Weekly Indicators for October 3 - 7 at Seeking Alpha

 

 - by New Deal democrat

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

This was the week that the 800 pound gorillas of Wall Street reported Q3 earnings, and - to use a World Series type metaphor - hit it out of the park. 

Meanwhile down in gruntland, the amount of goods being moved from ports to markets hit a major air pocket.

More signs of a “K shaped”, or bifurcated economy where Wall Street titans are doing well, fueling upper income spending, while down below there are signs of exhaustion.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy - with data almost entirely unaffected by the government shutdown - and reward me with a penny or two of lunch money for my efforts in collecting and organizing it for you.

October employment situation: stagnant hiring, increased firing, continued wage growth

 

 - by New Deal democrat

On a normal first Friday of the month, I would be crunching the official jobs report data to try to provide not just a coincident report on the jobs market, but also to focus on the leading indicators within that report, such as the manufacturing and construction sectors and also aggregate real payrolls. For the second month in a row, I can’t do that. But what I can do is aggregate some of the most reliable alternate sources for the state of the labor market; and fortunately, there is no big divergence among those: they all point to a stagnant but not meaningfully contracting jobs sector.

Let me start with the number of jobs, and then follow with alternatives to the unemployment rate. And further, let me start with the three best sources: the ISM reports, the regional Fed reports, and ADP.

To begin with, the ISM reports are diffusion indexes. They don’t report the number of gains or losses, but whether more firms than not are hiring vs. firing. Any number below 50 means more firms are letting people go than hiring them, and ss I reported Wednesday, ISM services showed slight contraction, at 48.2. The ISM manufacturing report had previously also shown contraction for October, at 46.0:

Since services account for about 75% of all jobs, the economically weighted number is 47.6 for the month. This would translate to a continued downturn in jobs in the goods producing sector, to a virtual standstill or even small losses in the service-providing sector as well.

The next source is the 5 regional Fed reports from NY, Philly, Richmond VA, Kansas City, and Dallas. These are also diffusion indexes, with the balance point at zero, so a positive number is expansion, a negative one contraction. As I reported last week, here are the numbers from the five manufacturing reports (1st line) and services reports (2nd line):

NY 6.2; Philly 4.6; Richmond -10; Kansas City 1; Dallas 2.0; AVERAGE 0.8

NY -5.2; Philly -0.5; Richmond 0; Kansas City -4; Dallas -5.8; AVERAGE -3.2

Unlike the ISM manufacturing report, the regional Fed reports show slight gains in the manuacturing employment sector; but like the ISM services report, significant contraction in the services employment sector.

Next, as has been widely reported, ADP indicated that 42,000 private sector jobs were added in October. As the below graph by Prof. Jason Furman shows, the average of the last three months is approximately 0:

Bank of America’s internal data also showed further deceleration over the past two months from the last officially reported numbers:

A gain of only 0.5% for the entire last 12 month period suggests no monthly growth at all in either September or October.

Finally, although I have no idea whether this new source is reliable or not, Revelio Labs reported that in October -9,100 jobs were lost:

Weakness was also shown in new job postings by Indeed, which declined further in October. Note that this source has closely matched the job openings data from the JOLTS series:

Another important metric in the monthly jobs report is wages. These are also covered by some of the regional Fed reports as well as ADP.

Here are the manufacturing (1st line) and services (2nd line) diffusion indexes from the regional Fed reports for October:

Manufacturing: NY n/a; Philly n/a; Richmond 15; Kansas City n/a; Dallas 14.2; AVERAGE 14.6

Services: NY 25.9; Philly 38.3; Richmond 17; Kansas City 21; Dallas 10.7; AVERAGE 22.6

The economically weighted average from both indexes is 16.5, indicating that wage increases continue at a strong pace.

ADP similarly reported continued strong wage growth, at 4.5% YoY for job stayers, and 6.7% for job switchers:

Finally, let’s take a look at unemployment measures.

As I often say, jobless claims lead the unemployment rate. Initial jobless claims are noisier but more leading; when combined with continued claims they carry more signal but lead only slightly. Here is what both measures looked like compared with the unemployment rate as of the last official reports:

Since the shutdown, initial claims have varied between 220,000 and 230,000, and on a four week moving average basis have been slightly lower than one year ago, while continuing claims have been in the 1.930 to 1.960 million range, close to the top of their readings in the past three years. This suggests that the unemployment rate would be no lower than, and likely slightly above its range from one year ago, which was 4.1%-4.2%:

This would put this month’s likely unemployment rate at between 4.2% to 4.4%.

Further, as was widely reported yesterday, Challenger Gray indicated that there were 153,000 job cuts in October, the highest for this month in several decades, and with one exception the highest since the pandemic lockdowns:

And Bank of America indicated that unemployment insurance checks directly deposited into its account, while slightly down from September, were 10% higher YoY - an even bigger YoY increase than official continuing claims:

To summarize, the best alternative jobs data we have for October are almost all in accord. There were roughly no job gains at all, +/- about 40,000. Meanwhile wages continued to grow at a relatively fast pace, in accord with the official data from earlier this year. And the unemployment rate was steady to slightly higher compared with earlier.

Long leading indicator Senior Loan Officer Survey for Q3 was neutral to slightly positive

 

 - by New Deal democrat

The Senior Loan Officer Survey is a long leading indicator, telling us about credit conditions that typically turn worse a year or more before the economy turns down, and improve just at the economy is ready to turn up. Fortunately, since it is reported by the Federal Reserve, it is unaffected by the government shutdown.

The one downside is that the information is only reported Quarterly, and with a one a one month lag. So the Q3 update was only reported on Tuesday.

There are two series that have a long enough record to give us a lot of information. The first is whether banks are tightening or loosening standards. Since tightening is shown as an increase, this is one of those series where higher means worse. 

Historically banks are still tightening, but less so as an expansion begins. As it progresses, they ease lending standards; but  become more cautious well in advance of an ensuing recession. In early 2024, the sharp decline in the percentage of banks that were tightening standards indicated an expansion that was well established.

Interestingly, although at no point during this expansion have banks on net eased, this year the relative progression of banks that moving in that direction has stalled:

This is a neutral reading. It does not look like what has historically happened closer in time to a recession; but on the other hand it does not indicate a strengthening expansion.

In the second series, confusingly, higher does mean better. And in Q3, each measure was slightly positive. Further, while the series are very noisy, there was an unmistakable improving trend in 2023-24, which may be plateauing this year:

In any event, the Q3 result indicates business confidence in expansionary plans.

The upshot is that this long leading credit indicator is presently neutral to slightly positive.

ISM services index rebounds, indicating moderate expansion, but with stagflation

 

 - by New Deal democrat

With the shutdown of the official government sources, along with the regional Fed indexes, the ISM manufacturing and services indexes have become especially important. To recap, because of manufacturing’s diminished importance to the general economy, the services index has become significantly more important. For forecasting purposes, I assign a 75% weight to services, and a 25% weight to manufacturing, which is approximately their contribution to the total economy. Because there is some noise in the monthly numbers, I use the three month average of each.

On Monday, we saw that manufacturing continued to contract. The story was quite different in this morning’s services report, as the headline number increased to 52.4 (anything over 50 indicating expansion), while the more leading new orders subindex jumped from 50.4 to 56.2. As a result, the three month average of the headline number continued in modest expansion, at 51.5, while the new orders subindex rose to 54.2, a solidly expansionary reading.

Here is what the two headline numbers, for manufacturing and services, look like:

Since the three month average of the manufacturing index was 48.7, the economically weighted headline number rose to 50.8.

Next, here is the comparative look at the two new orders indexes:

Since the three month average of the manufacturing new orders subindex was 49.4, the economically weighted new orders number also rose to 53.0.

Because of the government shutdown, as I did Monday, I am paying more attention to the prices paid subindex as well. For services that rose to 70.0, the highest reading since the end of 2022, with the three month moving average being 69.5:

The manufacturing prices paid three month average was 58.0, so the economically weighted subindex stands at 66.6.

Finally, the employment numbers are also particularly significant now as well. In services as in manufacturing, these continued to indicate contraction, at 48.2. The three month average for services employment is 47.3:

Since the three month average for manufacturing was 46.0, the economically weighted employment reading is 47.0, indicating contraction.

Once again, the ISM monthly readings for services were in accord with the regional Fed reports. We see modest expansion - indeed a pickup of activity since the summer, and also a pickup in new orders, but a slight decline in employment, with rampant inflation - i.e. stagflation, but a stagflation which is currently still balanced towards expansion.

Since we won’t get a jobs report on Friday, I will offer a more detailed analysis of all the alternative measures of employment on Friday instead.

Tabulated initial and continuing state unemployment claims continue rangebound

 

 - by New Deal democrat

As I have done since the beginning of the government shutdown, the number of initial and continuing claims can be calculated notwithstanding, because it is based on reporting by the States, plus DC, Puerto Rico, and the Virgin Islands. Then by applying the same adjustment as was used for the same week last year, the seasonally adjusted number can also be estimated closely.

Further, since my forecasting method relies on the YoY% changes, it is almost never an affected by that seasonality. 

So tabulated, for the week ending October 25, unadjusted initial claims totaled 202986 vs. 201.447 in 2024, an increase of 0.9%.  

Last year this week the seasonal multiplier was *1.0822. Applying it gives us an estimated seasonally adjusted number of 220,000.

We can similarly calculate the four week moving average, since the last four weeks of claims were 228,000, 224,000, and 230,000, as well as this week’s 220,000. That gives us an average of 225,500, which is -10,750, or -4.5% lower than the number of 238,500 one year ago, which was the peak week for affects by the hurricanes which struck the Southeast, particularly Florida and North Carolina last autumn. These will end within two weeks.

Using the same methodology, unadjusted continuing claims for the week ending October 18 totaled 1,708,221 vs. 1,616,081 last year, an increase of 5.7%.

The seasonal adjustment for the applicable week last year was *1.14784. Applying it gives us an estimate of 1.961 million continuing claims, or 29,000 higher than one week ago. This is still within the range of continuing claims in the past few months, although very close to the high end of that range.

To give you a graphic idea of how this data shakes out, here are initial claims (blue), the four week average (red), and continuing claims (gold) all normed to 0 as of this week’s tabulation, compared with their readings in the past two years before the shutdown:

As with the past several weeks, absent hurricane distortions this continues the general neutral trend of initial and continuing claims, higher than one year ago but much less than 10% higher, forecasting a weakly expanding economy for the next several months.