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).

Weekly Indicators for October 12 - 16 at Seeking Alpha

 

 - by New Deal democrat

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

The tug of war between the AI-powered inflationary expansion, and the Big Bad Billionaire Bust-out Bill and Iran war-related increase in interest rates and gas prices continues. In the present, so far AI is winning. But out on the horizon, enough damage has accrued that (for this week at least) the long leading indicators have turned from positive to neutral.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny of two in lunch money for my efforts collecting and organizing it all for you.

Insutrial production, primarily powered by AI-related utilities, continued its rebound in September

 

 - by New Deal democrat

One of the biggest, if not the biggest, trend I have been writing about is the rebound in manufacturing that has been driven by AI data center construction. In that regard, industrial production, one of the four important monthly series that the NBER looks at in determining whether the economy is expanding or contraction, has been an important indicator of that upward trend, and that continued in September.

Headline production (blue) rose a sharp 0.7% to another post-pandemic high, and manufacturing production (red) rose 0.3%. And electric and gas utility production (gold, right scale), which is most closely aligned with AI data center construction, increased sharply against, by 3.5%. The below shows all three normed to 100 as of just before the pandemic:

Utility construction has outpaced the manufacturing sector as well as the headline number in the past few years, and continued to do so in September. On a YoY basis, while headline production was up 2.2% and manufacturing production up 1.1%, utility production continued to be up sharply, by 8.7%:

So the big news from industrial production is that AI data center construction continues to be the centerpiece of the manufacturing rebound since last year.