Weekly Indicators for May 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Several of the indicators that popped higher one week ago sank back lower this week. The overall picture remains very slight positivity in the coincident numbers. Meanwhile stock prices continued to make several new 3 month+ highs, but several long leading indicators, including corporate profits as reported in  revised GDP and interest rates, turned more negative.

As usual, clicking over and reading will bring you up to the virtual moment on the data, and reward me a little bit for my efforts.

April report for real personal income and spending adds to the evidence that a cyclical peak might ultimately be dated to January

 

 - by New Deal democrat

As I’ve repeated for the past several months, at present the report on personal income and spending is co-equal to the employment report as the most important monthly data. And for the second month in a row, the results were very mixed. And also, like yesterday, revisions played a big role, this time to the downside.

Nominally, personal income rose 0.4%, and personal spending rose 0.8%. Because the applicable deflator rose 0.4%, real personal income was unchanged, and real personal spending rounded to up 0.5%. And real disposable personal income rose less than 0.1% rounding to unchanged.

Since the pandemic began, real income is up 3.3% (vs. a reported 4.0% in March), and real spending is up 8.2% (vs. 7.6% in March). Because much of this was distorted by several rounds of stimulus, here’s the view normed to 100 as of July 2021, also including real disposable personal income (gold), which is much more affected by gas prices:

Note that net revisions added 0.1% to the increase in spending, but revisions subtracted a large -0.7% from income.

Revisions also affected the pesonal savings rate, which was also revised down -0.6% for March from 5.1% to 4.5%, and then declined another -0.4% in April to 4.1%. Due to the “paradox of saving,” while this decline in a negative for individual households, it is good for the economy as a whole, since consumption makes up 70% of economic activity, and consumption leads employment.

In the long term, though, this rate of saving is very low, only exceeded to the downside in the 50 years prior to the pandemic by the period from November 2004 through September 2008:

Finally, let’s turn to the indicators that the NBER uses to determine the onset of and end of recessions, two of which were updated this morning.

The good news is that real personal income less government transfers (blue in the graph below) rose 0.2% in April to a new high. The bad news is that this is against some very big downward revisions for the past 6 months, meaning that April’s “record” is actually -0.6% below where we thought we were in March, and less than 0.1% above its now-previous record of last September:

The other big coincident indicator used by the NBER updated today, real manufacturing and trade sales for March, declined another -0.6% from their recent high in January:

Here is what all of the “big 4” coincident indicators, including industrial production and nonfarm payrolls, look like each normed to 100 as of their respective peaks:

Two of the four - industrial production and real manufacturing and trade sales - are down from their peaks. A third, real personal income less transfer receipts, has essentially been flat since last September. Only jobs have continued to increase significantly.

Further, on a YoY basis, real personal income less government transfers is up 1.2%, industrial production is up 0.2%, and real manufacturing and trade sales are up 0.7%. The historical record going back over half a century shows that when all three of these coincident indicators have been at their current YoY levels they are now, with *no* exceptions a recession was already underway:

In summary, while there was good news on real personal spending and on real personal income less government transfers; there were very negative revisions to income. While it remains unlikely, together with yesterday’s report of negative Gross Domestic Income for Q1, including the average of GDP and GDI; this report increases the chances that ultimately the NBER will discount the continuing growth in nonfarm payrolls and declare that there was a cyclical peak in January.

Initial claims: revisions rear their ugly head again

 

 - by New Deal democrat

Revisions are a permanent hazard in reporting on economic data. That was very much in evidence in this week’s jobless claims report.

Not only was last week’s number revised down by -17,000, but the initial report of 264,000 two weeks ago is now all the way down to 231,000! Big difference.

Anyway, the current report indicates a weekly uptick of 4,000 to 229,000. The 4 week moving average was unchanged at 231,750. Continuing claims, with a one week delay, declined -5,000 to 1.794 million:

On a YoY% basis, after revisions claims are currently up only 6.5%, and the more important 4 week average only 7.2%. Only continuing claims continue to show big gains of 25.3%:

Most importantly, after revisions the 4 week average has never crossed the 12.5% threshold, and has been below 10% for the last two weeks. Should claims be below 10% YoY as well, I will remove the yellow flag - pending revisions.

Financial markets in past fiscal crises; the “gold standard” of employment reports shows big deceleration in Q4 of last year

 

  - by New Deal democrat

I have a post up at Seeking Alpha on how stocks, bonds, and consumers behaved during the 3 fiscal crises of the last decade. Hint: recessions are always disinflationary.

Also of interest: the “gold standard” of employment data is the Quarterly County Employment and Wages report, which is not a sample, but the full census of 95% of all establishments. Unfortunately, it has two drawbacks: (1) it does not get reported until almost 6 months later, and (2) it can be revised for a full year or more afterward.

With those caveats, YoY employment through December of last year decelerated from 4.3% at the end of Q3 to +2.6%, and a total of 152,318,000 jobs:

This compares with the monthly jobs report which was up +3.2% YoY (red, left scale) at 154,535,000 jobs (blue, right scale):

We had a similar disconnect for Q2 data, which subsequently got revised away.

New home sales and prices: yet another confirmation of a bottom in sales, while prices continue to decline YoY

 

 - by New Deal democrat

The last of the monthly updates for new home construction, new home sales, was reported this morning. And it continued the theme from the other data (permits, starts, existing home sales); namely, the bottom in sales appears to be in, while prices are still declining.

First, on sales: new home sales increased 27,000 on an annualized basis to 683,000 (red in the graph below). But as I’ve said many a time, this series is very noisy and heavily revised. 683,000 is exactly what last month’s report claimed for March (blue):

So, as usual, take this month’s gain with a grain of salt.

Nevertheless, the value of this series is that it very often is the first data series to turn. We can see this when we compare the above monthly data with single family permits (red):

While single family permits is almost all signal and little noise, single family home sales both peaked and troughed first in the post-pandemic world.

By the way, purchase mortgage applications also have trended basically sideways since last autumn’s peak in mortgage rates (via Yardeni.com):

Second, another of my long-time mantras is that prices (red in the graph below) follow sales (blue). Since prices are not seasonally adjusted, we have to compare YoY:

Sales peaked first and have made a trough. Prices peaked a year later, and as of this morning’s first estimate, made a new multi-year low, off -8.2% YoY.

Because the price data is also noisy, below I’ve compared it with the YoY% change in the FHFA purchase only index (blue):

Since the latter data is only through February, when it is updated next week we should expect a further YoY decline.

Of course, as indicated above, all of this is predicated on mortgage rates not making new highs. As of yesterday, mortgage rates were just below 7%, only about 0.20% below their October 2022 highs:

Should this renewed move higher in rates persist, we can expect a re-test of housing sales and construction lows a few months from now.

Labor has gained since the pandemic, but corporations have been sucking up the lion’s share of those gains

 

 - by New Deal democrat

I neglected to add a link to my Weekly Indicators piece at Seeking Alpha on Saturday, so here it is.

Also, I’ve been trying to understand why, with all of the long and short leading indicators lined up in almost classic formation, no recession has started yet. I discussed that in another piece at Seeking Alpha as well (basically, a big decline in gas prices can do wonders for consumers, and the still-tight labor market is keeping wages ahead of inflation (especially since consumer inflation is being bigly distorted upward by how house prices and apartment rents are calculated).

And on the score of average American wage-earners keeping ahead of inflation, I thought I’d make a few observations in light of the question of whether monopoly pricing is a big part of the continuation of higher inflation, pace Menzie Chinn at Econbrowser.

First of all, yes average working and middle class Americans have been keeping ahead of inflation, especially as measured since before the pandemic started, as this first graph below does for real average hourly earnings (blue), real aggregate payrolls (purple), and real personal income (gray):

Real average hourly earnings are up 1.9% compared with right before the pandemic, real aggregate payrolls are up 4.5%, and real personal income is up 4.0%. 

And as the below longer term graph shows, all three of these measures are at new highs compared with any time before the pandemic:

So, to reiterate: yes, average Americans have done significantly better financially since the pandemic started, thanks in very large part to the two rounds of stimulus in 2020 and 2021 that acted as bridges during the time that part of the economy (restaurants and entertainment venues) were largely shut down.

But now . . . Let’s put that in perspective of how well corporations have done since the pandemic.

The first below graph is the exact same graph as the first one above, but with the addition of corporate profits after taxes (red), also deflated using CPI for uniformity):

All of a sudden those consumer gains are reduced to squiggles, as corporate profits increased by over 80% compared with right before the pandemic at their highest, and are still over 50% higher.

And here is the longer term version of that graph as well:

There were (justified!) complaints about corporate profits hiving off almost all the economic gains going all the way back to the 1990s - which now look like molehills compared with recent mountains.

Another good way of looking at this is by way of labor’s share of productivity gains, normed to 100 as of the last Quarter just before the pandemic started:

Labor share did increase sharply, and is still ahead of where it was at the end of 2019 by 1.2%. Even as of the last measurement (Q1 2023), it is still ahead of any time during the last expansion of 2009-2019.

But measured over the longer term, labor share is still pitiful:

And even by 1990 labor’s share of productivity gains had been gradually going down ever since the end of WW2.

To put it simply: labor was gifted with massive stimulus in response to the pandemic in 2020 and 2021. And over time corporations with market power have been sucking up the lion’s share of those gains. 

Housing update: sales have bottomed, prices in process

 

 - by New Deal democrat

No important economic news today. Yesterday existing home sales were released, but their economic impact isn’t all that important, except as it can confirm what has been happening with new houses under construction. And confirmation is what it gave us.

First, *sales* of houses have bottomed, following the peak in mortgage rates over 7% at the end of last October.

New home sales (which will be released for April on Monday) as is often the case, were the first to turn, having bottomed last July:

Existing home sales yesterday remained above their January bottom by a substantial margin:

With one exception, housing permits and starts, as reported earlier this week, also bottomed in January:

As shown above, the big bounce came in single family units. While starts in multi-family units have continued to slowly increase, permits for multi-family units made a new low:

This suggests that multi-family units under construction have a ways to go before they turn down. As indicated the other day, total units under construction have turned down, but not by much:

Turning to prices, we mainly have to measure YoY, since little of the data is seasonally adjusted.

Yesterday prices for existing homes were reported to have declined by -1.7%. The past two months have been the first YoY declines since the end of the housing bust over 10 years ago:

YoY median prices for new homes rose to +3.2%, after a single month of YoY decline in January. The below graph is averaged quarterly to cut down on noise:

Here the number is +1.4%.

The FHFA and Case-Shiller repeat sales indexes have only been updated through February, and show sharp YoY deceleration, but still increases of 4.0% and 2.0%, respectively:

These two repeat sales indexes are seasonally adjusted, and show very minor declines of less than 1% and less than 3% respectively:

In absolute terms, prices may have bottomed as well.

The repeat sales indexes will be updated for March on May 30.

Jobless claims: yellow caution flag persists

 

 - by New Deal democrat

In response to last week’s big jump in new jobless claims to 264,000, I wrote that it might be an outlier vs. the beginning of a rising trend. This morning claims fell back to their previous average range, at 242,000. The 4 week average declined -1,000 to 244,250, while continuing claims from the previous week declined -8,000 to 1.799 million:

I’ve been paying particular attention the YoY% change, since that is what triggers a recession warning from this metric: specifically 2 months in a row of claims higher YoY than 12.5%.

With this morning’s update, the weekly number is 9.0% higher YoY, and continuing claims are higher by 25.5%. The most important 4 week average is higher by 14.0%:

The 4 week average has hit the %age marker, but hasn’t remained above it long enough to generate the red flag. In the past (not shown), as often as not readings of this sort, that have not persisted, have been false positives. So for now, the yellow flag caution persists.

A Fed nightmare? Housing permits and starts confirm improvement from bottom, multi-unit construction sets new record high

 

 - by New Deal democrat

Housing construction is perhaps the single most important method by which the Fed seeks to translate its interest rate policy into effects on the economy. 

To be blunt, the Fed’s sledgehammer attempt via one of the most aggressive rate hike campaigns in its history appears to be on the verge of failure. That’s because housing construction, more than a year after the Fed started its campaign, is not meaningfully cooperating.

Let’s go to the numbers . . .

In April housing starts increased by 30,000 at an annualized rate to 1.401 million. Permits declined -21,000 to 1.416 million, and single family permits, which are the least volatile among the leading metrics, increased 26,000 to 855,000. These are 87,000, 76,000, and 107,000 units, respectively, higher than their January lows:

This is unsurprising, since mortgage rates made their highs of just over 7% at the end of November. Below is the update of the graph I have run for over a decade showing the YoY% changes in mortgage rates (inverted, *10 for scale), total and single family permits:

I wrote last month that it appeared the bottom was in, and today’s report gives us more confirmation of the same.

But perhaps the biggest news is what happened with total units under construction. They *increased* by 7,000, and are only -2% lower than their peak half a year ago. While single family units under construction did decline by -10,000, that was more than offset by the continued rise, by 16,000, in multi-family units under construction:

The 959,000 multi-family units under construction is a new all-time high.

The Fed has been raising rates in order to get its preferred metric of inflation down to 2% YoY. I have been pointing out for months that the only important sector that has not decelerated sharply towards that figure is shelter. Total housing under construction only -2% below its all-time peak is not creating meaningful slack in construction prices, and so far housing prices as measured by both Case-Shiller and the FHFA (not shown) are only -5% and less than -1% from their all-time highs as well. 

So the good news is, housing is not killing the economy. Not by a long shot. The bad news is, this is going to give continued ammunition to Fed hawks either not to pause, or worse to continue the interest rate hikes, until the economy begs for mercy.

March total business sales strongly suggest that real total sales have entered a downturn

 

 - by New Deal democrat

Today’s final significant economic report was total business sales for March. This is a nominal figure; the “real” number won’t be updated until personal income and spending is reported for April in two weeks.

And here, the report was a clear negative. Not only did total March sales decline -1.1%, but January was revised down by -0.1% and February down by -0.3% (blue below, vs. real sales in red):

This will make real manufacturing and trade sales for January unchanged from December, deepen February’s decline, and because producer inflation for March was down on average about -0.3% and consumer inflation increased slightly, the March “real” number when reported is likely to be negative on the order of -0.9%, as shown in the below graph which estimates the real number by averaging producer and consumer price deflators:

For April real sales, which won’t be reported until the end of June, we can at least create an opening estimate by averaging real retail sales (which are about 1/3rd of the total sales number) and industrial production. This estimate misses wholesale sales completely and also doesn’t account for manufacturing inventory changes, so is less reliable - but as indicated, it’s a start. The long term YoY view shows that it captures the trend about 90% of the time, even if it misses the mark monthly often:

Here’s a close-up on the YoY change since the pandemic, again showing that this method captures the trend if not the exact monthly number:

And here’s the monthly view for the past 2 years:

This method also forecasts a significant decline in March, and a small increase in April.

Taken all together, this morning’s three reports suggest that both manufacturing and real sales have turned down since late or the end of last year, respectively. If so, then the producer side of the economy has begun a mild recession. We will have to await April’s personal income and spending report in two weeks to see if real consumer income has also begun to trend down.

April industrial production looks great! - until you account for the March revisions

 

 - by New Deal democrat

The second of this morning’s three significant economic releases was April industrial production, and here the revisions were very important.

In April total production increased 0.5% from March, but March itself was revised downward by -0.5%, so the net result was unchanged. Manufacturing production increased 0.9% from March, but March was revised downward by -0.6%, for a net increase of 0.3%:

Both measures remain below their respective September and October 2022 peaks, by -0.5% and -0.9% respectively.

On a YoY basis, total production (including mining and utilities) is only up 0.2%, while manufacturing production is down -0.8%. Here’s what that looks like in comparison with the last 50 years:

Typically this kind of YoY decline in manufacturing has been associated with a recession, or at very least a slowdown. Because so much manufacturing was offshored beginning in 2000, note that we had steep downturns twice in the last decade before the pandemic without the economy going into recession. 

This is because consumer income and spending held up well. But as we saw from this morning’s retail sales report, that has not been the case over the past year.

Because manufacturing production goes into sales or inventories, it also gives us a clue about real manufacturing and trade sales one month before the official number comes out. I’ll update this once the March nominal number is reported later today.

Real retail sales for April are flat, off sharply YoY, and near the bottom of their 2 year range

 

 - by New Deal democrat

The first of today’s three significant economic releases was retail sales, which were up +0.4% nominally for the month of April. There were inconsequential small revisions to February and March. After April inflation of +0.4% is taken into account, real retail sales were unchanged. 

Here’s what the last 2.5 years look like:

After the 2021 spring stimulus spending spree, except for one month last year real retail sales failed to make any meaningful new high. Indeed their present level is close to their lows ever since.

On a YoY basis real retail sales are down -3.4%. This is a very negative number. To show you why, I’ve added 3.36% to the YoY calculation for the last 21 months below:

And here is the identical calculation going all the way back 75 years up until the pandemic:

With the exception of one year during the Korean War, the 1966-67 near-recession, and one month in 2002, YoY% changes this negative only occurred in the depths of deeper recessions.

As I’ve also written many times, real retail sales (/2 YoY) are a good if noisy short leading indicators for jobs, as shown over the recent short term below:

We can expect further deceleration in job gains in the months ahead. In fact, the only reason I suspect jobs have not started contracting already is the pent-up shortages in workers needed to accommodate the huge increase in spending that began with the stimulus spending spree back in 2021.

Finally, real retail sales make up about 1/3rd of real manufacturing and trade sales, one of the “big four” monthly coincident indicators most relied upon by the NBER in determining if the economy is in expansion or recession. Nominal real manufacturing and trade sales for March will be released later today.

The question for tomorrow: is the producer side of the economy rolling over?

 

 - by New Deal democrat

There’s no important economic news today, but tomorrow there will be several important updates, including real retail sales and industrial production for April, as well as non-deflated total business sales (manufacturing, wholesale, and retail together) for March. These will give us important updates on the production side of the economy, so let me provide an overview now.

The consumer side of the economy has continued to expand, as jobs (red) and real income excluding government transfers (blue) have continued to grow, albeit at decelerating rates:

The big coincident indicators for the production side are industrial production (red in the graphs below) and real manufacturing and trade sales (blue), the Quarterly % changes (to reduce noise) in which I show below, together with the manufacturing subset of industrial production (gold) for the 50+ years before the pandemic:

Usually quarterly growth rapidly turns into quarterly contraction as we head towards a recession. The exceptions have been several oil price shocks (1974, 1990) and Volcker’s Fed engineered recession (1981).

Here is the monthly % change update for the past 18 months (yes, it’s noisy):

I show this monthly since we do not have full Q1 2023 data yet. Note that industrial production and its manufacturing component have stayed in the vicinity of zero on a monthly basis, while real sales were negative during last spring, and rebounded somewhat subsequently.

The reason for the decline and rebound in real total sales has everything to do with oil and gas prices, the recent course of which are this:

With that in mind, now let’s look at the same monthly data for production and total sales, normed to 100 as of just before Russia’s invasion of Ukraine. Note I also include gas prices (gray, with volatility reduced for scale) to show its impact on real total business sales of the big run-up in prices due to Russia’s invasion of Ukraine, and then the big decrease as the West adapted:

Both total and manufacturing production may have peaked late last year, while total real sales declined in February (the last data available) from their January peak.

Real retail sales form about 1/3rd of real total sales, so tomorrow’s retail sales report will give us our first indication for April, while the nominal total business sales report, adjusted for both producer and consumer inflation, will give us more detailed information about March.

Tomorrow I will be looking to see if there are more definitive signs that production and real sales have been rolling over, as I suspect the producer side of the economy will decline before the consumer side, and in particular employment, does.