Personal income and spending continue their positive trend in November, but looking late cycle-ish

 

 - by New Deal democrat

Adjusted for inflation, both personal income and spending came in positive once again in November. But under the hood, the report looked a little tepid, and while it certainly wasn’t recessionary, the data was consistent with what I would expect later in the cycle of an expansion.

For the record, real income rose 0.2% for the month, and real spending increased 0.3%, continuing their consistent trend since mid-year 2022:

Real income less government transfers, one of the metrics that the NBER looks at to determine economic expansions vs. recessions, also increased, by 0.1%, in November, continuing its uptrend as well:

Last month the headlines were mainly about inflation. I demurred. And that was burne out by the mild 0.1% increase in prices this month, average for the past year:

Indeed, in the seven months since April prices have only risen a total of 0.9%, for a 1.6% annual rate, below the Fed’s target. 

On a YoY basis, prices increased 2.4%, up from 2.1% in September (blue in the graph below). This was all about services (gold), which are up 3.8% YoY, their approximate YoY advance for the past six months. On a YoY basis, goods (red) are still in mild *deflation*:

On a monthly basis, the deflation in goods prices appears to be ending. Prices rose very slightly (less than 0.1%) in November:

The YoY comparison is elevated all because of services, as this long term graph shows:

In contrast with the CPI, only about 0.3% of that YoY rate is housing.

If goods deflation is no longer a tailwind, and services inflation remains elevated, that is a typical late cycle configuration.

Also looking late cycle-ish was the personal saving rate at 4.4%, down from 5.5% last January.  As the below longer term historical graph which subtracts the current rate to show it at the zero line shows, the current saving rate is equivalent to that late in the last two expansions (not counting the pandemic):

Basically, as an expansion goes along, consumers get further out over their skis, and so more vulnerable to an adverse shock.

Finally, the PCE price index is used to calculate real manufacturing and trade sales (with a one month lag), another metric used by the NBER to determine if the economy is in recession or not. This declined -0.1% in October, but as the pot-pandemic graph below shows, its uptrend remains intact:

So the good news is that this very important report on the health of the consumer remained positive in November, consistent with its trend since June 2022. There wasn’t any bad news. But the continued elevation in the services price index and the low level of savings suggest that we are later in this expansion cycle. 

Jobless claims: with a dash of seasonality salt, trending towards weakness

 

 - by New Deal democrat

As expected, jobless claims declined from one week ago, as the delayed Thanksgiving week seasonality moved out of the numbers.

Initial claims declined -22,000 to 220,000, while the four week moving average increased 1,250 to 225,500. With the typical one week delay, continuing claims declined -5,000 to 1.870 million:

On the more important YoY basis, initial claims were higher by 6.3%, and the four week average higher by 7.3%. Continuing claims were also higher, by 3.9%:

Because the initial claims numbers include the weeks before, of, and after Thanksgiving, the seasonality effects should be a wash; which means that while they are not recessionary, they do imply some real weakness.

Finally, here is the look at initial and continuing claims averaged over the entire month, compared with the unemployment rate. Note all of these are rendered as YoY% changes:

One year ago the unemployment rate was 3.7%. The latest claims comparisons suggest that (absent the effects of mass immigration in the past several years) the rate should be trending higher by about 5%-10% over that level. Since this is a percent of a percent, that means trending towards 3.9%-4.1%, which is a lower range than the rate has been in the past five months. 

More importantly, with one exception weekly jobless claims have come in higher YoY every week since the beginning of September. I’m continuing to take these numbers with an extra dash of seasonality salt, but at this point claims are joining the list of indicators - ever so slightly - suggesting weakening of the economy ahead.

The housing sector now hoists a red flag recession warning

 

 - by New Deal democrat

The very important construction data from the long leading housing sector was mixed this morning for November.

The most leading datapoint, permits, increased 86,000 on an annualized basis to 1.505 million. Even more importantly, single family permits, which have the least noise and most signal of any of the datapoints, continued their rebound from their recent June low, increasing 1,000 to 972,000, their highest level since April. Measnwhile starts, which are noisier and tend to lag permits by one or two months, declined another -23,000 to 1.289 million, their second lowest reading since 2020:

Starts did rebound in the hurricane-stricken South, but that was counterbalanced by a steep decline in the Midwest. Again, this series has a lot of noise, so I am not terribly concerned about a one month pothole.

But if housing permits suggested a near term increase in construction, units presently under construction continued to plummet, down -27,000 to 1.434 million, -16.2% down from their peak, and the lowest number since August 2021:



This is very important, because in the past it has declined on average -15.1% and by a median of 13.4% before the onset of recessions:

Three months ago I hoisted a yellow flag “recession watch” for housing construction. I held off hoisting a red flag last month because of the hurricane effects in the South. With that dissipated, I am hoisting the red flag now: housing is forecasting recession.

Nevertheless, as I cautioned last month, in our present situation it appears permits have bottomed. Because starts, following permits, should start trending back upward in the next several months, and housing units under construction follow starts:

I still think housing units under construction will not decline too much further before bottoming as well. 

Additionally, employment in residential construction, which typically follows units under construction with a lag, has continued to increase so far:

Residential construction employment should decline before any recession were to occur.

Finally, recall that mortgage rates (change YoY, inverted) lead all of this data, including both measures of permits:

So the issue becomes whether mortgage rates continue to head back higher - in which case recession risks increase - or are at the top of their range going forward.

While the housing sector is now forecasting recession, focusing on it alone is not enogh. Focusing on manufacturing or residential construction employment alone is not enough. As I wrote last month, it is only when there is a more broad-based downturn across multiple goods-producing sectors that a recession typically occurs. Employment in goods producing jobs did decline slightly from two months ago, but it is not significant at this point. As I pointed out on Monday, corporate profits also stalled in Q3, but have not turned down; and if they did peak it would not forecast recession until later next year. Additionally, as we saw yesterday consumption is still going strong.

So while the housing sector is forecasting recession in the near future, it has not been joined by other critical components yet.

Industrial production continues to slide

 

 - by New Deal democrat

Industrial production declined for the third month in a row in November, down -0.1%, while October was revised downward another -0.2%. Manufacturing production on the other hand increased 0.2% in November, but September and October were revised downward a combined -0.3%, so on net this was another -0.1% decline. They are now down respectively -1.5% and -2.0% from their late 2022 highs:

Before 2001 and especially before the Great Recession, any YoY decline *always* coincided with or at least immediately heralded a recession. But since the accession of China to regular trading status in 1999, downturns of even -5% or more, as in 2015-16 and 2018-19 have not necessarily meant recession.

And as this close-up of the post pandemic record show, on a YoY basis production is only down about -0.9%:

The economy continues to be powered forward by consumption of services, and also by construction spending. Increasingly that does not include residential construction, which as I have written a number of times recently is down from its most recent peak to a level which typically in the past has meant recession. We’ll find out more about that tomorrow.

Real retail sales on the cusp of breaking out of their multi-year doldrums

 

 - by New Deal democrat

Consumption leads employment, and as I reiterated yesterday real per capita retail sales has a history as a long leading indicator.

Which means that retail sales for November, which rose 0.7% nominally, continues its recent strong string of positives, increasingly looking like it is finally breaking out of its 2 year plus doldrums.

Since consumer prices rose 0.3% in November, real retail sales were up 0.4% for the month. While real retail sales are still -1.9% below their all time peak right after the 2021 stimulus package, with today’s report they are the highest since May 2022 except for one month:

On a YoY basis, they are also higher by 1.0%:

This is another positive since recessions typically occur with sales negative YoY. Here’s what the past 30 years before the pandemic look like, subtracting 1% from the YoY measure so that it shows at the zero line:

It’s a weak result, but for a change a non-recessionary one.

Finally, real retail sales are a good short leading indicator for the trend in jobs growth. Yesterday I speculated that real retail sales per capita might be distorted in the past several years by the outsized importance to CPI of the sharp increase in the shelter component. So in the graph below I also include real sales ex-shelter (light blue):

Either way, real retail sales are forecasting continued deceleration - which at this point translates into increased weakness - in hiring in the months ahead. Because, as I have pointed out in several posts in the past few weeks, YoY jobs gains are likely to be revised significantly downward for late 2023 and 2024 when we get the annual benchmark revisions in a couple of months, we may be closer to the trend line forecast by real retail sales already.

Updating the nonfinancial long leading indicators

 

 - by New Deal democrat

I haven’t “officially” updated my take on the long leading indicators - those that forecast a recession at least one year beforehand - in almost two years. That’s because the hurricane force tailwind of the supply-side deflationary unlinking of the global supply chain completely swamped everything else. So if I were to examine, e.g., corporate bond prices, is the appropriate comparison with 2021, or with 2023, after the supply chain had unlinked? Since there’s no clear answer to that, I haven’t seen the point.

But the same isn’t really true of the non-financial indicators. These detail producer and consumer well-being out in the real world. If their fortunes are waxing, the economy should continue doing well; if they are waning, there’s likely trouble ahead.

So I thought now might be a good time to look at those. Below I’ll look at five such long leading indicators. Two have to do with the housing market, two with corporate health, and one with consumer spending. (The three financial indicators I’ve eliminated are the yield curve, corporate bond prices, and money supply, all of which are more or less under the control of the Fed, and are strictly financial).

Let’s start with housing. Housing permits have long been known as a long leading indicator. Below I show total (blue) and single family (red) housing permits:

With the sole exception of the 2001 recession, which was focused on producers, housing permits have declined over 10% - and usually over 20% before the onset of recessions, with the peak occurring over one year before. In our present situation, both total and single family permits are down almost -25% since their peaks in January 2022. As I’ve written several times in the past couple of months, this is recessionary, although in a recession I would expect them to decline even further. We’ll get the next update of these numbers on Wednesday.

A similar tale is told by private residential fixed investment as a share of GDP. Calculated both in real and nominal terms, this metric also turned down typically between one and two years before a recession. In real terms the ratio peaked in 2021; in nominal terms in 2022:

So, both of our housing metrics are telling us to beware of recession.

Now let’s turn to the producer sector. Corporate profits deflated by unit labor costs also typically turn down a year or more before a recession. This makes sense, because once profits turn down, executives start looking for ways to cut costs, and frequently that means cutting staff.

With the exception of 1974, this metric has always declined at least one year before the onset of a recession. It did decline from the last quarter of 2021 to the last quarter of 2022, but has risen since then to an all time high in Q2 of this year, before declining a tiny -0.2% in Q3:

If this is generally positive, the picture of corporate borrowing is more mixed.

Corporate demand for loans has been declining for several years. The nadir of its decline was in 2022. While still negative, it had generally been improving since then - a typical marker of an economy coming *out* of a recession - until this past quarter:

We won’t know for several more months whether or not this is the beginning of a new slide.

The closest I’ll get to a financial indicator in this series is the percentage of banks tightening vs. loosening standards for corporate loans. Banks have progressively been making conditions less tight for the past year. Again, this is something we typically see coming out of recessions:

If corporate profits recover from their slight decline in Q3, then this is all just a blip, and producer health is very positive. If they don’t, then I’d want to see if loan demand continues to slide.

Finally, let’s look at the consumer side. In the modern era, real per capita retail sales have generally turned down at least one year before a recession. This is typically the sale of goods more than services. If consumers are pulling in their horns buying actual stuff, then producers react - with a lag - by cutting production and/or staff.

Here the news has been relentlessly negative since 2021, and in the past two years in all but three months real sales have actually been lower YoY:

This has looked very recessionary for several years.

But because similar measures, like real personal consumption expenditures for goods have been very positive, it made me wonder if the difference was all about the deflator, because shelter costs are 1/3rd of the entire CPI measure, but are a much smaller share of the personal spending deflator. So this next graph deflates retail sales by CPI less shelter, and there the story is quite different:

Basically, take out rent and the fictitious owners’ equivalent rent, and real sales per capita have been increasing off and on for over two years. Shelter costs are squeezing consumers, but they’re spending their money on other stuff just fine.

The conclusion I come to looking at the above nonfinancial long leading indicators is that the economy, excluding the housing sector, is not poised to enter a recession in the next few quarters. What happens with the housing sector will depend very much on mortgage interest rates. The next crucial measure to watch is whether corporate profits resume growth, or whether Q2 of this year was their high water mark for the cycle. Even in the most negative case, that would suggest no recession until at least the latter part of next year at the earliest.