Construction spending mainly flat nominally and declining in real terms, except for AI data center-related Boom

 

 - by New Deal democrat

Before I get to the main object of this post, there was a little kerfluffle in the financial markets this morning about a “hot” producer price index number. Specifically, PPI for final demand increased 0.5% in January. Commodity prices also increased 0.3%. The YoY% changes were 2.8%, although raw commodity prices were only up 1.6%. The below graph also shows CPI, which officially was up 2.4% YoY (although a proper accounting for shelter would probably add at least 0.2% to that number):

The bottom line is that inflation is not cooperating with those who would like to see further Fed rate cuts, since it is likely making little if any progress towards the Fed’s goal of 2.0%. Stagflation, anyone?

But let’s turn to an important manifestation of costs and spending in the real world, by way of this morning’s one- and two-months stale report for construction spending in November and December. 

For the month of December, nominally total construction spending (blue, left scale in the graph below) rose 0.3%, although it remains below its recent peak in September, and its post-pandemic peak of May 2024, and is down -0.4% YoY. The long leading sector of residential construction spending (red, right scale) rose a more significant 1.5%, but it also remains significantly below its peak of May 2024, although as I pointed out one month ago, there are certainly signs of “green shoots,” i.e., a bottoming process:

The picture is somewhat different when we account for the costs of construction materials. These rose 1.8% in November and another 0.9% in December to near its all-time highs:

On a YoY basis, they are also up 6.6%.

As a result, in real terms both total and residential construction spending fell, by -1.5% and -0.4% respectively:

The overall trend remains slightly negative for total construction spending, although residential construction spending has been trending sideways. Hence, small signs of “green shoots” by way of forming a bottom.

One big negative is manufacturing construction spending, which declined -2.5% in December, and is down over -15% from its August 2024 peak (recall that the big Boom was a direct result of the Inflation Reduction Act)

So much for tariffs bringing back manufacturing!

What has been powering the positive contributions to total construction spending, as with so much of the economy, is AI data center related spending. Power generation spending rose 0.8% for the month of December and is up 5.8% YoY. Another aspect is the water needed to cool these power plants, which declined -2.5% in December, but is up 8.1% YoY, and made an all-time highs in October:

So once again, we have an economy that is barely holding its head above water, and indeed in real terms the construction sector is declining, with just about the only subsector holding it afloat being AI data center spending, and its stock market-associated wealth effect consumer spending.

More clarity in jobless claims: both post-pandemic seasonality and regime change at work

 

 - by New Deal democrat

As we move further into the calendar year, we are getting more clarity on what has been happening with jobless claims. As a reminder, I look at these because historically they have been a good short leading indicator for the unemployment rate and more broadly for the economy as a whole. And to cut to the chase what I see happening with claims is *both* residual post-pandemic seasonality *and* a change in regime to lower claims that started at mid-year last year.

First, to this week’s numbers: initial claims rose 4,000 to 212,000. The four week moving average rose 750 to 220,750. And with the typical one week delay, continuing claims declined -31,000 to 1.833 million:

The one week delay in continuing claims this week is likely unusually important, because this reports (like initial claims last week) for the week including President’s Day and so had one fewer day that government offices would be open.

Note, though, that the post-pandemic seasonality, in which claims make lows at the turn of the year, rise to highs at mid-year, and then decline back down through the end of the year, looks more apparent now as we see initial claims and their four week average moving higher since January.

But as usual, the YoY% change is more important for forecasting purposes; and it is here that we see continued evidence of a change in regime. On a YoY basis, initial claims were lower -7.1%, the four week average down -2.5%, and continuing claims down -0.8%:

This is the trend of generally lower claims we have seen since the end of last June. This trend is a positive for the economy over the next few months. Again, the reason for this regime change may have to do with the nearly complete cessation in new immigration, and fear and deportations driving immigrants already here not to show up for work or to file claims, leading to lower jobless claims. Since we have also seen a gain in AI data center-related employment, it could reflect a lower number of layoffs in nonresidential construction employment as well.

Finally, since we are close to the end of the month, let’s take a look at what this likely means for the unemployment rate (red in the graph below, left scale) in the next monthly jobs reports:

The downward trend in jobless claims strongly implies a declining trend in the unemployment rate over the next several months, towards 4.2% or even 4.1%. 

Per Prof. Edward Leamer’s forecasting method, a yellow flag “Recession Watch” is warranted

 

 - by New Deal democrat

In a landmark paper almost 20 years ago, UCLA Prof. Edward Leamer wrote that “Housing IS the Business Cycle.”

In that paper he concluded:

In the years before recessions … consumers contribute a total of 65% of the leading weakness. In contrast, business spending contributes only 10%…. The temporal ordering of the spending weakness is: residential investment, consumer durables, consumer nondurables consumer services….

I’ve been writing for many months that the housing sector has been recessionary. I’ve also noted that another important leading indicator from the real economy, truck sales, has also been recessionary. This month three more of the items on Leamer’s list, albeit in noisy terms, also appear to have turned recessionary.

The first of those is personal spending on durable goods, which I noted last Friday. Here is the graph I used then, normed to 100 as of one year ago:

The second is motor vehicle sales for December (blue in the graph below), which was reported as part of last Friday’s GDP release, and is the quinessential “consumer durable” on Leamer’s list. These declined sharply to an annualized rate of 14.810 million, the lowest monthly number in four years, and over -17% below the peak month last March, in which a SAAR of 17.892 units were sold:

The three month average of 15.5 million is -9% below the peak average earlier last year of 17.0 million. This is significant because, as the historical graph below indicates, typically recessions have begun once motor vehicle sales have declined roughly -10% from peak. In both the above and below graphs I also show heavy truck sales (red), which almost always decline first and more decisively, and recover later. As I’ve noted above, these have already been recessionary:

The third metric is manufacturers’ new orders for consumer goods, which were reported last Wednesday. These declined -1.4% for the month, but more importantly with the exception of last April and May were the lowest in almost two years:

They were also negative YoY, just as real personal spending on goods also turned negative YoY in that most recent report last Friday:

In other words, every single item on Leamer’s leading checklist has turned negative except for consumer spending on services (which I question because frequently services spending has continued to increase throughout recessions).

On Tuesday I noted that since September three of the four of the typical monthly data upon which the NBER has traditionally relied upon in determining if a recession has occurred - payrolls, real sales, and real income excluding government transfers - have been essentially flat:

I characterized this as “an economy barely holding its head above water.” By the terms of Prof. Leamer’s forecasting method, a yellow flag “Recession Watch” is warranted. Should the three month averages of motor vehicle sales and new orders for consumer durables turn more negative, a “Warning” would be warranted.

Repeat existing home prices continue to increase at a snail’s pace, but still outstrip post-pandemic wage growth

 

 - by New Deal democrat

In the past month, all of the various home price indexes have confirmed abating inflation in the shelter sector. This morning the FHFA and Case Shiller house price indexes were updated through December. Last week we got price information for new houses, and earlier in the month for existing homes. In this post I’ll update all of them. My emphasis is on a rebalancing of the housing market between new and existing homes in the context of a housing shortage that caused prices to spike in the post-pandemic period.

On a seasonally adjusted monthly basis, the Case Shiller national index (blue in the graphs below) rose 0.4%, while the FHFA purchase only index (red) rose 0.1% for the October through December period. This is the fifth straight seasonally adjusted increase, after 4-5 months of seasonally adjusted declines earlier in 2025 [Note: as per usual, FRED has not  updated this month’s FHFA readings yet]:

So it is safe to say that the downtrend earlier in 2025 has reversed, although the increases are at their 2023-24 pace, and not the price spike of 2021-22.

Here is the equivalent monthly graph for new home sales (gold), which unfortunately are not seasonally adjusted. These increased 4.2% for the month of December, which is within their range of monthly noise - and in fact less than their increase in December one year ago:

But on a YoY basis, the trends in all three indexes continue to be very subdued, with the Case Shiller Index up only 1.3% and the FHFA index up 1.7%, lower than their YoY increases at any point since the pandemic with the exception of a brief period in 2023. Meanwhile the YoY median price of new houses *declined* -2.0% (note I show new home prices quarterly as well as monthly in order to smooth out noise):

Although I won’t bother with the long term historical graph this time, the YoY gain in the FHFA Index is the lowest in the past 35 years outside of the 2007-11 housing bust and 2 months in 1993, while for the Case-Shiller national index it is the lowest except for the 2007-11, housing bust, the 1991 recession, and briefly in 2023. Although new home prices are, as shown above, much noisier, they display a similar pattern. 

In a similar vein, the monthly change in existing home prices is not seasonally adjusted. These declined -2.0% in December, typical for that month. Here is a look at the past 10 years:

Although I can’t show you a YoY graph, the change for 2025 was only 0.9%.

In summary, prices for existing homes were up 0.9% YoY, and repeat sales of existing homes were only up 1.3% and 1.8%; while the prices of new homes actually continued to decline.

Finally, let’s take a look at affordability. The below graph shows average weekly earnings for nonsupervisory workers compared with the Case-Shiller, FHFA, and new homes price information, all normed to 100 as of just before the pandemic:

As of the end of 2025, average weekly earnings have increased 32.9%, while repeat home sales prices have increased 53.6% and 56.9%. In other words repeat home sales prices have increased over 20% more than average weekly wages since before the pandemic. The median price for an existing home (not shown) has increased by 47.0% over that same period. By contrast, the price decreases of the past several years mean that the median new home has sold for only 24.9% more than just before the recession, or about -8% less than average wage gains.

So if we continue to see a very gradual rebalancing of the housing market between new and existing home prices, but we simply need much more new and existing home inventory to bring down median prices to the pre-pandemic level (not to mention the issue with mortgage rates, but that’s another story).

Long leading indicators in Q4 GDP suggest worsening conditions for an economy barely keeping its head above water

 

 - by New Deal democrat

Last week’s Q4 GDP release, as usual, updated two long leading indicators: proprietors’ income (a placeholder for corporate profits, which won’t be reported until next month at the earliest), and private residential fixed investment, a proxy for housing. They were of particular interest this time because, while the normalized yield curve (except at the short end) brought about by the Fed’s lowering interest rates has been getting a lot of attention as forecasting a good economy ahead, the rest of the long leading indicators aren’t doing so well. And that is of further particular concern because most of the critical coincident indicators of the economy aren’t doing so well, either.

Let’s take a look at them, starting with the two in the GDP report.

First, real private residential fixed investment declined slightly, and — the more precise long leading indicator — as a share of GDP made not just a new post-pandemic low in Q4, but a new 10+ year low:

Further, proprietors’ income declined for the third quarter in a row. The below graph shows it deflated by the PCE index, but even nominally there was a decline during Q4:

Here is the historical view (in log scale) to put it in more perspective:

 

The message of these two metrics would suggest a recession could happen at any time. 

A third non-financial long leading indicator, real retail sales per capita, although not part of the GDP, after improving throughout 2024, was also faltering in the second half of 2025:

Although I won’t bother reposting graphs, as we know from last week, housing permits and units under construction also faltered during most of 2025. 

In other words, take away the financial-based indicators, and the “real world” long leading indicators are flat at best.

Now let’s turn to the monthly coincident indicators that the NBER is said to track. The graph below norms them — payrolls, industrial production, real personal income less government transfers, and real manufacturing and trade sales — to 100 as of September. I’ve also included real retail sales, since the reporting on real manufacturing and trade industries sales is lagging so badly:

With the exception of industrial production, the best any of them have done since September is a 0.2% increase in real personal income as of November (before declining in December).

Note that there was lots of volatility early in 2024 that had to do with front-running the imposition of tariffs. So this is the same series shown YoY:

 

All of them except for industrial production are converging towards 0, i.e., no gain at all since one year ago.

Finally, although it isn’t necessarily part of the NBER’s calculations, real disposable personal income, both in total and per capita, also barely advanced in 2025, and particularly since July:

This is the discretionary money that consumers have to spend. As I pointed out last week, increased spending has only been as a result of consumers going into their savings, which renders them more vulnerable to any adverse shock.

In sum, we have an economy that is barely holding its head above water, and more compartments (to mix in a Titanic metaphor) are flooding.

Weekly Indicators for February 16 - 20 at Seeking Alpha

 

 - by New Deal democrat

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

It is striking that the (generally) non-governmental high frequency data point to a strong consumer-led economy, while the official, generally monthly data point to a stall in sales, income, spending, and jobs, with only production growing. This almost has to be resolved one way or the other soon.

As usual, clicking over and reading will bring you all of the most timely information, and bring me a penny or two to put towards lunch money.

December personal income and spending: on the very cusp of recessionary

 

 - by New Deal democrat

Personal income and spending are among the most important monthly indicators of all, because they give us a detailed look at consumption by the broad range of American households. And since consumption leads employment, they also give us an idea of what is likely to happen with regard to jobs in the near future.

This morning’s data was for December, so it is almost one month stale. For the month, nominally personal income rose 0.3% and spending rose 0.4%. But the PCE deflator also increased 0.4%, so in real terms income rounded to unchanged, and spending rounded to only a 0.1% increase. Here is what they look like since the pandemic:

Note that real personal income has been flattening for months, and has been lagging spending, which becomes even more apparent on a YoY basis:

Real personal income is only up 1.4% YoY, and real spending is up 1.7%. And both measures are decelerating.

Further, once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income actually declined -0.1%:

Real personal income excluding transfers was only up 0.1% YoY, and completely flat since last January. With only two exceptions — 2022 and 2013 (which was an artifact of a change in Social Security withholding) — such a low rate has only happened during recessions:

How is that spending being sustained? Households are digging into their savings. The personal savings rate declined -0.1% to 3.6%, the lowest rate since 2022. In fact, as the below long term historical graph, which subtracts -3.6% so that the current rate shows at 0, the personal saving rate has only been this low during the years immediately preceding the Great Recession, and during 2022:

In 2022, the economy was saved by the hurricane strength tailwind of deflating producer prices, which enabled a continued Boom in consumer spending. Needless to say that is unlikely to happen now. To the contrary, as indicated above, PCE prices increased 0.4% for the month, are were up 2.9% YoY, the highest rate of YoY increase since March 2024:

An accelerating PCE deflator is not something that is going to encourage the Fed to cut interest rates further.

And the leading portions of consumer spending are also flashing red warning signals. Historically, the pattern has been that real spending on goods (red in the graph below) turns down in advance of recessions, and in particular spending on durable goods (orange), which tends to turn down first. Real spending on services (blue) has tended to rise even during all but the most prolonged or deep recessions. The below graph shows the post-pandemic record, normed to 100 as of one year ago:

In December, services spending rose 0.3%, but real spending on goods declined -0.5%, and on durable goods -0.9%. For all of 2025, services spending did indeed increase, up 2.6%, but real spending on goods declined -0.1%, on real spending on durable goods declined -2.9%. And it wasn’t just one poor month. The trend in goods spending has been flat all year. To smooth out some of the noise, I have been tracking the three month average. That average peaked in October, and made a six month low in December.

In summary, real personal income, as well as real personal spending on goods, have flatlined in recent months, and are now slightly negative. Savings are being used to power additional spending, making consumers particularly vulnerable to any adverse shock. Any further deterioration would be clearly recessionary — and a downturn in the stock market, which has delivered so much “wealth effect” spending, could be just such a blow.

AI data center and electricity supply production as drivers of industrial production and capital goods spending

 

 - by New Deal democrat

There is more and more accumulating evidence that manufacturing, at least in the aggregate, is something close to Booming. That message was apparent in yesterday’s durable goods orders report for December. While the headline number (blue in the graph below) declined -1.4%, the three month average for this very volatile series made a new post-pandemic high. The much less noisy capital goods new orders number (red, right scale) increased 0.6% to a new all time high. The three month average for that metric made a new all time high as well:

These numbers have been rising for the past 18 months, and even accelerating, as the YoY% gains have also been increasing:

The same dynamic was apparent in yesterday’s industrial production release, in which headline production rose 0.7% for the month, and the manufacturing component 0.6%. The latter made a 3+ year high, and the former a post-pandemic high. But as I pointed out, the real driver was electric utility production. The below graph drives this home by norming all three to 100 as of just before the pandemic. Headline production is up 1.3% since then, but manufacturing production, despite the increases of the past 18 months, is still down -0.4%. Utility production, however, is up 13.9%!:

As I indicated then, I suspect this is almost all driven by AI data center and attendant power plant construction. Below I again show headline industrial production (blue) compared with employment in manufacturing (red), and in non-residential construction (gold), again all normed to 100 as of just before the pandemic:

Employment in manufacturing has been declining for several years, and is now -1.2% below its pre-pandemic levels. But employment in construction ex-residential housing is up 9.4%, and as of the latest report was still rising!

We know that some non-residential construction employment was increasing due to the Inflation Reduction Act, which led to a surge in construction of manufacturing plants, but that peaked in the middle of 2024 and has been declining since:

While this isn’t definitive, and I haven’t yet found a way to do a more granular analysis, it all points to the big increase in both electric utility production and non-residential construction employment being concentrated on the building of AI data centers and the gargantuan energy demands to power them. On this (I submit) rather slender reed is the current growth of the economy reliant.

Presidents’ Day week jobless claims pose a quandary

 

 - by New Deal democrat

Later this morning I’ll discuss yesterday’s positive durable goods orders release, and in that context I’ll also have more to say about the likely reason why industrial production also improved so much. Tomorrow we’ll get personal income and spending, and new home sales, both from December, as well as the first pass at Q4 GDP — all of which are one month late - even now three months after the end of the government shutdown!

In the meantime let’s take our usual weekly look at jobless claims. I do this because they are a good short leading indicator, particularly of the labor market.

Initial claims declined sharply last week, down -23,000 to 206,000, the best reading since mid-January. The four week moving average declined -1,000 to 219,000. And with the typical one week delay, continuing claims rose 17,000 to 1.869 million:

As per my usual practice recently, the above graph includes the last three years to show that there has been a pattern of unresolved seasonality whereby claims rise in the first six months of the year, and then decline in the last six months. 

Now let’s look at the YoY% changes which are more important for forecasting pursposes:

Initial claims were down -8.0%, but the four week moving average was still higher by 0.6%. Continuing claims were also higher by 0.4%.

So was the big decline this week a return to the positive comparisons YoY that we saw beginning last July? Or was it simply a function of Presidents’ Day being one week earlier this year than last year? Notably, in 2023 and 2024 there was a big spike downward in claims during the equivalent week in February, and while there was no such spike last year, there was a big upward spike the following week.

All of which means we’ll have to wait one more week to see if this week’s initial claims number was an outlier or not. Another week of lower claims YoY suggests that the trend since last July of comparatively very low claims has not abated, while a spike upward would suggest that unresolved post-pandemic seasonality has resumed being the bigger driver of the trends.

In either event, for forecasting purposes the numbers remain either mildly or strongly positive.

Industrial production surged in January, further evidence of an AI data center led rebound

 

 - by New Deal democrat

Industrial production is much less central to the US economic picture than it was before the “China shock,” but it remains an important if diminished economic indicator, particularly since the month it has peaked in the past has typically been the month the NBER has chosen as the economic cycle peak.

In January, headline industrial production (blue in the graph below) rose 0.7%, establishing another new post-pandemic high (although it remains below its 2018 all-time high).  Manufacturing production (red) increased 0.6%, and was the highest since October 2022: 

Recently the issue of utility production, which has been supercharged both by the needs of crypto mining and AI data center construction, has become important to the overall numbers. This increased another 2.1% in January to another all-time record:

This was a 0.7% increase YoY. 

There has been all kinds of evidence from the regional Fed reports, and to a lesser extent the ISM manufacturing index, that production has been rebouding since the fall. This morning’s report was powerful further evidence of that rebound. A big caveat, particularly with the impact of tariffs, is how much of this broader rebound, like utility production, is contingent on the AI data center Boom continuing.

Housing short term indicators say “recession;” longer term indicators suggest “recovery” is close

 

 - by New Deal democrat

When I updated this information in September, I wrote that “a puzzling relationship this year has been that the housing data has been classically recessionary for a number of months, and yet the economy has not rolled over.” I concluded that update by noting that while the report was “very much recessionary, [ ] in some YoY comparisons, I would expect further damage before the actual onset of one. But that could easily occur within the next four to six months.” 

Indeed, some of that did happen in the October report released last month. On the other hand, I noted that the fact that permits did rebound for two months and units under construction did not decline further argues for the possibility of a bottom in the housing market and the proverbial “green shoots.”

So the short term outlook and the longer term outlook may have begun to diverge.

Let me start by reiterating the basics: mortgage rates lead sales, which in turn lead prices, which in turn lead inventory. Sales, in the form of permits and starts, are long leading indicators. Inventory, in the form of units under construction, is a shorter leading indicator. Further, as has become increasingly important in the last year, employment in residential construction, and the inventory of houses for sale, are the last to turn down before a recession. Here’s the historical pre-pandemic look at that last relationship:

Per my opening remarks above, the housing market has been in recessionary territory for many months. So let me take the data out of my usual order, and focus on the short leading indicators first, before discussing the longer leading ones.

To wit, housing units under construction declined -1.5% to 1.277 million annualized, the lowest number since 2021, and -25.5% below their late 2022 peak:

There have been only two times in the past 50 years when such a decline did not yet give rise to a recession: in 2007, when the decline was just -0.1% lower, at -25.6%, and 1991, when the decline was 28.2%. As is apparent from this, just a further -2.8% decline from here would give us an all-time decline without a recession.

Now let’s look at the post-pandemic record of residential construction employment and new housing inventory for sale in comparison with units under construction:

Both of the above “final shoes to drop” have in fact dropped. With the recent revisions, employment in residential construction peaked in March 2024, although it is only down -1.5% from there. New housing for sale peaked in March and May of last year, and is currently down -3.2%. Historically this decline in inventory under these circumstances meant a recession was already underway, although the decline in employment in the past had typically been on the order of -5% to -10% before a recession began.

But if the above discussion suggests that housing remains recessionary - in fact, by most measures a recession should already be underway, the more leading indicators suggest that if it does not happen in the next few months, it is not likely to happen at all.

First of all, although I won’t bother with a graph, mortgage rates have fluctuated in a range between just over 6% to 7.6% in the past 3+ years. In the past several months, interest rates have been near the bottom of their range, and permits have responded.

In more detail, in December total permits (red in the graph below) increased 60,000 to 1.448 million, . Single family permits, which convey the clearer signal, increased 18,000 to 876,000. Meanwhile the much noisier and slightly lagging housing starts rose 60,000 to 1.448 million units, over 100,000 higher than their recent October low:

Even with these gains, permits and starts remain in territory below their peaks sufficient to be consistent with a recession. On the other hand, all three measures are down less than -10% YoY, where in the past it has taken a more severe decline of greater than -10% to be consistent with with a recession:

Further, in the past once permits and starts have bottomed, it is a signal that a recovery from a recession will begin within the next 6 - 8 months.

Similarly, the YoY% decline in housing units under construction, which I discussed further above, has also improved significantly from its worst levels of 2025. In the past, this has almost always meant that a recession has already ended:

The only episode which is consistent with the present was the late 1980s, where YoY declilnes stabilized for several years before the 1991 recession began.

In short, most of the housing metrics are telling us that we should already be in recession, while the more leading ones are telling us that if one does not happen in the next few months, it is unlikely to happen at all.

I continue to believe that the decisive factor which has prevented the economy from rolling over so far (unless the government shutdown last autumn proves to have been the precipitant) is the AI Boom, which has led to stock market gains, and a “wealth effect” increase in spending by the uppermost income consumers.