Why the leading elements of the Establishment Survey in the jobs report still forecast expansion

 

 - by New Deal democrat

Continuing my catching up this week, let’s take a look in some further detail about why I didn’t think Friday’s jobs report portended recession - at least, not yet.

As I always point out, the jobs report does contain some leading numbers. These are generally employment in more cyclical industries that, when they turn down, start the cascade into the broader economy. Generally speaking, these are all goods-producing industries, and specifically manufacturing and construction. Usually I also include temporary help, but that has clearly been undergoing some structural changes, so I am temporarily discounting that.

Anyway, here is a closer look.

First, here are goods producing jobs (gold) vs. manufacturing jobs (blue) back in the post-WW2 era:

During this time, manufacturing was a much bigger slice of the goods-producing pie, so it is not surprising that the two lines look very similar. Except for the recession caused by the oil embargo (1974) and the Fed-engineered recession of 1981-82, caused by the sudden reversal and sharp increase in rates by Paul Volcker, these always started declining before jobs generally started to decline.

Next, here is the era including when residential construction jobs (red) were specifically broken out:

Note that these have relatively speaking become a larger slice of the pie, as a larger population needs more residences built. They too have always turned down (except for the pandemic) before the overall jobs number have turned.

Finally, here is the post-pandemic close-up:

Manufacturing employment has stalled, but has not in any meaningful sense turned down. Residential construction employment and goods-producing employment generally have continued to rise.

Historically, even more leading than the number of manufacturing jobs (red) has been the average work week in manufacturing (blue). In fact, it is one of the 10 “official” leading indicators in that Index. The below two graphs show the leading relationship on a YoY basis:

Here is the post-pandemic close-up:

There were significant YoY declines in 2022 into early 2023, but the YoY comparison has stabilized this year. This suggests that manufacturing employment is not poised to decline significantly in the months ahead.

Here is the absolute number of weekly hours in manufacturing worked historically:

I include this because the situation changed after 1982, with employees typically working more overtime. It has usually taken not just a decline, but a decline all the way to 40.5 hours before a recesion has begun. Except for last winter, we have remained above that line.

For completeness’ sake, here is temporary employment:

This has been almost relentlessly declining for over two years. There is pretty clearly something structural rather than cyclical going on here.

Finally, short term unemployment (blue in the graph below) was historically one of the leading components of the index, before it was replace by initial claims (red):

You can see that they follow similar trajectories, although initial claims are considerably less noisy.

Here is the post-pandemic look:

both have increased in recent months, with the former starting before the latter. Again, I suspect this has to do with recent immigrants being unable to find jobs, and thus not applying for unemployment.

To conclude, not everything is positive, but the two negative elements both have special considerations. The bulk of the leading data from the Establishment Survey of the jobs report is still forecasting economic expansion in the next few months.

Credit conditions in Q2 improved, and are typical of an economy having come *out* of a recession, not going in to one

 

 - by New Deal democrat

The Senior Loan Officer Survey, the premier quarterly measure of the loose- or tight-ness of bank lending, was published yesterday for Q2. And since lending conditions are a long leading indicator for the economy, and several of the metrics contained in this release have a good and lengthy track record, let’s take a look.

And to cut to the chase, the news is positive.

The first measure that has a lengthy and accurate historical record is the percentage of banks tightening or loosening criteria for making commercial and industrial loans. This is one of those data series where a positive number is negative, as it means more banks tightening than loosening. A negative number means more banks are loosening conditions.

Although the data for lending to both large and small firms was negative, it was less negative than at any point in the last two years, with on net only 8% of banks tightening:

Going back 30+ years, this is typically what we see 2 to 4 quarters *after* a recession has ended, not going in to one.

The second measure is the percentage of banks reporting strong demand for commercial and industrial loans. This is divided into large and small banks, and large and small firms, giving us four series. And in this case, positive means positive for the economy as well. In the graph below, the two series for large firms are in light and dark rend, the two fo small firms are in light and dark blue:

Although the graph looks a little like spaghetti, the trend in the past 6 quarters is clear. The percentage of banks reporting weakening demand got smaller and smaller, until finally this past quarter on net the data was positive, with the percent of large banks reporting stronger demand was higher by 10%+, and the percent of smaller banks reporting weaker demand dwindled to under 10%, for an unweighted average of +4%. Across all four divisions, the numbers are the best since Q3 of 2022.

Again, this is very much what we see just after having come *out* of recessions rather than going into one.

By no means are all of the long leading indicators so sanguine; in particular real money supply and the yield curve are still negative. But credit conditions are improving.

Economically weighted ISM indexes show (and forecast) an economy still - barely - in expansion

 

 - by New Deal democrat

As I was traveling last week, I did not write about several data series that I normally update. I plan on taking care of that this week. There’s also a little excitement in the markets today. Typically when there has not been drastic *hard* news, the action is all about leveraged positions being unwound in disorderly fashion, setting up a “V”-shaped market correction. We’ll see.

In the meantime, this morning the ISM non-manufacturing index for July was reported. Since I have started paying more attention to this as part of an economically weighted short term forecasting tool along with the ISM manufacturing index, which is one of the items I wasn’t able to get to last week, let’s take a look now.

Last Thursday the manufacturing index deteriorated further, with the headline number declining from 48.8 to 46.8, and the more leading new orders subindex declining from 49.3 to 47.4. Since 50 is the dividing line between expansion and contraction, that puts both metrics further into contraction (although note that both were lower during 2022 and also during 2015-16, when there were no recessions):

This morning the non-manufacturing index bounced back from contractionary levels in June, with the headline index increasing from 48.8 to 51.4, and the new orders subindex increasing from 47.3 to 52.4. That puts both metrics back in expansion:

Since the turn of the Millennium, when we use an economically weighted average of the non-manufacturing index (75%) with the manufacturing index (25%), it has generated a much more reliable signal, when we use the 3 month average, requiring it to be below 50. 

So what does it tell us now? Including July, here are the last sis months of both the manufacturing (left column) and non-manufacturing index (center) numbers, and their monthly weighted average (right) :

FEB 47.8  52.6. 51.4

MAR 50.3. 51.4. 51.1

APR 49.2  49.4.  49.3 

MAY 48.9. 53.8. 52.5

JUN 48.5. 48.8. 48.7

JUL. 46.8. 51.4. 50.2

And here is the same data for the new orders components:

FEB 49.2  56.1. 54.4

MAR 51.4. 54.4. 53.6

APR 49.1. 52.2. 51.4

MAY 45.4. 54.1. 51.9

JUN. 49.3  47.3. 47.8 

JUL.  47.4. 52.4. 51.2

While the single month average for both the headline and new orders components showed contraction in June, it did not trigger a signal based on the three month average. For July, the current three month weighted average of the two for both the headline and new orders components is the same: 50.3.

Once again, the recession warning signal has not been triggered. And once again, as I wrote last month, “the signal for the combined weighted ISM indexes remains expansionary - but just barely - in its forecast for the next few months.”

Just like last Friday’s Establishment Survey portion of the jobs report, this is a vary weak expansionary economy. The Fed should have cut last week. This is more data that it should start cutting rates at its September meeting, if there are no panic-induced emergency cuts before then.

Weekly Indicators for July 29 - August 2 at Seeking Alpha

 

 - by New Deal democrat

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

Unlike the jobs report, the high frequency data has only shown slight weakening in a few metrics in the past several months. One which did turn from positive to neutral, per my blog post on Thursday, was initial jobless claims.

To keep up to the virtual moment on the economic data, click over and read. It will also reward me a little bit for my efforts organizing and highlighting the metrics.

July jobs report: Estblishment survey weak (but still positive), Household survey (even more) recessionary

 

 - by New Deal democrat

In the past few months, my focus has been on whether jobs gains are most consistent with a “soft landing,” i.e., no further deterioration, or whether deceleration is ongoing. In the last several months I have also pointed out that the Household Survey is probably understating growth because of its large undercount of recent immigrants joining the labor force.

This month the summary is easy: the Establishment report was weak (but still positive); the Household report was recessionary.

Below is my in depth synopsis.

HEADLINES:

• 114,000 jobs added. Private sector jobs increased 97,000. Government jobs increased by 17,000. 
• May was revised downward by -2,000, and June was revised downward by -27,000, for a net decline of -29,000. This continues the pattern from nearly every month in the past 18 months of a steady drumbeat of downward net revisions.
• The alternate, and more volatile measure in the household report, showed an increase of 67,000 jobs. On a YoY basis, in this series only 57,000 jobs, which round to 0.0%, or no gain at all.  With the sole exception of 1952 and one month in 1957, this has always and only occurred shortly before or during recessions.
• The U3 unemployment rate rose 0.2% to 4.3%, triggering the “Sahm rule” recession indicator.
• The U6 underemployment rate rose 0.5% to 8.2%, 1.4% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now rose 362,000 to 5.600 million, vs. its post-pandemic low of 4.925 million in early 2023.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. Outside of construction, all of the rest were flat or negative.

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, declined -0.2 hours to 39.9 hours, and is down -0.6 hours from its February 2022 peak of 41.5 hours.

• Manufacturing jobs rose 1,000.
• Within that sector, motor vehicle manufacturing jobs declined -1,300. 
• Truck driving declilned -2,400.
• Construction jobs increased 25,000.
• Residential construction jobs, which are even more leading, rose by 1,700 to another new post-pandemic high.
• Goods producing jobs as a whole rose 25,000 to another new expansion high. These should decline before any recession occurs.

• Temporary jobs, which have generally been declining late 2022, fell by another -8,700, and are down about -500,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer rose 223,000 to 2,351,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.09, or +0.3%, to $30.14, for a YoY gain of +3.8%. This continues the decelerating trend in YoY growth in wages since their post pandemic peak of 7.0% in March 2022. Keep in mind that this is still significantly higher than the 3.0% YoY inflation rate as of last month.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers declined -0.2%, and is up 1.2% YoY, basically in trend for the past 12+ months.

•  the index of aggregate payrolls for non-managerial workers was unchanged, and is up 5.1% YoY. These have been slowly decelerating since the end of the pandemic lockdowns. But with the latest YoY consumer inflation reading of 3.0%, this remains powerful evidence that average working families have continued to see gains in “real” spending money.

Other significant data:

• Professional and business employment declined -11,000. These tend to be well-paying jobs. This series had generally been declining since May 2023, but earlier this year had resumed increasing again. As of this month, they are only higher YoY by 0.6% - a very low increase that has *only* happened in the past 80+ years immediately before, during, or after recessions.
• The employment population ratio declined -0.1% to 60.0%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate increased +0.1% to 62.7%, vs. 63.4% in February 2020. The prime 25-54 age  participation rate rose sharply to 84.0%, the highest rate during the entire history of this series except for the late 1990s tech boom.

SUMMARY

This month was the smallest gain in employment since the pandemic except for this past April. The unemployment rate was the highest since October 2021. Once again, however, there was some divergence between the two surveys, with the Household survey being decisively weaker.

I nevertheless still recommend taking the recession cries that you will read elsewhere in the next few days with lots of grains of salt. I note in particular the very large increase in the prime age labor force participation rate - which itself is probably an underestimate, due to the impact of the post-pandemic immigration surge, which has not been incorporated into the underlying labor force participation level, which has been flat. As indicated above, the YoY stall in the Household number is also recessionary. Within the Establishment survey, the stall in professional and business jobs was also recessionary.

But the main Establishment report, while undeniably weak, was still positive, with significant gains in construction, a small gain in manufacturing, and an aggregate decent gain in goods production. Additionally, aggregate nonsupervisory payrolls are likely still growing in real terms, which means most households have more money to spend in real terms. While some of the leading aspects of this survey data (like manufacturing hours) were negative, I don’t think we have any serious pre-recession signal unless and until goods-producing jobs roll over.

Jobless claims increase; no longer positive but neutral (and likely still affected by unresolved seasonality)

 

 - by New Deal democrat

I’m still on the road, so this will be an abbreviated report.

Initial claims rose 14,000 to 249,000, the highest since last August. The four week moving average rose 2,500 to 238,000, the highest since last September. Continuing claims, with the usual one week lag, rose 33,000 to 1.877 million, the highest since January 2022:

Last August claims also rose sharply from their brief downturn in July, so I continue to suspect there is residual seasonality here.

At the same time, all three metrics are now higher YoY, the one week claims number higher by 3.8%, the four week average by 1.9%, and continuing claims by 5.7%:

This is not recessionary, but it is no longer positive. Jobless claims are now neutral, and if they trend higher for a few more weeks may warrant a yellow caution flag. Which also means that the unemployment rate is likely to rise further in the next few months, if not necessarily tomorrow.

June JOLTS report: deceleration all around (including the bad stuff)

 

 - by New Deal democrat

The theme of the JOLTS report for June was “continued deceleration,” but no particular cause for concern. As we’ll see below, that’s because the “bad” metrics declined just as must as the “good” ones did. 



To start with, job openings (blue in the graph below), a soft statistic that is polluted by imaginary, permanent, and trolling listings, declined -46,000, or -0.6% from an upwardly revised May reading  to 8.184 million (vs. a pre-pandemic peak of 7.594 million). Actual hires (red) declined -314,000, or -5.6% to a new post-pandemic low of 5.341 million (vs. a pre-pandemic peak of 6.0 million). Voluntary quits (gold) declined -121,000, or -3.6% from downwardly revised near-post 2020 lows in April 3.282 million, the lowest rate in three years. The last two, as you can see In the below graph below, are sharp declines. Note all values are normed to a level of 100 as of just before the pandemic:

Hires are now down -10.9% from their level just before the pandemic, and quits are down -5.2%.

But the reason this month’s air-pocket isn’t particularly concerning is that the exact same thing happened with layoffs and discharges (blue in the graph below), which declined -180,000, or -10.7% (!) to 1.654 million, their lowest level since late 2022, and roughly 25% below their typical level in the 10 years before the pandemic:

The more leading weekly initial jobless claims (red), which have increased signficantly in the past several months, suggest that layoffs and discharges may increase as well, although the former have probably been affected by unresolved seasonality, so take this with an extra grain of salt.

Finally, the quits rate for June was unchanged from a -0.1% downwardly revised May at 2.1%, again a post-pandemic low. As I have noted for a number of months now, the quits rate (blue in the graph below) tends to lead average hourly earnings (red, right scale), this suggests that the deceleration in nominal wage growth may continue also slowly:

My big concern over the past year has been if a further deceleration in wage growth were to coincide with an upturn in inflation, because that would likely cause a decline in real consumer income and spending. If both are abating, then the net impact remains a positive for the economy.

Repeat home sales were benign in May, forecast continued downtrend in shelter CPI in months ahead

 

 - by New Deal democrat

First, a brief administrative note: I am traveling this week, so posting is going to be sporadic and delayed. I’ll get to this morning’s JOLTS report later today or tomorrow morning.

With that out of the way, let’s take a look at repeat home sales prices.

To reiterate my focus, in the housing data I am looking at any movement towards rebalancing between new and existing home sales. As to existing home sales, wethis means increasing inventories and more stable or even slightly declining prices. We did see another increase in inventory last week. In the repeat sales index, I am looking for signs that price increases might be abating. 

And that is what was shown this morning. The monthly comparisons were unchanged in the slightly leading FHFA index, and comparable to the last 6 months in the Case Shiller national index. Since the YoY comparisons are against 0.6% and 0.7% increases monthly last year, the YoY% increases also show deceleration.

The unchanged reading in the FHFA (purple below) is tied with January and March for the lowest change since August 2022. For Case Shiller (blue) it is near the low end of recent monthly changes, and the last 6 months in general have been the lowest since February 2023:

On a YoY basis, the FHFA index is up 5.7%, the lowest since last August. The Case Shiller’s YoY increase is the lowest since last December:

Again, the FHFA tends to lead the Case Shiller index by a month or two, so the direction is good.

Becase the house price indexes lead the shelter component of the CPI (red above) by 12-18 months, this means we can expect continued deceleration in that very important component of consumer prices as well.

This means that Owners Equivalent Rent, which is 25% of the entire CPI, should continue to trend towards 3% YoY increases in the months ahead.

This is a good report which should give the Fed more reason to be comfortable beginning to cut interest rates.

Weekly Indicators for July 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

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

The high frequency data, like the personal income and spending report, continue to show a strong consumer. Some of the long term negatives have also gotten “less bad” as well.

As usual, clicking over and reading will bring you up to the virtual moment as to the data, and reward me a little bit for organizing it all for you.

Personal income, spending, and prices: consumer remains strong, inflation close to 2% target no matter how you measure it

 

 - by New Deal democrat

I am on the road today, so I will have to keep this brief.

In June nominal personal income rose 0.3%, and spending rose 0.2%. Since PCE inflation rose less than 0.1%, real income rose 0.2% and real spending rose 0.1%.

Since spending on services tends to rise even during recessions, the more important component to focus on is real spending on goods. This rose 0.2% to its highest level ever except for last December:

As indicated above, PCE inflation was also subdued. The core measure rose 0.2%. On a YoY basis, PCE inflation is 2.5%, and core PCE inflation is 2.6%:

Both of these are at their lowest levels since the pandemic.

Finally, with the usual one month delay, real manufacturing and trade sales rose sharply, by 0.9%, also to their highest level ever except for last December:

The two big takeaways from this month’s report are that the consumer remains strong, and inflation, no matter how you measure it, is close to the Fed’s 2% target. Again, if that is indeed a target rather than a ceiling, the Fed has no reason not to proceed with at least several small interest rate cuts.

Coincident real GDP metric is good, but leading indicators from the GDP report are not: is the Fed listening?

 

 - by New Deal democrat

Real GDP grew 0.7% in Q2, or a 2.8% annualized rate, a perfectly good number in line with the past three years:

Probably even more importantly, the GDP deflator increased 0.6% for the quarter, or at an annualized rate of 2.3%. As the below graph shows, this is a perfectly normal rate going back to the start of the Millennium:

In other words, if 2% inflation is a target and not a ceiling, the Fed need not wait any further before starting to trim interest rates lower.

And the long leading indicators contained within the GDP report ought to give them more reason to cut, because both declined slightly.

First, private fixed residential investment as a share of GDP, a proxy for the housing market, declined slightly both in nominal (blue) and real (red) comparisons:

This doesn’t scream recession, but the generally flat trend of the past several years (with the supply chain tailwind now gone) at very least suggests lackluster growth ahead.

Secondly, real deflated proprietor’s income, a proxy for corporate profits (which won’t be reported for another month, also declined, by -0.4%:

Business profitability is also not providing any help to the economic outlook for 2025.

Continued resilient real consumer income and spending is keeping the economy growing. But the power sources for that engine are not providing any more juice. 

Again, not recessionary, but more evidence that the Fed should start to lower rates now.

Jobless claims hold their ground against the most challenging comparisons of last summer

 

 - by New Deal democrat

This week completed the most challenging YoY comparisons with last summer. Recall that I suspect there may be some unresolved post-pandemic seasonality in these numbers, as this year’s increase starting in late spring has been close to a mirror image of last year’s increase. So if there is some real new weakness in jobless claims, the last three weeks were the most likely times it would show up.

And the result this week was not too bad. Initial claims declined -10,000 to 235,000. The four week average increased 250 to 235,500. With the typical one week delay, continuing claims declined -9,000 to 1.851 million:

More importantly, on a YoY basis weekly claims were up a slight 1.7% (4,000), and the four week average was unchanged. Continuing claims were up 4.9%, still close to their recent YoY low comparisons:

This is a neutral result compared with the most challenging comparisons of last summer. Specifically, it does not suggest a recession in the near future.

Finally, looking ahead to next week’s unemployment rate for July, we see that the monthly numbers were about equal to June’s but higher than earlier this year:

This suggests some further upward pressure on the unemployment rate in coming months (recalling that the big wave of immigration in the last several years is almost certainly distorting that comparison upward). It’s possible the “Sahm rule” will be triggered as a result, but recall that the comparison rate for that rule is also going to increase 0.1% this month as well.

7%+ mortgages weigh on new home sales, while prices continue slight downtrend, and inventory uptrend

 - by New Deal democrat

Now that we have new as well as existing home sales, let’s take a little more extended look at the housing sector.

Let me start by reiterating the big picture: mortgage rates lead sales, which in turn lead prices. Further, new home sales are the most leading of all housing metrics, but they are noisy and heavily revised. The much less noisy single family permits lag them slightly. Finally, we are looking for relative normalization between the new and existing home sectors, which would mean *relatively* more existing vs. new home sales, firming in new home vs. existing home prices, and more inventory growth in existing homes vs. new homes. 

Only the third of these made progress in June.

Three months ago I wrote that “because mortgage rates have risen somewhat in the past few months (from 6.67% to 7.10%, I expect this range in new home sales to continue, with a slight downward bias in the immediate months ahead.” That is what has happened in the three months since. Mortgage rates (red in the graph below, right scale) remain elevated (over 7% on average in May) compared with earlier this year, so downward pressure has been placed on new home sales:

Specifically, in June new home sales declined another -4,000 to 617,000 annualized, with only a slight revision to May. This is on par with new home sales late last year when rates were also above 7%.

As expected, the much less noisy, but slightly less leading single family housing permits (red, right scale), have turned down with a slight delay as well:

Prices (brown) continued to rise after sales declined, and have since declined themselves slightly as well (if there were more combined new and existing home inventory, we would expect a steeper decline in prices):

On a YoY basis (red), in June the median price for a new home was almost exactly unchanged (down -0.1%):

But the slight downward trend over the past 12+ months remains intact.

Finally, inventory always lags sales, and this continued to climb to its highest all-time level except for the peak of the 2000s housing bubble:

For comparison, yesterday we saw that sales of existing homes remained near their 5 year lows, while inventory (not seasonally adjusted) rose to a three year high, and prices continued to rise YoY, but at a slower pace. Here is the graph of existing home inventories (not seasonally adjusted) for comparison:

Mortgage rates over 7% have thus continued to be an obstacle to normalization. Sales of both new and existing homes remain near five year lows. Prices of existing homes continue to rise faster than for new homes. Inventory for both new and existing homes is increasing, but the latter is increasing - from an extremely low post-pandemic level in 2022 - faster than the former, 23.3% vs. 11.2% YoY.

To sum up, there is still a long way to go on the journey to a normal housing market. I expect existing home inventory to continue to rise sharply until prices stop rising faster than prices for new homes. Meanwhile sales for both will continue their existing flat to slowly decreasing trend until mortgage rates are significantly lower.

Existing home market inventory and prices move slowly towards normalization, while sales remain punk

 

 - by New Deal democrat

Since existing home sales are less important for economic purposes, and especially with new home sales being reported tomorrow morning, I will keep this brief.

What we are looking for is rebalancing in the housing market. For that to happen, we want the inventory of existing homes to increase, prices to stabilize, and sales to gradually pick up.

In June we got two out of three.

The inventory of homes for sale increased to 1.32 M. This series is not seasonally adjusted, so we look YoY, and there we find that this is the highest inventory for June since 2020:

Meanwhile the YoY% gain in prices was 4.1%. This metric is also not seasonally adjusted, and there we got the lowest YoY% increase since last December:

But sales of existing home declined 0.22 M annualized in June to 3.89 M. This is at the bottom of its range in the past 12 months, and reflects the increase in mortgage rates several months ago:

So, inventory is increasing, and prices are increasing at a slower pace, but sales are not picking up at all, at least not with the mortgage rates of 7% we saw several months ago.

I’ll compare with the situation as to new houses tomorrow.

How restrictive are real interest rates?

 

 - by New Deal democrat

Over the weekend Harvard econ professor Jason Furman suggested that the Fed funds rate is not very restrictive:

“As inflation has come down the real Federal funds rate has risen and is now the most restrictive it has been this cycle, a point that Austin Goolsbee has emphasized a number of times. … That is not the way I would look at it. The rates that matter for the economy are long rates. and expected inflation over, say, the next decade has not changed that much. So the real mortgage rate, for example, is restrictive but not increasingly so.”

Let’s take a look.

First, here is the historical look at the real Fed funds rate, i.e., the nominal rate minus the YoY inflation rate. Since it is currently just under 2.4% higher than inflation, I subtract that so the current rate shows at the zero line below:

Indeed the current real Fed funds rate is the most restrictive since just before the Great Recession. Beyond that, it is also more restrictive than during most of the 1960s and 1970s. Only during the 1980s and the latter part of the 1990s was it consistently higher. We’ll circle back to this further below.

Also, note that interest rates -not so  coincidentally - were only as restrictive or more restrictive than their current levels shortly before recessions during the 1960s and 1970s, as well as the 2000s.

But what about compared with longer rates?  Here is the same graph, again normed to zero at its current readings for the real 10 year treasury rate (blue), real 5 year Treasury rate (gold), and real 2 year Treasury rate (red) since the turn of the Millennium:

The two year real rate is almost as restrictive as the real Fed funds rate over this nearly 25 year period. Further, while the 5 and 10 year real rates are *relatively* less restrictive, they are still more restrictive than at almost any time in the past 10 years, and about average for the 15 years before that.

Here is the same graph for the period of the 1960s through 1990s for which data is available:

Longer term real rates are less restrictive than at almost any point in the 1980s and 1990s, but about average for the 1960s and more restrictive than most of the 1970s.

So the conclusion is that longer term real rates are generally more restrictive than at most times in the past 25 years, and about average for the last 40 years of the 20th century.

Which isn’t that helpful.

For forecasting purposes, there are two more important points.

1. The ECRI method that uses nominal long term bond rates as one of their four indicators that goes into their ”long leading index” does not make use of the yield curve. Rather, it asks whether long rates are higher or lower than they have been previously in the expansion. We know that rates are higher than they were before 2023, but have been roughly flat since then.

2. Now let’s circle back to the 1980s and 1990s. What was important during both of those very long expansions is that rates, although high in both nominal and real terms, *trended lower.* For example, here are mortgage rates in the 1980s and 1990s:

One of my top-line forecasting systems is based on the fundamentals of consumer behavior. Consumers can get more money to spend via higher real wages. Or an asset, like stocks or real estate equity, can appreciate in value and be cashed in. Or the interest rates servicing those loans can go sufficiently lower to allow for refinancing, thus freeing up more cash for spending.

In the 1980s and 1990s, interest rates, especially mortgage rates, very frequently made new lows. Thus even those in real terms rates were restrictive, they were *less* restrictive generally than one or two years before. Consumers refinanced, and spent the freed-up cash. It was only when no new rates were established for 3 years, and other assets stopped appreciating, that recessions occurred.

Currently we have higher real rates than at almost any time in the past 10+ years, at a level of restrictiveness equivalent to before recessions in the 1960s, 1970s, and 2000s, and long term rates that have not made new lows in 3 years.

In other words, the refinancing spigot has been shut off. If stock prices, real estate prices, and real wages stop appreciating - which they very importantly have *not* at the moment - the economy is very vulnerable to a turndown.