December jobs report: good headlines, but deceleration continues

 

 - by New Deal democrat

If the long leading indicators all last year, and the majority of the short leading indicators from the past few months are to be believed, a recession is near. And if that is the case, we ought to see the leading elements of the jobs report begin to roll over. One of them, the average manufacturing workweek, clearly has. Arguably so has temporary employment. Residential construction employment may have peaked. But total construction and manufacturing employment continued to increase through November’s report.

So my focus as of this report is on those remaining leading components, as well as whether the deceleration in the 3-month moving average of jobs growth is continuing.

As described below, the deceleration continues, also including wages, but the leading sectors have not materially deteriorated from the past few months.



Here’s my in depth synopsis.

HEADLINES:

• 223,000 jobs added. Private sector jobs increased 220,000. Government jobs increased by 3,000. The three month moving average of growth declined further to 247,000.
• The alternate, and more volatile measure in the household report had its best month in quite awhile, increasing by 717,000 jobs. The above household number factors into the unemployment and underemployment rates below.
• U3 unemployment rate declined -0.2% to 3.5%.
• U6 underemployment rate also fell -0.2% to 6.5%.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and will help us gauge whether the strong rebound from the pandemic will continue.  These tilted to the negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, declined -0.3 hours to 40.6, and is down -1.0 hours from its February peak last year of 41.6 hours. This is recessionary.

• Manufacturing jobs increased 8,000, and are at a level higher than before the pandemic.
• Construction jobs increased 28,000, also at a level higher than before the pandemic. 
• Residential construction jobs, which are even more leading, increased by 3,100.

• Temporary jobs, which until several months ago had been rising sharply, declined again, by 35,000.
• the number of people unemployed for 5 weeks or less declined by 11,000 to 2,233,000, about 100,000 above its pre-pandemic level.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel, which was recorded at $28.10 in November, was revised downward by $-.09, and increased $.06 from that to $28.07, a 0.2% gain m/m, and up 5.0% YoY, vs. its 6.7% peak at the beginning of 2022.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers declined for the second month in a row, by -0.2% which is still above its level just before the pandemic.

•  the index of aggregate payrolls for non-managerial workers was unchanged, and is up 7.4% YoY. This metric has been decelerating nominally almost consistently for the past 16 months.  Compared with inflation through November, it is up only 0.2% YoY (recessions typically start when it crosses zero).

Other significant data:

• Leisure and hospitality jobs, which were the most hard-hit during the pandemic, rose 67,000, but are still about -6% below their pre-pandemic peak.
• Within the leisure and hospitality sector, food and drink establishments added 26,300 jobs, but are still about -4% below their pre-pandemic peak. 
• Professional and business employment declined -6,000, the second poor reading in a row after last month’s measly increased of 1,000.
• Full time jobs decreased -1,000 in the household report.
• Part time jobs increased 689,,000 in the household report.
• The number of job holders who were part time for economic reasons rose 190,000.
• The Labor Force Participation Rate increased 0.2% to 62.3%, vs. 63.4% in February 2020.
• Those not in the labor force at all, but who want a job now, declined -352,000 to 5.176 million, compared with 4.996 million in February 2020.
• October was revised downward by -21,000, and November was also revised downward by -7,000, for a net decrease of -28,000 jobs compared with previous reports. This is at least the second such downward revisions in a row.

SUMMARY

This report was mixed. There were many positive elements, including the unemployment and underemployment rates, labor force participation rate, and the absolute number of gains in jobs. The gains in the household report were the best in months. The leading sectors of manufacturing and construction employment continued to gain. It is nearly impossible to envision a recession beginning while that is still happening.

On the other hand, the manufacturing workweek declined to recessionary levels (suggesting job cuts will be close behind), and temporary employment continued to decline. Aggregate hours worked declined for the second month in a row, and aggregate payrolls were stagnant. There were again downward revisions to previous months’ data. Wages increased at the lowest pace in nearly two years.

This does not suggest to me that a recession is imminent, but it does suggest that deceleration in that direction has continued.

New jobless claims end 2022 on a positive note; preview of tomorrow’s jobs report

 

 - by New Deal democrat

Initial claims started off the year - or ended last year if you are technical about it - on a positive note, declining 19,000 to a 3 month low of 204,000. The more important 4 week moving average declined 6,750 to 213,750, a two month low. Continuing claims for the prior week also declined by 24,000 to 1,694,000 (due to either a software or human entry glitch, FRED recorded the entries as December 31, 2023! Which leaves a one year gap, so I have omitted this week’s data on the graph below):

All three numbers also remained lower YoY. The most important leading indicator, the YoY% change in the 4 week moving average of new claims, is 3.2% lower than its level one year ago (due to the same glitch, this week’s data is omitted on the below graph):

Although seasonal distortions can be at their maximum right now, this is a very good weekly report.

Tomorrow we get the much more important monthly jobs report. Because initial claims lead the unemployment rate, and have remained low, I expect the unemployment rate to remain unchanged +/-0.1%. As to payrolls themselves, I expect the three month average of 272,000 to continue to slowly decline, which suggests a monthly number below 250,000. Because tax withholding came in negative YoY for the second month in a row in December, I will be on particular alert for a downside outlier compared with recent reports.

Additionally, I will be looking to see if there is deterioration in some leading employment metrics that haven’t rolled over yet; specifically construction and manufacturing employment. Since the weekly Staffing Index has also weakened in the past month, I will also be looking to see if temporary employment continues to decline. 

November JOLTS report consistent with a continued “hot” labor market

 - by New Deal democrat 

The JOLTS report for November showed both continuing decelerating trends in some series, but overall a picture of a labor market that continued “hot.”

Here’s the graph I ran one month ago of job openings, hires, quits, and total separations:

Now here is an update for the past 2 years of all four series:

Three of the four series - openings, hires, and total separations - show a pattern of continued deceleration since the beginning of this past spring, although only hires made a new 12+ month low is this report. Only quits appear consistent with a stabilizing market - although they too could be read as decelerating.

At the same time, both openings and hires continue at levels above any month that predated the pandemic.

In the eight years before the pandemic, layoffs and discharges averaged 1800 +/-100 monthly, with a low of 1500. Since the end of the pandemic lockdowns, they have averaged 1400 +/-100. At 1350 in November, they continue right in that range:

Taken as a whole, the JOLTS data for November implies a hot labor market; just not as hot as before.

December manufacturing, new orders both decline further, to readings even more on the cusp of recession

 - by New Deal democrat

I described last month’s ISM manufacturing reading as being one “on the cusp of recession.” Well, this month’s reading was even cusp-ier.

To recapitulate, this index has a very long and reliable history. Going back almost 75 years, the new orders index has always fallen below 50 within 6 months before a recession. Recessions have typically started once the overall index falls below 50, and usually below 48.

This is the second straight month that the index was below 50, declining another -0.6 to 48.4. As noted above, per the ISM itself, typically recessions have not begun until this index falls below 48, and as you can see below it came close in 2012 and 2015 without a recession happening. 

Meanwhile the new orders subindex declined another -2 to 45.2, a new expansion low and the 6th time in the past 7 months that it has been below 50:

Like I said, cusp-ier.

Note that industrial production, the King of Coincident Indicators, has declined in the past two months and looks very much like it has been in the process of peaking (blue the graph below), while manufacturing employment (red) has still been rising as of last month’s jobs report:

I don’t think a recession will start until we see those manufacturing employment numbers starting down. We’ll see in two days.

2023 data begins with another lesson: the remedy for high prices is - high prices

 

 - by New Deal democrat

And so, another year begins. And kicks off with a look at the leading housing sector. And furthermore, there is even some good news.

Total construction spending in November rose 0.2% for the month, while the more leading residential construction spending declined -0.5%. While total construction spending is only down 0.6% from its recent high in July, residential construction spending is down -8.1% from its recent peak last May:

This is in line with the steady drumbeat of negative news in the housing sector for the past year.

Generally speaking, residential construction spending comports with the number of housing units under construction. But in 2022, like in 2018-19, spending (blue) has declined while the number of units under construction (red) has risen slightly:

The answer probably lays in the costs of construction materials, for which there is a special inflation index, shown in gold YoY below compared with the YoY% change in residential construction spending:

The cost of materials increases and decreases with a lag once there is a boom or bust in construction. This is what happened in 2018-19, and it happened in 2022 as well. The cost of construction materials, which was up as high as 35% YoY one year ago, as of November was only up 0.6% YoY!

The remedy for high prices is - high prices. The good news is, with the complete abatement in the rise in the price of construction materials, some of the pressure is taken off of construction sales. 

As I’ve already mentioned several times, while I am watching for coincident indicators like employment and consumer spending to turn down, I am already on the lookout for a positive turn in some long leading indicators. And the abatement of construction costs increases in the housing sector is one such sign. 

Weekly Indicators for December 26 - 30 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The volatile coincident consumer numbers bounced higher this week, while another recession indicating system flashed red, suggesting a recession is most likely to start during the 2nd Quarter of 2023.

As usual, clicking over and reading will not only bring you up to the virtual moment as to the economy, but will bring me a little pocket change for my efforts.

Best wishes for a happy, healthy, and prosperous new year to all readers!

Coronavirus dashboard for year end 2022: becoming endemic, and still an important threat to seniors

 

 - by New Deal democrat

As we close out 2022, let’s look back at the overall picture for COVID.

The best historical measure of actual infections is Biobot, which samples wastewater. This is because the advent of easy home testing one year ago meant that far fewer people have had “confirmed” cases this year in comparison to “actual” infections. The solid line in the graph below is the level of particles (left scale) from which actual case levels can be inferred (right scale):

Current levels are now higher than any other wave peak except for last winter’s Omicron.

Regionally the Northeast is faring the worst, although its current outbreak is not yet at the level of its first, disastrous, wave. The South is also increasing sharply, while for now the West remains in relatively good shape:

As you can see, this contrasts with “confirmed” cases, which while they have increased, are well below all previous waves:

But hospitalizations and deaths are much more reliable, since cases have always generally been confirmed. 

Hospitalizations have increased 50% from their recent lows, but are well below all prior waves of infections at this point:

The same is true of deaths, which since March have varied between 300-500/day, well below their levels at any previous times during the pandemic:

Deaths continue to be concentrated among the unvaccinated or not-fully vaccinated:

And they also skew much higher with age:

Even fully vaccinated seniors should probably remain on guard, and in particular mask up whenever indoors in public places. Altogether, non-fully vaccinated people over age 50 account for nearly 3/4’s of all COVID deaths.

Vaccinations in the US hit a wall this year, only increasing from about 65% to 70% of the population fully vaccinated, and only increasing from 75% to 80% even partially vaccinated during the entire year:

Total deaths from Covid  have increased by 100,000 in the past 9 months (i.e., at a 133,000 annual rate), to 1.1 million:

Total *confirmed* cases in the US have just topped 100,000,000, about 20,000,000 of which have been during the last 9 months:

Because *actual* cases were at least double confirmed cases before this year, and at least triple the number of confirmed cases this year after home testing became widely available, probably about 240,000,000 or more Americans (or about 75%+ of the population) have at one point or another been infected.

Finally, here is the what the prevalence of the Alphabet soup of newer variants looks like at the moment. XBB and its subvariant XBB.1.5 make up 44% of all cases, BQ.1&1.1 another 45%, with BA.5 down under 4% and the remaining variants in the soup 7%:

The biggest regional outbreaks showed by Biobot correspond with the highest prevalence of variant XBB:

Note that XBB%1.5. Is most prevalent, at 75%, the Northeastern regions, followed by roughly 20% in the Southern regions, and less in the Midwest and West, corresponding almost exactly to the Biobot data referenced at the beginning of this article.

Between previous infections and vaccinations, probably only 5%or less of the population is totally “naive” to the Covid virus, with no resistance whatsoever.

This, along with improved medical care, probably explains why Covid has become much less deadly on a per capita basis this year. It is well on its way to becoming endemic. 

The bottom line is, we keep seeing ever more easily transmissible variants, with low hospitalizations and even lower deaths. In the last 9 months, deaths have tranistioned from 500,000/year to 133,000/year. The lion’s share of deaths skew to the under-vaccinated and the elderly. If people over age 50 were all fully up to date in their vaccinations and always masked in indoor public spaces (yes, this means *no* indoor restaurant dining), deaths would probably be down to about 35,000/year or about 100/day, a true flu-like comparison.

Initial claims close out the year still positive

 

 - by New Deal democrat

This morning we got the final economic news of the year, as initial claims for the week rose 9,000 to 225,000. The 4 week moving average declined 250 to 221,000. Continuing claims rose 41,000 to 1,710,000, a 10 month high:

The weekly number was actually 14,000 higher than one year ago, but that is not significant. The 4 week average and the continuing claims numbers both remained below their levels from the end of last year:

So this series closes out the year still positive.

At the same time, beginning next week the YoY comparisons get more challenging. To reiterate, I’ll raise a “yellow flag” caution if the 4 week moving average turns higher YoY. I won’t raise a recessionary “red flag” unless and until the average is higher by 10% or more YoY. 

I plan on posting my final “Covoravirus dashboard” for the year tomorrow, and my normal “Weekly Indicators” over the weekend, before we start the new year.

Three graphs which defined the economy in 2022; a look back at my forecasts

 

 - by New Deal democrat

In the summer of 2021, looking at the long leading indicators, I wrote:

“while the long leading indicators confirm a firm, even strong expansion through the remainder of 2021, by spring of 2022 they are neutral, suggesting a much softer economy, although not a recession before the midyear limit of this forecast.”

By the beginning of this year, the long term outlook transformed into the short term outlook, which was:

“The short leading indicators now confirm the positive trend through the first half of this year, with very little evidence of softening at this point.“

Meanwhile I took my first look at the longer leading outlook for the 2nd half of this year 

“ If 6 months ago the long leading index forecast a weakening, but still positive, economy by roughly midyear this year, they forecast an outright stall by year end 2022.”

As we know now, we got the complete stall - perhaps even a mini-recession - in the first half of this year, and growth picked up in the second half.

So what happened? This brings us to the three graphs that defined the economy this year.

By far the most important is this first one, showing oil and gas prices:

Prices had already been gradually heading higher, outside of the 2020 lockdown period, for about 5 years. Then, with the Russian invasion of Ukraine in February, oil prices, immediately followed by gas prices, rose by over 50%, peaking in early June. As the situation there stabilized, and Europe’s dependency on Russian gas was successfully decoupled, prices fell almost as quickly. As we end the year, gas prices are at the same level as they were 18 months ago.

This was a textbook oil shock. It took an economy which was already slowing, and threw it briefly into reverse (albeit a minor one). Then, as the shock reversed, economic activity, especially by consumers, picked up again.

The second graph is one I have run many times for over a year, comparing house prices with owners’ equivalent rent in the CPI:

Just as I first forecast over a year ago, the big increase in house prices started showing up in the fictitious owners’ equivalent rent, with a one year delay, dragging core inflation higher along with it, even as house prices slowed down and then peaked during the summer. As we end the year, house prices are declining, but owners’ equivalent rent has yet to peak.

Which brings us to the third graph, which is the YoY change in the Fed funds rate:

As it chased inflationary pressures that were manifest in 2021, the Fed raised interest rates by over 4% in just 9 months, the fastest rate of increase since Volcker’s recession of 1981. These interest rate increases have created recessionary sales numbers in the housing industry, caused banks to tighten lending standards, and to some extent countered the expansionary effect of the declines in the price of gas.

As we end 2022, gas prices are likely to stop declining soon, if not already now, while the effects of even the first of the Fed rate hikes last spring has not fully made their way through the economy. Industrial production and retail sales have stalled, while real manufacturing and trade sales and personal income less transfer payments are still below their peak levels earlier this year. Only jobs and wider consumer spending have not rolled over. These will likely be the big focus in the earlier part of next year.

As to which, my short term and long term forecasts for 2023 will be posted at some point during the next month.

House price indexes decline, unchanged in October; further evidence of real declines since summer

 

 - by New Deal democrat

The Case Shiller national house price index declined another -0.3% in November, and is now up 9.2% YoY, compared with a peak of +20.8% YoY in March (note that is in line with my rule of thumb that a decline of 1/2 or more in YoY growth over the past 12 months indicates a series has peaked and rolled over).

The FHFA purchase only house price index was unchanged for the month, and is up 9.7% YoY (vs. its peak of +19.7% in February, so also is in decline per my rule of thumb):

Here’s an update of the FHFA house price index YoY (/2 for scale) vs. Owners’ Equivalent Rent in the CPI:

Because OER follows house prices with roughly a 12 month lag, I expect OER to continue to increase YoY for a few more months before declining steeply probably beginning next spring. Note also that the most recent FHFA and Case Shiller report is for Octobe,, so this month’s YoY change is probably closer to about 6%.

Weekly Indicators for December 19 - 23 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Coincident indicators continue to ever so microscopically worsen - but not yet in recession territory; while there is an increasing suggestion from the long leading indicators that a recession could be relatively short. Provided, of course, that the Fed takes the hint.

As usual, clicking over and reading will bring you up to the virtual moment as to the economic situation, and reward me slightly for my efforts.

Also, this programming note: Merry Christmas to all who celebrate! There will be a few economic releases in the next week, but don’t be surprised if I take a few days off.

New home sales for November: at last, a bright spot! (relatively speaking)

 

 - by New Deal democrat

New home sales are very volatile, and heavily revised. But they frequently are the first housing metrics to turn. And November’s new home sales report suggests that they may indeed have made their low.

Last month new home sales increased to 640,000 annualized, from a downwardly revised 607,000 (vs. the original 632,000) in October. Here’s what the past year looks like (FRED hasn’t updated, so here’s the Census Bureau’s graph):

The preliminary read for November is the highest number since March, with the exception of August’s 661,000.

Now, a word of caution, but also a word of caution *about* that caution: we know that cancellation rates for new home contracts have increased sharply since springtime. So, that has made the *actual* sales numbers worse than the reported numbers. BUT, even taking them into account, as of October, the low point was July. I don’t have this month’s number for cancellations, so that might change. But also, there is no reason to think that there weren’t similar levels of cancellations during any of the other historical housing downturns brought about by increased mortgage rates. In other words, new home sales this year should have a comparable pattern to previous downturns.

Finally, YoY prices were up 9.5% (this data is not seasonally adjusted) (again, FRED hasn’t updated, so here is the YoY% change through October:

Since this is less than 1/2 the highest % growth in the past 12 months, per my heuristic this indicates that house prices, if we could seasonally adjust, have actually started to decline.

As I’ve mentioned a number of times recently, I am on the lookout for long leading indicators that might suggest how long (or short) a recession we might be in for. At the moment, new home sales is suggesting the downturn may not be that long (Fed willing, of course).

Real personal income and spending hold up (thank you, lower gas prices!) but still consistent with onset of recession

 

 - by New Deal democrat

This morning’s report on personal income and spending for November shows why I pay more attention to real retail sales as a forecasting tool.

First, to the data: personal income increased nominally by 0.3% in November, while nominal spending increased only 0.1%. Since the deflator for the month was 0.1%, that means real income increased 0.3% and real spending was unchanged. Since the end of stimulus spending in May 2021, real spending is up 4.1%, while real income has declined -1.7%:

The personal saving rate increased 0.2% to 2.4%, which is just above its all time lows, as shown in the below graph which subtracts -2.4% so that the current reading shows as 0:

Real personal income less transfer receipts is one of the 4 monthly data series heavily relied upon by the NBER in dating recessions. This increased in November and is less than -0.1% below its all time high of exactly one year ago. The big decline in gas prices since June is a major driver of the recent improvement:

Which means that the YoY reading is just below 0. Why is this significant? Because in the past this metric has only declined to 0 or negative during - frequently late in - recessions:

This lag in the performance of real income and spending is why I pay more attention to real retail sales. Here is the 50+ year look at the YoY% changes in real personal spending (blue) vs. real retail sales (red):

Note that real retail sales have *always* turned negative YoY before recessions start, whereas real personal spending either turns late, and sometimes does not turn negative at all.

Here is what that looks like for the past 12 months:

Real retail sales have been flat to slightly negative ever since this past March with the exception of July and August, while real spending is still higher by 2.0% - although in the past such a low positive level has also been consistent with the onset of a recession.

At the moment, the labor market is the only segment of the economy that does not appear to be actively rolling over into recession.

Durable goods orders appear to have peaked

 [Note: I’ll post about personal income and spending, as well as new home sales, later.]

 - by New Deal democrat

I normally don’t pay much attention to the monthly durable goods report, but this morning’s report for November appears significant.

That’s because durable goods spending has been one of the few short leading indicators to have continued to improve - until now. Here’s the long term view:

New factory orders for durable goods declined -2.1% in November, while “core” durable goods orders excluding aircraft and defense increased 0.2%. Here’s what the last 12 months look like:

Durable goods orders have been essentially flat since June, and are now below that level. “Core” orders last made a high in August. They appear to be in the process of rolling over.

That leaves consumer durable goods spending and initial jobless claims as the only remaining positive short leading indicators.

Initial claims continue in range; why they will give us a lead on when the Sahm rule for recessions may be triggered

 

 - by New Deal democrat

Initial claims ticked up 2,000 last week to 216,000. The 4 week moving average declined 6,250 to 221,750. Continued claims, with a one week delay, declined 6,000 to 1.670 million:

To state the obvious continued good news, it remains the case that almost nobody is getting laid off. 

Also continued good news is that claims, and in particular the 4 week moving average, remain lower than their level one year ago:

So long as this remains the case, we can be confident that the economy remains in expansion. I’ll hoist a yellow cautionary flag if and when claims turn higher YoY, and a recessionary red flag if they turn higher by 10% YoY.

I’ve seen some commentary that no recession can start so long as initial claims remain very low.

Historically this is not true. There has been no “magic level” of initial claims correlating with increased or decreased employment or unemployment levels. Sometimes it has taken 400,000 or more (1980, 1981), sometimes as low as 250,000 or less (1970, 1974). In 2001, it took about 370,000; in 2007, it took 340,000. The key has been a sufficient increase from the expansionary lows.

Confirmation of the above can be found indirectly via the Sahm Rule, which holds that we can be confident that a recession has started if the 3 month average of the unemployment rate has risen 0.5% from its previous 12 month lows. (Note in some cases the actual start of recessions has not required this much of an increase. Rather, the rule is one of sufficiency rather than necessity).

With that rule in mind, it has also been the case for 60 years that initial claims lead the unemployment rate. Here’s the graph that plainly shows the leading/lagging relationship from 1966 through 2019:

And here is the continuation of the graph for the past 2 years:

So the fact that initial claims made their low last March and remain slightly higher continues to indicate that the unemployment rate would make a subsequent low (it did, in July and September), and has also risen slightly since.

If and when the 4 week average is 10% above its previous low YoY, we can be confident that the unemployment rate will similarly follow higher (keeping in mind that a 10% increase from 3.5% unemployment is 3.85%). So initial claims will give us a good heads up as to when the Sahm rule might be triggered in the near future.