Leading components of Q1 GDP paint a mixed picture

 

 - by New Deal democrat

As you probably already know, real GDP increased 1.1% at a seasonally adjusted annualized rate in Q1. This doesn’t necessarily mean that the economy improved throughout the period. The median GDP for the quarter where post WW2 recessions have begun was +2.4%, and there are reasons to believe that the reason for the positive number in Q1 was big January gains. We’ll find out tomorrow with personal income and spending, and real business sales, whether these were reversed in the following two months.

While GDP by and large is a look in the rear view mirror, there are two leading components. First, 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 Q1 of this year this declined again, although less so than in the last several quarters, whether measured nominally or in real terms:

Secondly, proprietors’ income (light and dark blue in the graph below), a proxy for corporate profits (light and dark red), which won’t be reported for another month, were up +0.2% nominally, and +3.9% without inventory valuation:

But 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: 

So adjusted, proprietors’ income declined -0.7% for the quarter with the inventory adjustment, but increased 3.2% without it.

Finally, last month I noted that real final sales at levels as low as it had been in Q4 were typically seen within 3 quarters of the onset of a recession. These did improve in Q1, but don’t undo the negative inference going forward:

Overall, this is a mixed picture, but still tending to the negative in terms of implications for the near future.

Four week average of initial claims drops below “yellow flag” level, for now

 

 - by New Deal democrat

While GDP will get the lion’s share of attention today (and I’ll post on it later on), by and large it is a look in the rear view mirror. The more forward-looking data is weekly jobless claims.

This week initial claims declined -16,000 last week to 230,000. The more important 4 week average declined -4,000 to 236,000. Continuing claims, with a one week lag, declined -3,000 to 1.858 million:

More importantly for forecasting purposes, YoY initial claims were up 11.1%, the 4 week average up 9.8%, and continuing claims up 22.1%:

That the 4 week average declined below 10% removes the “yellow flag” recession caution for the moment, although the increase in continuing claims is consistent with a recession in the immediate future.

 

 - by New Deal democrat

Aside from the monthly jobs report, at this time imo the most important economic data will be issued this Friday: namely, real personal income and spending, the deflators of which also figure in the calculation of real manufacturing and trade sales.  That’s because, while real *consumer* spending of goods has been flat to declining for a year, and manufacturing production has been flagging, real personal consumption of *services* has been running historically hot, while producer price deflation has helped buoy *producer* sales.

Let’s start with a follow-up on my note this morning on durable goods orders. I pointed out that in 2015-16 there was a “shallow industrial recession” which never brought down the economy as a whole. That’s because, while durable goods orders (bright red) and industrial production (dark red) both declined 10% or more during that period, consumer spending as measured by both real retail sales (light blue) and real personal consumption expenditures (dark blue) sailed right along:

Let’s compare that to our post-pandemic period. For roughly the past 18 months, both real retail sales have been flat or even slightly declining, both industrial production and durable goods spending have only in the past six months done the same. Meanwhile real personal consumption expenditures have continued to improve:

 Further dissection of personal consumption expenditures shows that *nominal* expenditures for goods has historically tracked very closely with *nominal* retail sales:

But the deflators for the two series are different, as a result of which *real* retail sales have not performed nearly as well as *real* personal consumption expenditures for goods:

Further, historically both real retail sales and real personal consumption expenditures for goods have turned down YoY both earlier and more deeply than real personal consumption expenditures for services (gold):

The same graph since the pandemic recession shows that YoY spending on goods is flat to declining in both series, while YoY real spending on services is still a historically robust 3%:

Finally, it’s worth pointing out again that personal saving tends to increase just before recessions, as consumers grow more cautious:

Note that this has already occurred in the past 6 months:

To return to my main theme, what has been so important about the reports on real personal spending and real manufacturing and trade sales is that (1) the deflators are more favorable to growth than in other “real” series; and (2) in particular, real spending on services has barely flagged at all.

On Friday I will be paying particular attention to whether or not this pattern continues, or whether real sales and real consumption at last turn down, and whether real consumption on services in particular decelerates significantly or not.

Transportation orders increase, but core capital goods orders decline further in March

 

 - by New Deal democrat

Durable goods orders increased in March by 3.2%, which sounds great, except that it was primarily transportation orders (Boeing). Core durable goods excluding transportation and defense declined -0.4%:

While both core and total durable goods orders are down from their peaks last year, joining the recent decline in residential construction among the leading sectors, neither are off nearly as much as their 10%+ declines in 2015-16 that at the time I labeled the “shallow industrial recession,” or their declines before the 2001 recession:

By contrast, the 2008-09 recession started off as a consumer-led downturn, where durable goods orders gave no advance warning.

This is important, because as the US in the past 40 years offshored most of its base manufacturing, that sector has had increasingly less impact on an economy that is now 70% consumer-driven.

The best foretaste of consumption is real retail sales. But the broadest measure is real private consumption expenditures, particularly for services, which will be reported in two days. I intend to post a heads-up on what to look for in that report later today.

 

 - by New Deal democrat

For the past few months I have speculated that home sales were bottoming. This morning’s report on March new home sales put an exclamation mark on that idea.

New home sales increased 57,000 in March (from a February level downwardly revised by -17,000) to 683,000 annualized (blue in the graph below). The increasing trend in sales from the bottom of 543,000 last July at this point seems crystal clear. As I have said many times, new home sales are very noisy, and very heavily revised, but frequently turn first. For confirmation, I use single family permits, which have very little noise and usually clear trends (red). And they are almost certainly confirming the trend from new home sales:

Since mortgage interest rates peaked last October, this is not surprising.

Meanwhile, just as we saw with the house price indexes earlier this morning, the median price of new homes increased slightly YoY for the second month in a row, now up +3.2% (gold, compared with the YoY% changes in new home sales, blue):

As is usual, prices have followed sales with a significant lag.

This is good news for the economy in 2024, as it tends to put a floor under any downturn later this year, suggesting that if there is a recession, it will be relatively brief and shallow (Fed permitting).

House prices on track to go negative YoY by summer, despite monthly increase in February

 

 - by New Deal democrat

House prices through February as measured by both the FHFA (gold in the graphs below) and Case Shiller (red) Indexes rose, the former by 0.5% (after a downwardly revised 0.1% in January), and the latter by 0.2% (after a -0.2% decline in January). Here’s what the monthly changes look like for each, as compared with Owners’ Equivalent Rent in the CPI (blue):

[Note that both house prices indexes are /2.5 for scale]. Since a year ago, both house price indexes were rising at almost 2% a month, the YoY% changes have continued to decelerate sharply:

The FHFA index is only up 4.0% YoY through February, while the Case Shiller is only up 2.1% YoY. At the rate of decline since last summer, the FHFA Index will be negative YoY by about June, and the Case Shiller Index could go negative YoY by next month’s report for March.

The implications for CPI is that the Owners’s Equivalent Rent component is likely to stabilize at current YoY levels for several more months before declinining, and CPI ex-shelter, which actually was slightly in *deflation* since last June as of the March report, will continue to be flat or lower.

Finally, while the increases in house prices have been quite small compared with the recent past, I was expecting a bigger decline from both indexes once the tide turned last summer. Undoubtedly the reason has a lot to do with the below graph, showing that while the active listing count of houses for sale has increased by over 50% since one year ago (teal), in absolute terms it is much lower than before the pandemic (blue); and indeed the new listing count has continued its almost relentless decline beginning 2 years ago, now down about -20% from a year ago:

The very low number of houses for sale puts a low ceiling on supply, meaning even normal demand can still create bidding wars.

That increasing interest rates is causing fewer houses to be put on the market, as potential move-up buyers do not want to trade 3% and 4% mortgages for 6% and 7% mortgages, creates quite a conundrum for the Fed.

Income tax withholding payments stumble again

 

 - by New Deal democrat

The important data this week will include new home sales tomorrow, Q1 GDP and initial jobless claims on Thursday, and most importantly of all (imo) real personal income and spending, along with real manufacturing and trade sales on Friday.

In the meantime, today let me take another look at a significant coincident indicator, income tax withholding payments, because the situation has changed in the past week.

Tax withholding payments have for years been employed as a proxy for jobs. Unfortunately, there’s no monthly or quarterly data published on FRED. The best representation is annual data from 1947 to 2020. Below I show the YoY% change in that annual data, adjusted for inflation, compared with the YoY% change (*3 for scale) in monthly nonfarm payrolls:

Because of a quirk in FRED graphing, it appears that jobs lag tax payments, but that’s just a byproduct of comparing monthly vs. annual data. Had I used annual payroll averages, the peaks and troughs would match exactly (but the jobs data would be less fine-grained). The bottom line is that, while the two haven’t matched exactly, especially in the 1980s, typically the increases and decreases move in tandem.

Turning to the present, last week I cited to the California Department of Revenue, showing that tax payments in that State had declined steeply compared with the prior fiscal year during the last four months of 2022, before stabilizing during the first three months of this year.

For the nation as a whole Matt Trivisonno has the YoY data, measuring the entire 365 day total of tax withholding vs. the entire previous 365 days, and has a public graph with a 3 month delay. Here’s his latest:

Like the California graph, it shows a steep deceleration during 2022, which had been as high as +21% YoY in March, down to only about +6% by the end of December. Thereafter through January, the YoY data stabilizes.

Indeed, by my own calculations, for the first three months of fiscal 2023 ending December 31, withholding tax payments were only up +1.2% YoY. But for Q2 they rebounded sharply, up +5.4% YoY. 

But in the last 10 days they have stumbled. For the first 14 withholding days in April, payments are down -3.4%, $189.7 Billion vs. $196.3 Billion one year ago. For the last 4 weeks as a whole, withholding payments are down -5.0%, $270.2 Billion vs. $284.5 Billion.

What is notable about that, in addition to including the April 18 deadline for payment of taxes this year, is that the CA Department of Revenue had suggested that the late 2022 stumble was due to stock market declines meaning that stock options hadn’t vested.

Well, since last October the stock market has rallied, and last week was very close to an 8 month high:

Only a short term shortfall at this point, and of course it could reverse by the end of the month, but if stock options are vesting and withholding payments are still down, even before accounting for inflation, that suggests renewed trouble in the jobs market.

The last dissent of Thurgood Marshall: the Rule of Law vs. the transitory Edicts of 5-4 Court majorities

 

 - by New Deal democrat

Daniel Kiel at the TPM Cafe, on the supreme differences between Clarence Thomas and his predecessor, Thurgood Marshall, writes:

“Thurgood Marshall, … in his final opinion before retiring after a quarter century on the court, [ ]warned that his fellow justices’ growing appetite to revisit – and reverse – prior decisions would ultimately ‘squander the authority and legitimacy of this Court….’”

This criticism has never seemed more on point than in the aftermath of Dobbs, as Red State Legislatures and Trumpy lower court judges swing for the fences to invite the obliteration of existing precedents.

Marshall’s final dissent occurred in the case of Payne v. Tennessee, a case that involved the scope of victim impact statements and testimony in the sentencing portion of capital murder trials. A badly splintered Court in that case overruled two previous 5 to 4 rulings that were less than 10 years old to hold expansively in favor of the prosecution. The various plurality, concurring, and dissenting opinions all dealt extensively with the doctrine of stare decisis, which simply means that decisions that have already been made should be left in place.

Stare decisis was important to Hamilton’s rebuttal to Brutus in Federalist #78, the essay that famously claimed that the judiciary would be “the least dangerous branch.” He wrote that:

“To avoid an arbitrary discretion in the courts, it is indispensable that they should be bound down by strict rules and precedents, which serve to define and point out their duty in every particular case that comes before them; and it will readily be conceived from the variety of controversies which grow out of the folly and wickedness of mankind, that the records of those precedents must unavoidably swell to a very considerable bulk”

This was central to Hamilton’s argument. He believed that as time went on, the Supreme Court would be increasingly hemmed in by precedents, and thus unable to enact their ideological whims or prejudices. 

Well, we know how that has worked out, don’t we?

But back to Marshall’s last dissent. The crux of his argument is:

“the majority declares itself free to discard any principle of constitutional liberty which was recognized or reaffirmed over the dissenting votes of four Justices and with which five or more Justices now disagree. The implications of this radical new exception to the doctrine of stare decisis are staggering. The majority today sends a clear signal that scores of established constitutional liberties are now ripe for reconsideration, thereby inviting the very type of open defiance of our precedents that the majority rewards in this case….

“The overruling of one of this Court's precedents ought to be a matter of great moment and consequence. Although the doctrine of stare decisis is not an ‘inexorable command,’ [citation omitted] this Court has repeatedly stressed that fidelity to precedent is fundamental to ‘a society governed by the rule of law,’ [citations omitted] ‘[I]t is indisputable that stare decisis is a basic self-governing principle within the Judicial Branch ….’

“…. By limiting full protection of the doctrine of stare decisis to ‘cases involving property and contract rights,’ [ ] the majority sends a clear signal that essentially alldecisions implementing the personal liberties protected by the Bill of Rights and the Fourteenth Amendment are open to reexamination. Taking into account the majority's additional criterion for overruling -- that a case either was decided or reaffirmed by a 5-4 margin ’over spirited dissen[t],’ [ ] -- the continued vitality of literally scores of decisions must be understood to depend on nothing more than the proclivities of the individuals who now comprise a majority of this Court.”

To be fair, where the 5 to 4 rulings are less than a decade old, Scalia’s response in his concurrence seems a much more accurate point:

“quite to the contrary, what would enshrine power as the governing principle of this Court is the notion that an important constitutional decision with plainly inadequate rational support must be left in place for the sole reason that it once attracted five votes.”

Point well taken. But then, Scalia goes completely off the rails:

“[S]tare decisis[ ], to the extent it rests upon anything more than administrative convenience, is merely the application to judicial precedents of a more general principle that the settled practices and expectations of a democratic society should generally not be disturbed by the courts.”

It strikes me that the expectations of a democratic society are a helluva lot bigger principle in play than mere “administrative convenience.”

But even worse, Marshall was exactly on point in his criticism of the plurality opinion by Rehnquist, for they did indeed say:

“Stare decisis is not an inexorable command; rather, it ’is a principle of policy and not a mechanical formula of adherence to the latest decision.’ [citation omitted] This is particularly true in constitutional cases, because in such cases ’correction through legislative action is practically impossible.’ [citation omitted]. Considerations in favor of stare decisis are at their acme in cases involving property and contract rights, where reliance interests are involved,”

Up until the last sentence, the majority is exactly correct. Constitutional decisions by the Supreme Court are almost impossible to reverse by democratic means. And as we have seen with the Fifteenth Amendment, even when those Herculean hurdles are cleared, a majority of the Court might simply elide them away, as Roberts did in Shelby County.

But seriously, the reliance of a democratic society on settled precedents of the Court is at its peak in *property or contract cases*??? How one drafts a contract or a title deed is more important than who one can marry, who one can be romantic with, what one can do with their own body??? This is simply breathtaking in its fundamental ignorance.

To wit: the American public should not have to draft new Constitutional Amendments and get them passed by 2/3’s of both Houses of Congress and 3/4’s of all States, in order to protect civil rights that have been upheld by Supreme Court decisions and been in effect for decades.

Simply put, the rule by an ever-shifting 5 to 4 majority on the Supreme Court is not by any means the Rule of Law. Marshall was spot on in his last dissent that Edicts by shifting majorities on the Supreme Court have indeed “squandered its authority and legitimacy.”

Weekly Indicators for April 17 - 21 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

There’s more *extremely* slow deterioration in some coincident indicators of recession, but at the same time, the downturn has been telegraphed for so long that some leading indicators are on the verge of turning bullish again.

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

The economic tailwind from last autumn’s declining gas prices is probably over

 

 - by New Deal democrat

On Wednesday I discussed how gas prices, with an assist from higher stock prices leading to stock options being cashed in, was the primary reason why the coincident indicators hadn’t rolled over yet.

I wanted to explore that a little more: was the boost from lower gas prices going to allow for a “soft landing,” or a “modified limited rolling recession,” if you will? Or was the boost ending, where we could expect the other factors driving the economy to take precedence? Let me look at this two ways.

First, gas at the pump has to be funded by wages. So one way to measure the impact of gas prices on consumers is to compare the two. In order to take the effects of Russia’s invasion of Ukraine out of the picture, in the below graph I have normed both gas prices and non-managerial wages to 100 as of April 2 years ago. Here is the long-term graph:

We can see the periods of really cheap gas prices at the end of the 1990s, and during both recent recessions, as well as the big downturn in 2014-15. More recently, we can see that the run-down in prices in the second half of last year took us about to the historical norm. Since the beginning of this year, prices have turned “relatively” expensive, without engaging an actual “choke collar” on the economy, as they did in the first part of last year.

Here’s another look at the same data, this time dividing gas prices by hourly wages:

The stress caused by the Russian invasion of Ukraine is over, but the tailwind of the downturn in prices thereafter has ended as well.

Second, it’s been suggested that whenever gas prices hit a certain level of GDP, that has been enough to trigger a recession. I show that below by dividing gas prices by nominal GDP, and norming the data to 100 as of Q4 2007, the last time an oil price spike helped spark a recession:

Note at the far left how the impact of the invasion of Kuwait by Iraq in 1990 helped trigger that recession as well.

Last year’s run-up didn’t quite hit the 100 threshold, peaking at 90. This was enough to crimp GDP without actually causing a recession. By the end of Q4 that had entirely receded. We’ll find out about Q1 next week.

Let’s look at this same data on a YoY basis. Below I show the YoY% change, inverted, of gas prices averaged quarterly (so that a decrease in price shows as an increase, e.g.), together with YoY nominal GDP (*5 for scale):

Basically this shows that “the remedy for high (low) prices is high (low) prices.” Big run-ups in prices create GDP slowdowns about 1 year later, and big run-downs in prices an increase in YoY GDP a year later (but of course it’s not monocausal, e.g., the tech boom of the late 1990s and the shallow industrial recession of 2015-16 were not particularly in tune with gas prices).

This graph suggests that the effects of the big run-up in gas prices early last year have not yet fully been felt, and that the effects of the run-down in prices thereafter will probably show up by next year.

The bottom line for now is that gas prices probably were part of the GDP slowdown in the first 2 Quarters of last year, and probably a part of the rebound thereafter, up into Q1 of this year. But the tailwind is probably over beginning this Quarter. In other words, I expect the effects of other aspects of the economy to increase in salience beginning with this Quarter’s data.

Jobless claims continue to warrant yellow caution flag, while continuing claims shade closer to crimson

 

 - by New Deal democrat

Initial claims (blue in the graph below) continued their recent track into recession caution territory this week, as they rose 5,000 to 245,000, 12.9% higher YoY and the 5th time in the last 7 weeks that claims have been 240,000 or above. The last time they were at this level was in January 2022. 

The more important 4 week moving average (red) declined -250 to 239,750, 10.6% higher than 1 year ago. This is the 4th week in a row that the YoY% change has been above 10%, but it has not yet crossed the 12.5% threshold that historically has been a recession warning. On an absolute basis, except for 2 of the 4 previous weeks, the highest it had been at this level was also January 2022.

Finally, continuing claims (gold) rose 61,000 to 1,865,000, 22.1% above their level one year ago, and the highest since November 2021:

Here is the YoY% change, which is more important at the moment:

The increase in continuing claims appears especially significant. Historically, continuing claims have lagged, and have not been higher YoY by 20% or more until after a recession had already started (below graph subtracts 20% so that a YoY 20% increase shows at the zero line):

The only two exceptions prior to the pandemic were 2 weeks in November and December 1979, just before the January start of the 1980 recession, and 1 week in November 1989, 8 months before the onset of the July 1990 recession. 

Parenthetically, it is important to note that the massive seasonal revisions which were announced 2 weeks ago did not significantly affect the YoY comparisons. 

For forecasting purposes, this metric continues to warrant a yellow but not red flag. But if continuing claims are over 20% for even one more week, that yellow will shade closer to orange or even crimson.

Coincident indicators hold on, mainly due to improvement in gas prices YoY

 

 - by New Deal democrat

I’ve been paying particular attention lately to the coincident indicators, because the leading indicators have telegraphed a recession for about half a year - so why isn’t it here yet???

A good representation of coincident indicators remaining positive is the Weekly Economic Index of the NY Fed:

It looked on track to turn negative at the beginning of the year, but has not deteriorated any further since. Can we isolate where the strength has been coming from?

Yes we can. The NY Fed helpfully tells us that the index is an amalgamation of 10 data series, 8 of which are in the public realm, and all 8 of which I have been keeping track of for the past 10 years in my “Weekly Indicators” posts. The 8 are: initial jobless claims, continuing claims, the American Staffing Index, gas usage, Redbook consumer spending, Rail traffic, tax withholding payments, and steel production.

So, which of these are now or at least have recently been positive?

Most importantly, gas usage. As I’ve noted a number of times, gas prices declining from $5 last June to $3 in December can do a world of good to economic statistics. Unsurprisingly, gas usage was at its worst YoY last summer, and turned positive this winter:

With gas prices still roughly $0.50 less than they were last year at this time, usage has improved to about 5% better YoY.

A second series which has improved considerably, and more surprisingly, is tax withholding payments. Here’s a graph through the beginning of April provided by the CA Department of Taxation, which is similar to tax withholding payments for the nation as a whole:

Tax payments declined considerably YoY in the last few months of 2022, but then stabilized beginning in January. The CA Department of Taxation had attributed the decline to the failure of stock options to vest (and so be cashed in) as 2022 progressed, due to the stock market decline. Stocks bottomed in October and have been in a positive trend since, so likely stock options have been more attractively priced this year. So their explanation makes sense.

For the record, for the first 11 days of April, withholding tax payments are ahead by about 7% compared with last year, $149.4 Billion (11 days in) vs. $140.0 Billion last year.

One other series, which had been looking better YoY, has deteriorated in April: steel production. This had been down over 10% last year, before improving earlier this year and actually turning positive YoY in March. But now it is back down about -5% YoY:

A second deteriorating series is staffing. This was positive but increasingly less so last autumn, then turned neutral, and solidly negative beginning in February:

The index is now down -7% YoY. I consider it more of a leading than coincident indicator, since it correlates with temporary help in the payrolls report, which typically turns down well before jobs as a whole.

Finally, consumer spending as measured by Redbook, which had been up over 15% last summer, has been almost consistently deteriorating since then, and as of the last reading this week was only up 1.1% YoY:

This series is on track to turn negative YoY in the next month, if the trend holds.

As a whole, the coincident data continues to deteriorate. It has been helped considerably by lower gas prices, with a big assist from increasing stock prices. I do not think this will last long, but we’ll see.

New housing construction appears to have bottomed; but expect further declines in construction employment ahead

 - by New Deal democrat

For the past few months, I’ve noted that new home sales, which while very volatile frequently are the first metric to signal a change in trend, appeared to have bottomed by early last autumn. This morning’s report on housing permits and starts appears to have confirmed that signal. 

While total housing permits (gold in the graph below) declined -137,000 on a seasonally adjusted annual rate from last month, they remained higher than their November-January lows by about 75,000. Starts (blue), which are noisier and tend to lag a month or so, also declined -12,000, but remained 86,000 higher than their January low. Most importantly, single family permits (red, right scale) which are the least volatile measure of the three, rose 32,000, for the second straight monthly increase, and are now almost 100,000 above their January low:

It is very likely that the bottom for the housing sales market is in. Remember that sales follow interest rates, and in particular mortgage rates, which peaked last October and November. Below is a the latest update of the graph comparing the YoY change in mortgage rates (blue, inverted, *10 for scale)  with the YoY% change in both total and single family permits:

This is all good news, despite the monthly declines in total permits and starts.

The one important piece of bad news is that total housing units under construction declined again (blue in the graphs below), and are now -2.2% below their October peak. As I’ve noted monthly for awhile now, this is the metric that shows the actual total economic activity of the housing market, so it shows that housing is now detracting from GDP. Further, once construction turns down, shortly thereafter so does construction employment (red). Here is the historical view until the pandemic:

Now here is the last year, with both metrics normed to 100 as of their peak months:

Nonfarm payrolls has been the main coincident indicator holding up the economy, and construction employment is one of the leading sectors of the jobs market overall. This morning’s report tells us to expect further declines in that jobs sector.

Two “fundamental” indicators for the American middle/working class and the economy

 - by New Deal democrat

This week is a little light on data, except for housing permits and starts (Tuesday) and existing home sales (Thursday), so let me catch up on a few other indicators.

In particular, two of my favorite indicators are based on “fundamentals.” Basically, how much the average American is earning, and how much they are spending. Needless to say, we want both of them to be increasing. That’s because, as I have often said, consumption leads employment. If Americans are cutting back on spending, then cutbacks in employment will soon follow.

Because consumption leads, let’s start with spending, i.e., real retail sales YoY. This data series goes back 75 years. And it has been very reliable. Here’s the graph:

Leaving aside the pandemic, real retail sales has *always* turned negative YoY within about 6 months before the onset of a recession, except for two times in the 1950s where it turned negative YoY 4 and 5 months into the recession.

There have been some false positives (13 in total), where negative monthly YoY readings were not associated with a recession, but a majority of those were never worse than -1.0% YoY (the exceptions being 1951-52, 1956, 1966-67, 1987, and 2002). Further, a majority of the 13 times only lasted for 1 month, and only 3 have lasted for longer than 2 months in a row (1951-52, 1966-67, and 2002). 

In short, even a 1 month negative YoY reading is a yellow flag that a recession might be near, and if it goes on longer than 2 months with at least one negative reading of more than -1.0%, almost certainly a recession has either just started or will within the next few months.

Now let’s turn to employment, in the form of real aggregate payrolls for non-supervisory employees. In other words, in real terms the total pay that the American working/middle class is taking home. This has a 60 year track record, and has also been very reliable:

There have been *no* false positives, ie., where the indicator signaled but there was no recession. There have been 5 times when the indicator did not turn negative until several months into a recession: 1970 (4 months), 1974 (3 months), 1981 (3 months), 2001 (1 month), and 2008 (5 months). But with the exception of 1981, in the other 4 episodes this metric was in a clear and severe downtrend during those months.

Now let’s see what both look like together in the 50+ years both were in existence prior to the pandemic:

What this shows is that, if both of these two indicators are positive, you could be sure that you are not in a recession. With the sole exception of one month in late 2002, if both are negative you could be sure that you are either just before, during, or coming out of a recession. And frequently real retail sales had turned negative a few months before real aggregate payrolls.

Now let’s look at the past 18 months:

Real retail sales have been negative YoY for 7 of the past 13 months. I have discounted the negatives from last spring, because they were in contrast with.the spring stimulus spending spree of 2021. But 4 of the past 5 months have also been negative, and last month (March) by -1.9%.  Putting both indicators together, with the exception of 1966-67 and arguably the near double-dip of late 2002, there has never been a time in the past 60 years where a downturn this big for this duration has not meant a recession.

Most importantly, at the moment real aggregate payrolls are still positive, and they are not declining. Because, for reasons I discussed last week, I expect consumer inflation to only be about +3.2% YoY after June, for aggregate real payrolls to turn negative, there will have to be a pronounced slowdown in either hours, or jobs, or wage growth, or a combination of the three.