in Q2 of this year that almost completely cancels out their Q3 decrease. Perhaps more importantly, while both usual weekly earnings and the employment cost index are median numbers rather than an average like the monthly weekly earnings figure, the employment cost index norms by type of employment. Thus, in the immediate wake of the pandemic, many more low wage earners were laid off compared with higher wage earners, causing the other indexes to increase sharply even as unemployment soared as well. Then, as the pandemic gradually subsided and the low wage earners were hired back, those series decelerated back to a more “normal” change. But the employment cost index, which accounted for the change in the mix of employment, remained fairly steady.

As a result, when we measure the changes YoY rather than quarter over quarter, the huge swings tend to even out:

The monthly metric of average weekly earnings for all workers, averaged quarterly, is higher YoY on a nominal basis almost by the same percentage as median usual weekly earnings, but with much less drama.

And the same holds true on a historical basis. Note that the above graph, as well as all those below, show *nominal* changes, to account for the fact that different deflators may be used in the normal reporting of the series.

Here is 1979-99:

And here is 2000-2019:

Again, the “usual median weekly earnings” series is much more volatile, as you can see from the wider swings in the blue bars compared with the others.

This is not to say that Q3 real wages for ordinary workers have been good. As I’ve reported for a number of months now, on a YoY basis, real earnings have been flat or slightly negative. But take the noisy Q3 report with multiple grains of salt. It is likely to revert to the mean compared with the other reports in Q4.

Jobless claims continue near historic lows, forecast sub-4.0% unemployment rate

 

 - by New Deal democrat

Let’s take our regular weekly look at jobless claims. As a brief reminder, I always look at this because, especially in conjunction with stock market performance, it is an excellent short leading indicator, and also leads the monthly unemployment rate. 

And the news continues to be very good especially on a historical basis. Initial claims declined -6,000 to 194,000, one of the lowest numbers in 50+ years. The four week moving average declined -1,000 to 197,750, also one of the lowest numbers in 50+ years. With the typical one week delay, continuing claims rose 25,000 to 1.728 million, which remains also well behaved:

On the YoY% basis more important for forecasting purposes, initial claims were down -16.0%, the four week average down -13.2%, and continuing claims down -11.2%:

Note that these comparisons have been getting *even more* positive in the past several months, indicating a strengthening jobs market.

Finally, we’re far enough along in the months to update what this likely portends for the unemployment rate (orange, thin line) for the next few months. Since the unemployment rate is a rounding of the actual ratio of unemployed to the labor force, I’ve also included that (dark red):

We’ve had a slight contratrend move in the last several months in the unemployment rate, likely reflecting the upward tick in new jobless claims earlier in summer. But it is almost certain that the downward trend in the unemployment rate will continue, likely under 4.0% in the next few months.

In short, despite the continued chaotic economic lunacy coming out of Washington, it is extremely hard to derail the US economy. The bigger danger over the next months is that AI will prove to be a bubble after all, the popping of which would drag both consumer spending and also job growth down with it.

The inflationary expansion is still expanding, and is likely even more inflationary

 

 - by New Deal democrat

There were a couple of reports last week about the manufacturing sector that I didn’t cover then. Let’s take a look at them now. What I am interested in is whether the rebound in manufacturing is continuing, is it more or less inflationary, and is it supported by sales?

First up, both the NY and Philadelphia Fed manufacturing indexes were reported. The below several graphs average the two to minimize noise. Ideally I would like to show the three month average, but unfortunately it is one of the few things that FRED does not indulge.

The headline index average (blue in the graph below) shows that the rebound is very much in place, and if anything has accelerated in the past few months. The more forward looking new orders (red) suggests that the rebound, if not ebbing, might be a little past its peak:

In other words, still strongly positive, and set to continue for a few more months, all else being equal.

The prices paid (blue) and prices received (red) index averages tell a less positive story:

Not only are inflationary pressures still very widespread (in the prices paid subindex), but the indication is that they are increasingly being passed on to customers (in the prices received subindex).

So if there is an industrial expansion, it very much remains an inflationary one - and the inflationary aspect may be accelerating even more.

Now let’s look at the second report from last week: business sales and inventories.

The first thing for me to repeat is that sales lead inventories by several months at least, as shown in the below graph of the absolute levels of sales and inventories (/1.5 for scale) in log scale (note these are both nominal, but since we are interested in the trend, we don’t need to worry about the proper deflator):

Sales always turn up and turn down first. Once business see that their sales have turned, they either increase or decrease inventories in reaction.

But an even better way to show this same data is YoY, as below:

This makes it easy to see that inventories change, up or down, after sales do.

Now here is a close-up of the last few years in absolute terms:

Note that sales have stalled since May, declining slightly and then, as of August, the last month reported, only 0.5% higher. While this isn’t a downturn, and there have been a number of similar sideways moves before, if this were to continue several more months I would expect inventories to react as well - which would mean a cutback in production and, if pronounced and long enough, in employment.

Which brings me to my final graph, which is the average of the employment subindex in the two regional Fed reports:

Manufacturing employment has continued to grow at the best pace since the immediate post-pandemic Boom, if at a slower pace than at its June peak. The three month average is slightly down from there, but still quite positive.

In summary, the business sales and inventory report, and the NY and Philadelphia Fed manufacturing reports, show that the inflationary expansion is still both an expansion and inflationary, with employment growth as well. But new orders suggest that in a few months it might begin to decelerate somewhat, exacerbated by customers reacting to increased costs; and if that shows up further in sales, then production and employment might then begin to flag as well.

September new housing construction: saying farewell to the late incipient housing recovery

 - by New Deal democrat

Last month I started my report on housing construction by writing that “This morning’s report on housing construction may be the last decent one for quite awhile.” And it was. 

Up until last month I had been writing that housing construction was most consistent with an economy coming out of a recession than going in to one. Needless to say, with the spike in mortgage rates, that is no longer the case. In September housing starts (blue) declined -5.2% to 1.221 annualized, while the less volatile and slightly more leading permits (gold) declined -0.2% to 1.400 million. The least volatile metric of all, single family permits (red, right scale) declined -4.0% to 845,000:

All three of these metrics had been trending essentially sideways since the summer of last year. As of this month, the YoY comparisons are now near the bottom of that range, with starts down -7.4%, permits by -3.0%, and single family permits by -4.8%:

This doesn’t mean housing is forecasting a recession yet. While I won’t bother with the graph this month, in the past these three metrics have generally been down -10% or more YoY to be consistent with the onset of a recession.

Now let’s update the “last shoe to drop” in this series, housing units under construction. This was unchanged on an annualized basis at 1.280 million units:

This series has been essentially flat - even rising slightly - as well since the beginning of this year, which is typical of an economic recovery that is beginning or has already begun:

Which, if it weren’t for rising mortgage interest rates would be good news.

So let’s close out with graph of mortgage rates (blue, inverted) on a monthly basis, showing that they rose to an average of 6.86% in September and 7.38% so far in October:

As the above graph shows, a similar increase in mortgage rates in late 2023 (noisily) led to roughly a -10% decline in permits issued (gold, right scale) over the next few months. With the further increase in mortgage rates this month, I expect further deterioration in new housing construction over the next several months as well.

One final note:  from a forecasting perspective, the housing market, along with corporate profits and real retail sales per capita, is one of the three nonfinancial, or “real world” long leading indicators that is of added importance for whether the US economy continues in expansion or falls into recession. Despite the renewed downturn in housing, as of now, both of the other two are still very positive. So - barring particularly strong new lunacy from Washington - the inflationary expansion appears likely to continue over the near term.

Consumer spending, income and wealth

 

 - by New Deal democrat

For awhile now I have been writing about how the wealth effect has been powering sales among upper income households. Earlier this year the Minneapolis Fed took a look at the phenomenon, comparing data from several different sources, including Moody’s:

The New York Fed:

And Bank of America:

They noted that “While Moody’s pegs a sharp break after 2020, Bank of America did not observe a widening gap in their data until mid-2025, when a large separation in spending growth opened between lower-, middle-, and upper-income customers—arguably more ‘E’ than ‘K’”

Interestingly, while they don’t supply any explanatory data, in their conclusion they note:

For each measure above, households are stratified by income. This is a natural consequence of the available data; from credit card issuers to market research firms to U.S. government surveys, income is the common denominator.

“However, wealth—rather than income—increasingly distinguishes the most well-to-do U.S. households. According to the Federal Reserve Board, household wealth has become increasingly concentrated among the top 0.1 percent. And there is ample evidence that wealth (independent of income) empowers spending, with asset-rich individuals able to borrow against their holdings and fund very high levels of spending.

This is particularly noteworthy because in the past four years there has been a huge divergeance between income and wealth, at least as measured by stock market gains. As shown in the graph below, total personal income has risen 23% since September 2022, while the stock market has doubled - it’s up 100%!

All of this adds to the evidence that at the moment the US economy *is* the stock market. Which also means that, if all else stays the same (or reasonably close thereto), a sharp selloff in the stock market is likely to prompt a sharp decline in consumer spending - which can easily become a vicious cycle, which would be broken only when sales come more in line with income growth (or, heaven forbid, decline).