Updating some important coincident indicators

 - by New Deal democrat

We returned to no more significant monthly data today. So here are some important coincident indicators I’ve been particularly following.

Redbook consumer purchases only increased 4.3% YoY last week, the lowest number in almost 2 years. The 4 week average also declined to 4.7%, also a 2 year low:

This strongly suggests that the January retail sales report, which will be published next week, will be negative again in real inflation-adjusted terms, implying a further weakening of YoY employment gains in the months ahead.

The American Staffing Index also had its second negative YoY reading in a row:

This tends to correlate with temporary jobs in the nonfarm payrolls report, and argues the YoY comparison there, which just turned negative there, will worsen in the next monthly jobs report.

On the other hand, withholding tax payments, which were up 5.4% YoY in January, are also higher 5.4% YoY for the first week of February. Here’s an up to date chart from the California Treasurer’s Office (CA being 12% of the US population), showing the stabilization in payments in January:

Finally, here’s the Lewis-Martens-Stock Weekly Economic Index:

This index so far has stubbornly refused to turn negative (which is after all a good thing).

 

As Holiday seasonality disappears, initial jobless claims turn higher YoY

 

 - by New Deal democrat

Initial jobless claims rose 13,000 last week to 196,000. The four week moving average declined -7,500 to 189,250. Continuing claims increased 38,000 to 1,688,000. Below I show all three since initial claims first fell below 300,000 in late October 2021:

Because seasonality played such a role in January’s jobs report, here are initial claims non-seasonally adjusted (red) as well as the seasonally adjusted number:

This week was the first time since Christmas week that the number of layoffs was not heavily affected by the fact that workers who weren’t hired for the Holiday season couldn’t be laid off once it was over. Note that the spike for the five weeks of January for 2022 only partially materialized this year. 

And that, as it turns out, is significant, as shown in the below graph of the YoY% changes in initial and continuing claims:

For the week, initial claims are now higher YoY, for the first time since December. It will take a couple more weeks before we know if the underlying trend truly is higher. Remember that there is no recession signal unless and until claims, particularly on a four week average basis, are higher at least by 10% YoY. Hence the starting point when claims first fell below 300,000 in the graphs.

Credit conditions in Q4 were recessionary

 

 - by New Deal democrat

While we are still in our lull concerning monthly data, on Monday there was a significant update of one long leading indicator that is only reported Quarterly: the Senior Loan Officer Survey.

This survey has an excellent history of over 30 years telling us about credit conditions. Loosening of credit, and an increase in demand for credit means expansion ahead. Credit tightening and a decrease in demand for credit have only occurred shortly before, during, and shortly after recessions.

In the case of Q4 2022, the data speaks for itself.

Here is demand for commercial loans by large, medium, and small sized firms:

With the exception of one quarter in 1994, a falloff in demand of this magnitude has only happened at the time of the 3 recessions since then.

Here is the net percentage of banks tightening credit for loans to large, medium, and small sized firms. Note in this case a higher number means more tightening, so is bad:

The only time conditions have tightened this much has been in advance of or during the last 4 recessions since 1990.

Through Q4, banks were tightening credit, and firms were pulling back in asking for loans. This is recessionary, period.

Which has reminded me that I need to update my comprehensive examination of long leading indicators over at Seeking Alpha. I’ll post a link once that is done (maybe today, maybe not).

Scenes from the blockbuster January jobs report 2: revisions do not resolve discrepancies in the reports

 

 - by New Deal democrat

Yesterday I wrote that the blockbuster January jobs report was essentially the result of two factors: (1) a very low number of potential applicants in the jobs pool with an unemployment rate well under 4% meant that employers were reluctant to let go of workers, which especially impacted the numbers, which particular showed up as (2) the seasonal adjustments expected about 2,000,000 people to be laid off in January, but only 1,600,000 were, as some employers elected to keep Holiday hires on the payroll; also, you can’t fire the people in January that you didn’t hire for seasonal help in October through December.

Today let me deal with the second big reveal in the January report: the 2021 and 2022 revisions, and their effect on the big discordance between the Household and Establishment survey number that began last April.

There were revisions to both the Household and the Employment surveys. 

The Household revisions are easy to understand. Every year there is an adjustment for population growth. But instead of spreading that out over the 12 previous months, the Household survey adds it all at once to the January number. 

As a result, officially in January per the Household survey, 894,000 more people were employed. But 810,000 of that was caused by the addition of 954,000 to the 2022 population estimate. Only the remaining 84,000 of that was the change from December to January.

One way to reasonably estimate what the Household survey would have looked like in 2022 is to spread out those 810,000 job gains over the past 12 months, which amount to 67,500/month. The below graph does exactly that, adding 67,500 to each Household survey number in 2022, and compares it with the revised Establishment numbers:

Note that adding 67,500 to the January Household number would give us 151,500, about 400,000 below the Establishment number. But more importantly, note that there is still a very large disconnect between the Household numbers, which added 1,810,000 jobs since last March, for an average of 181,000 per month, vs. the Establishment survey’s reported gains of 3,649,000, or 365,000 per month.

Secondly, in the last several months there has been debate about whether the Household survey has been picking up weakness that was entirely missing in the Establishment survey. Evidence for this was indicated by an estimate from the Philadelphia Fed, based on the QCEW report for Q2 of last year that only 11,000 private sector jobs had been added during that entire 3 month period. This is important because the QCEW is the gold standard for employment reports, consisting of the actual total from 95% of all businesses via unemployment insurance payments. Subsequently the Census Bureau itself updated its “Business Dynamics Survey” through Q2 of last year, which seasonally adjusts about 70% of the QCEW numbers, and reported an outright *loss* of -287,000 jobs in the private sector during that period. 

To best show this, here is a graph from Prof. Menzie Shinn of Econbrowser, comparing the unrevised Establishment survey reports, with the Household reports, the QCEW gains normalized to the same number in 2021 and applying his estimate of seasonal adjustments, the Philadelphia Fed estimates, and the Business Dynamics Survey result:

Note that Prof. Shinn’s method of seasonally adjusting renewers a very different result from both the Philadelphia Fed and the Census Bureau itself in the BDS.

So at first blush it is very surprising that the 2022 benchmark revisions to the Establishment survey *added* 457,000 jobs to the previous results, and while Q2 2022 numbers were revised downward by -59,000, still showed 1,047,000 jobs gained during that Quarter, as shown in the graph below:

So, did people mistake the message of the Q2 QCEW? As Dean Baker wrote, apparently not:

“The QCEW relies on unemployment insurance filings, which give a virtual census of payroll employment. The establishment survey is benchmarked to QCEW annually, but the benchmark takes place with the January data, using the QCEW data from the prior year’s first quarter. The QCEW data from March 2022 were just included in the establishment survey, increasing employment growth in the year from March 2021 to March 2022 by 568,000.”

In other words, while the strong QCEW data from Q1 2022 was included in the benchmark revisions, the weak data from Q2 was not. 

This shows up dramatically if we compare the YoY% changes in payrolls growth as measured by the QCEW census, vs. the same metric from the Establishment survey. This is the best way to measure because the one drawback of the QCEW is that, even though it is comprehensive, it is not seasonally adjusted. But that doesn’t affect YoY comparisons.

Here is the YoY% change monthly in the QCEW survey through its most recent report for Q2 2022:

And here is the same thing for private nonfarm payrolls:

Comparing the YoY QCEW report through Q1 2022 with private payrolls, the former was up 7.2m jobs and 5.1%, and the latter up 6.9m and 5.6%. While the % change is still off, the total number is close, and on par with variances in the past. The median monthly difference between the two measures is 0.3%, and the mean is 0.5%.

For Q2, YoY the QCEW was up 5.7m and 4.0%, while private payrolls after revisions were up 6.3m and 5.3%. This is a very large difference. The median difference is 0.8%, and the mean is 0.9%.

My expectation is that the difference will be resolved in favor of the much more comprehensive final QCEW figures once they are in. Additionally, we’ll get preliminary figures for the Q3 2022 QCEW numbers later this month, and this will tell us if the divergence continued.

In short, even with the revisions there is a large difference between big Establishment gains in the last 9 months of 2022 vs. tepid ones in the Household report. And the divergence between the Establishment sample and the comprehensive QCEW and BDS jobs census figures for Q2 was not taken into account in the January revisions, and remains.

Scenes from the blockbuster jobs report 1: in January, nobody* got laid off!

 

(*hyperbole)

 - by New Deal democrat

There’s no important new economic data until Thursday this week. Meanwhile, there was lots to digest about Friday’s blockbuster jobs report, which I have now done, so I’m going to spend a couple (maybe 3!) days diving in to the details. Today I’ll deal with how seasonality and a very tight labor market were decisively important in Friday’s report. Tomorrow (and maybe Wednesday as well, depending on the length of what I have to say) will deal with revisions to both the Establishment and Household data for 2022.

Let me start off by running the following thought by you: do you really think that bars and restaurants hired almost 100,000 more people in January, as shown in the jobs report?

Yeah, me neither. And the truth is, they didn’t! Actually, in the aggregate they let go of 183,000 employees. Here’s the seasonally adjusted (blue) vs. non-seasonally adjusted (red) numbers beginning in July 2021:

Here’s the longer term view since the start of the series in 1991:

In a normal year, in January bars and restaurants typically let go of 200,000 or more employees. Only once (in 2006) did they lay off fewer than they did last month. 

The seasonal adjustment (and it’s perfectly valid, I am in no way saying it is inappropriate) translates that relative lack of layoffs in January to stellar job gains.

Similar patterns, while less drastic, appear across the jobs spectrum. Let me give one more example.

Virtually every single metric in the past several months has suggested that the manufacturing sector has entered a downturn. The ISM manufacturing new orders index is at a level that in the past has almost always indicated a recession is occurring. Manufacturing production has turned down slightly in the past several months. The average manufacturing work week has also declined sharply enough from its peak to be consistent with a recession. And in November and December, even after revisions, manufacturing added only 13,000 employees per month. So it was reasonable to expect employment in manufacturing to turn down in January. Instead, on a seasonally adjusted basis 19,000 jobs were added.

So, here are manufacturing jobs seasonally adjusted (blue) and not (red) since July 2021, showing that actually there were 91,000 layoffs, or 0.7% of the December workforce:

Here is the longer term view of the monthly % change in non-seasonally adjusted jobs in manufacturing since the modern era began in 1983, up until the pandemic, adding 0.7% so that the 2023 % would show as 0:

There were fewer layoffs this January than there were most years during that entire 35+ year period. Seasonally adjusted, that means a strong gain (again, a perfectly valid adjustment).

In fact, for private payrolls January’s monthly layoffs of 1.632% of the December workforce was the smallest in the entire 80+ year history of the data (shown as 0 in the below graph):

Government employment also jumped 74,000 in January. This was also heavily influenced by seasonal factors, but also by the return to work of 48,000 employees at the University of California who had gone on strike in November. The resulting non-seasonally adjusted decline for January of -1.5% was the least since the end of the Great Recession (note July, not January, is the month for the biggest NSA declines in government jobs):

Again, let me emphasize that there’s nothing wrong with performing this seasonal adjustment. 

But let’s take a slight detour and look at the entire historical record for the 4 week average of initial claims up until the pandemic:

In January, an average of only 191.750 people filed for initial claims. Except for the 1960s (when the US population was only half what it is now), and March and April of 2019 and last year, this is the lowest monthly average in history. Here’s a close-up view of seasonally adjusted and non-seasonally adjusted initial claims in the last 18 months, showing that the typical early January sharp jump in claims simply did not materialize this year:

In essence, nobody* is getting laid off. There was a seasonal increase in hiring for the Holiday season, but in the aggregate businesses decided not to lay some of those people off, but keep them on the payrolls. That, plus the resolution of the California strike, is why payrolls jumped so much in January. (*hyperbole)

Which raises a question: what will happen in February? As shown on the graph below of non-seasonally adjusted employment during the last expansion, February is typically positive, leading to the peak months of March through June:

Now let’s look at the revisions for 2022 which just took place:

January 2022 was revised down from 504,000 to 364,000, while February was revised up from 704,000 to 904,000. These were the two biggest revisions of the entire year, suggesting that seasonality led those two months astray.

In conclusion, here’s what we have: in a very tight labor market, in the aggregate employers were reluctant to lay off seasonal hires in January, electing to keep them on payroll. This translated into blockbuster job gains on a seasonal basis. But we have to wait for February’s report to see whether this is a sign of renewed strength in the jobs market, or whether employers have less need to hire new workers as a result. In other words, will January’s strength continue in a month where actual hiring, not layoffs, are expected.

Addendum: It’s also been pointed out that you can’t fire in January the people you didn’t hire in October through December. In 2022, there was considerably less Holiday season hiring than in recent years, as shown in this Challenger Gray graphic from early December:

Tomorrow: the story behind the revisions

Weekly Indicators for January 30 - February 3 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

While yesterday’s blockbuster jobs report dominated the monthly reports, several important weekly reports, notably the 4 week average of retail sales as measured by Redbook, and the temporary Staffing Index, weakened further to new post-pandemic lows. On the other hand, January tax withholding payments had the best showing in 3 months.

As usual, clickiing over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a $ or two for my efforts.

January jobs report: like a sports car at maximum acceleration

  

 - by New Deal democrat

My focus on this report was on whether manufacturing and construction jobs turned negative or not, and whether the deceleration apparent in job growth would continue.

Both of those were answered emphatically in the negative. Here’s my in depth synopsis.

HEADLINES:

• 517,000 jobs added. Private sector jobs increased 443,000. Government jobs increased by 74,000. The three month moving average of growth increased sharply to 356,000, over a 100,000 jump.
• The alternate, and more volatile measure in the household report had 2nd very positive month in a row, increasing by 894,000 jobs. The above household number factors into the unemployment and underemployment rates below.
• U3 unemployment rate declined -0.1% to 3.4%.
• U6 underemployment rate rose 0.1% to 6.6%.

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, reversed December’s decline and increased +0.3 hours to 40.9, although it remains down -0.7 hours from its February peak last year of 41.6 hours.

• Manufacturing jobs increased 17,000.
• Construction jobs increased 25,000.
• Residential construction jobs, which are even more leading, increased by only 100.

• Temporary jobs, which for the last several months were declining, reversed course and rose by 25,900.
• the number of people unemployed for 5 weeks or less declined -287,000 to 1,946,000, the lowest for the entire last 50 years except for 3 months in 2019.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.06, or +0.2%, to $28.26, a YoY gain of 5.1%, the lowest gain since June 2021.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers increased by a sharp1.0%, which is near a record for the past 60 years, and has only been exceeded by 3 months since 1995, all of which were earlier in the pandemic rebound.

•  the index of aggregate payrolls for non-managerial workers also increased sharply by 1.3%, and rebounded to up 9.2% YoY. This metric had been decelerating nominally almost consistently for the prior 16 months.

Other significant data:

• Leisure and hospitality jobs, which were the most hard-hit during the pandemic, rose 128,000, and have improved to -3.1% below their pre-pandemic peak.
• Within the leisure and hospitality sector, food and drink establishments added 98,600 jobs, and are now only -1.3% below their pre-pandemic peak. 
• Professional and business employment rose 82,000.
• Full time jobs increased 278,000 in the household report.
• Part time jobs increased 606,000 in the household report.
• The number of job holders who were part time for economic reasons rose 172,000.
• The Labor Force Participation Rate increased 0.1% to 62.4%, vs. 63.4% in February 2020.
• Those not in the labor force at all, but who want a job now, increased 138,000 to 5.314 million, compared with 4.996 million in February 2020.
• November was revised upward by 34,000, and December was also revised upward by 37,000, for a net increase of 71,000 jobs compared with previous reports. 

Finally, both the Establishment and Household report data for 2022 was revised this month. 

In the Household report, total population was adjusted upward by 954,000, and employment by 810,000. Other metrics had little or no change.

In the Establishment report, almost all months in 2022 were revised higher, with the exception of January, April and May. The net effect was an increase of 813,000 jobs in 2022, with relatively weaker growth in Q2, but stronger growth in the other 3 Quarters.

SUMMARY

This report could be likened to a sports car accelerating at maximum thrust. Almost everything was extremely positive. The only negative was the increase in involuntary part-time employment, which translated into a slight increase in the underemployment rate.

Everything else was positive, including all the leading indicators which I had been looking to weaken. In fact, some metrics were so positive that they make me think that some Holiday seasonality worked its way into the numbers. In particular, the 74,000 increase in government jobs was one of the strongest ever outside of census hiring every 10 years. Leisure and hospitality hiring was also among the strongest in the past 50 years outside of 2021, and food and drink hiring was the strongest ever aside from the immediate post-pandemic reopening through 2021.

Needless to say, in almost all sectors the pandemic losses have been completely recovered. As I indicated above, the universal sharp increases make me think that there was some unresolved seasonality in play. In particular, the return to bigger hiring in manufacturing contradicts every other measure of manufacturing in the past few months.

So I’ll celebrate this month’s report, but with a lingering suspicion that it is going to prove an outlier.

JOLTS and jobless claims: the labor market remains a strong positive

 

 - by New Deal democrat

The message from the JOLTS report for December yesterday and jobless claims for last week today is that the labor market remains the strongest sector of the economy, with plenty of unfilled job openings, and almost no layoffs.

Initial jobless claims last week declined -3,000 to 183,000, and the 4 week moving average declined -5,750 to 191,750. Both of these are close to their multi-decade lows from last March. Continuing claims also declined -11,000 to 1,655,000:

There is no danger of any imminent recession signal so long as claims remain lower YoY, which has been the case for the past few weeks:

One caution: there was relatively little seasonal hiring in November and December for the Holidays, so fewer layoffs in January makes sense. This is probably the last week for that comparison.

Meanwhile, yesterday most of the metrics in the JOLTS report for December were positive, with an increase in job openings and hires, with a very small decline in quits:

Layoffs and discharges did increase to their highest level since March 2021 with the exception of one month:

Overall the JOLTS report showed a moderating, but still positive labor market, and the weekly jobless claims report shows that it is still the case that very few people are getting laid off.

In tomorrow’s jobs report for January, I’ll be looking for signs in manufacturing and construction employment of weakening in those leading sectors, as well as whether short term unemployment is rising in any significant way, and whether the trend of decelerating gains has continued.

January manufacturing at recessionary levels; December construction spending also declines

 

 - by New Deal democrat

The first data for the month of January is in, and with one exception, it is pretty bad.

The ISM manufacturing index declined -1.0 to 47.4. According to the ISM, 48 is the cutoff below which is more consistent with a recession. Even worse, the new orders subindex cratered, falling 2.6 to 42.5:

Going back 75 years, the *only* time that new orders have been this low and a recession did not occur was in the middle of the Korean War:

This highlights focusing on the change in manufacturing employment, which has yet to turn down, when nonfarm payrolls is reported this Friday.

Construction spending for December was also reported, with a decline of -0.4% overall (blue), and a decline of -0.3% in the more leading residential construction sector (red):

The one caveat to this negative news is that the PPI for construction materials declined -1.1% in December, meaning that “real” construction spending increased. Below I show the YoY% change in residential construction spending (blue) vs. the PPI for construction materials (gold):

Note that, generally speaking, the cost of materials follows the change in construction with a lag. We’ve had the housing boom; now we are in the beginnings of a housing bust.

Again, I’ll be watching to see if there is a decline in construction employment of Friday.

The December JOLTS report was also posted this morning. I’ll deal with it separately tomorrow, but note that it, unlike the other reports, was pretty positive, with a positive reversal in job openings in particular. Contra that, ADP’s private payrolls number for January reported this morning was the lowest in over a year at only +106,000. Again, on my list for special focus on Friday is whether the deceleration in the three month average of employment gains since early last year continues.

House price indexes for November: up like a rocket, down like a feather

 

 - by New Deal democrat

As I’ve repeated many times in the past 10 years, in housing prices follow sales with a lag. Housing permits peaked at the beginning of 2022, and starts followed several months later. 

This morning the FHFA and Case Shiller house price indexes for November showed continued declines from their seasonally adjusted June 2022 peak, and also continued to decline sharply from their YoY growth peak, presaging a similar decline in CPI for shelter by the end of this year.

Here is what both look like normed to 100 as of their June peaks:

The FHFA index is down -1.0% since then, and the Case Shiller national index down -2.5%.

Between June 2020 and June 2022, the FHFA index increased by an average of about 1.5% a month! Since June, it has only declined by -0.3% a month. The Case Shiller national index also increased by an average +1.5% a month until June 2022, and has declined an average of -0.5% a month since.

In other words, in the aftermath of the pandemic house prices shot up like a rocket, but to date are only drifting down like a feather.

On the other hand, the YoY comparisons are getting much better. At their peaks during spring 2022, both measures of house prices were up about 20% YoY. As of November, the FHFA is down to +8.2% YoY, and the Case Shiller index +7.7% YoY:

At this rate, YoY prices will turn down by sometime this spring.

But as measured by households’ ability to make the down payment (leaving mortgage rates aside for this purpose), as shown in the below graph which norms house prices by the average weekly paycheck for nonsupervisory workers, house prices are still close to their all time highs:

Finally, as I have been emphasizing for over a year, house prices lead the CPI measure of Owners’ Equivalent Rent by 12 or more months. Here is the last 20 year history of the YoY% change in the Case Shiller Index (blue, /2.5 for scale) vs. Owners’ Equivalent Rent YoY (red):

The good news is that, whether we measure with reference to the FHFA or Case Shiller Indexes, the CPI measure for housing is on track to decline to about 3.0%-3.4% YoY by about the end of 2023 - very much within what ought to be the Fed’s comfort range. 

The bad news that we probably have a few months to go before the official measure of CPI for shelter peaks, likely at 8.0% or higher. So far the Fed seems to be paying a lot more attention to current OER rather than forward-looking house prices.

What to watch most for in this Friday’s jobs report

 

 - by New Deal democrat

After a two week drought, this week a plethora of economic stats get reported. Most importantly for my purposes that includes house prices, construction spending, the ISM manufacturing report, and of course on Friday nonfarm payrolls.

Speaking of which, 3 of the 5 short leading indicators that haven’t rolled over yet are included in the jobs report - construction and manufacturing employment, and short term unemployment. 

Since there aren’t any reports today, and since I’ve suddenly picked up a bunch of new followers at Seeking Alpha (probably because my articles document the economy sliding towards recession, which always seems to appeal to more folks than saying the economy is expanding or OK), I’ve posted a nice article there going into detail about what to look for in this Friday’s jobs report.

Clicking over and reading will not just give you the details, but hopefully give me enough coin to cover another lunch at my favorite watering hole.

Weekly Indicators for January 23 - 27 at Seeking Alpha

 

 - by New Deal democrat

“Slowly I turn. Step by step . . .” That old Vaudeville bit comes to mind in watching the coincident indicators creep towards a recessionary downturn on a weekly basis.

Also, some of the long leading indicators are also creeping in the direction of  no longer being negative.

Which is a longer way to say, my Weekly Indicators post is up at Seeking Alpha. As usual, clicking over and reading will bring you up to the moment on the economy, and bring me lunch money.

Good news and bad news on personal income and spending

 

 - by New Deal democrat

December personal income and spending had some material for both optimists and pessimists.

Let’s look at the good news first, mainly having to do with inflation. Both the total and core personal consumption deflator continued their overall deceleration in December, with the former up +0.3% for the month, and the latter, said to be much beloved by the Fed, up just enough to be +0.1% rather than unchanged. There’s been a lot of discussion about the abatement of inflation since June, and this is in line with that idea, as shown by the quarterly changes in both of the above metrics:

The quarterly changes in both deflators is at their lowest levels since Q1 2021.

The YoY% change also declined for both:

Similarly, real personal income excluding transfer receipts, one of the four coincident indicators typically used by the NBER to determine if a recession has occurred, also increased nicely, by 0.2%, in December, to a new all-time high:

If you wanted to tout good news, there it is. The bottom line is: a decline in gas prices from $5 to $3 in 6 months can do a world of good to inflation data.

Now let’s start to segue to the bad news.

Here is an update to the graph I’ve been running for about the past year, showing real personal income (red) and spending (blue) normed to 100 in May 2021, right after that spring’s stimulus spending splurge:

As noted above, real personal income continued to increase in December, and is up 1.3% since June, when gas prices were $5/gallon. But they remain -1.4% below their level of May 2021. And the increase in real personal spending appears to have reversed, down for the second month in a row, by -0.3%. It is down -0.5% since its peak at 4% over May 2021 levels.

Further, the personal saving rate increased 0.5% for the month, and is up 1.0% from its lowest level of 2.4% in September (which except for July 2005 was its all-time lowest reading):

Why is this bad? Because as expansions go on, consumers tend to go more and more out on a limb, i.e., their saving rate goes lower. When bad things start to happen, they pull in their horns, i.e., their saving rate increases. Although this is a noisy metric, it is one of the hallmarks of the onset of a recession, and is a crucial part of my “consumer nowcast” model, which turned negative about 3 months ago.

Also, real personal income excluding transfer receipts, discussed above, is only up 0.3% YoY. It has been essentially flat YoY since June. Here’s what that looks like historically:

A flat to negative YoY change in this metric has, with only one exception, for the past 60+ years meant a recession is occurring.

One final note: the personal income deflator goes into the calculation of real manufacturing and trade sales, another one of the “big 4” coincident indicators of recession used by the NBER. It declined for the second month in a row, by-0.4%:

It joins industrial production to become the 2nd of the “big 4” to have apparently rolled over. As discussed above, real personal income less transfer receipts remains positive (but with gas prices increasing again in January, it will have a much more challenging comparison next month), as does jobs growth.

To recapitulate: there was good news today on the inflation front, perhaps helping the Fed pause in raising rates; but there was bad news on most of the indicators which immediately precede or are coincident with a recession.

Q4 2022 GDP positive, but both long leading components continue negative

 

 - by New Deal democrat

Here’s my last note for this morning.

Real Q4 GDP came in at +0.7%, or +2.8% annualized. While this is lower than most quarters in the past several years, as shown below:

Although not shown (due to the huge pandemic swings), it would have been slightly above average for any quarter in the 10 years that predated the pandemic.

But as usual, my focus is on the two long leading components in the GDP report: proprietors’ income, a proxy for corporate profits, and private residential fixed investment (housing) as a share of GDP.

 And the bottom line is, both were negative.

Proprietors’ income (blue in the graph below), a proxy for corporate profits (red), which won’t be reported for another two months, were up +3.2% nominally. The “official” leading metric uses unit labor costs as a deflator, which we also don’t know yet, so I’ve substituted the implicit GDP deflator as a temporary fix: 

As deflated, they were down -0.4% for the quarter, and -4.0% since their Q2 2021 peak. Employers who are making less profit start to cut back labor’s hours and jobs, or at least on hiring. In other words, this portends future further weakening of the jobs market.

Secondly, real private residential investment as a share of GDP is a long leading indicator popularized over 15 years ago by Prof. Edward Leamer. It tends to turn down 6-7 quarters before a recession hits. It is even slightly more leading when calculated in real inflation-adjusted terms. Unsurprisingly, in Q4 of last year this took another bad hit:

This metric has been screaming “recession!” for several quarters now; just remember that supply constraints mean that housing units under construction made an all time high last month, as reported in last week’s monthly update for December.

This adds even more evidence for the proposition that there will be a recession this year.