Disinflating shelter prices and deflating gas prices work wonders for January CPI

 

 - by New Deal democrat

Over the last several years one of my big themes for consumer inflation had been how shelter and gas prices were pulling in opposite directions. After June 2022 gas prices sharply declined, while rents continued to increase just as sharply. By the end of 2024, shelter costs were seriously disinflating (i.e., rising, but at a gradually lower pace), while gas prices were stable or slightly increasing.

Well, today for perhaps the first time since the pandemic, both pulled strongly in the same - beneficial - directions. Beginning in late December, gas prices fell below $3/gallon for the first time since the pandemic. Meanwhile as I wrote on Monday, I expected the disinflation in shelter costs in the CPI to continue - and this morning it did. The result was YoY headline CPI coming in at 2.4%, the lowest except for one month since the pandemic, and core CPI coming in at 2.5%, which was the absolute lowest since the pandemic.

 As an aside, caution is still warranted, however, because the October-November kludge in shelter prices is still present in the YoY calculations, which will probably lower those comparisons by roughly -0.2% through next October.

As per my usual practice for the past several years, let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which was only up 2.0%:

The good news is that all three of these measures have decreased sharply since Sempteber. This is a significant disinflationary pulse.

As per my comment above, shelter inflation (blue) continued to decelerate YoY, down to a 3.0% increase, with both rent and owners’ equivalent rent increasing only 0.2% for the month. On a YoY basis, rent (gold) was up 2.8% and Owner’s Equivalent Rent (red) up 3.3%, the lowest increase for both since late 2021:

As usual let’s compare that with the YoY% changes in the repeat home sales indexes, which lead by about 12-18 months (/2.5 for scale), to CPI for shelter (blue). YoY home price increases are near or at multi-year lows, each at roughly 1.5%, and shelter inflation has followed (and yesterday we found out that the median price for existing homes had increased only 0.3%). The graph below includes several years before Covid to show its 3.2%-3.6% range during that time:

Not only has shelter inflation declined to back to its pre-pandemic YoY range, it is now *below* that range. Needless to say, this is not only good news, but because of the leading/lagging relationship of house prices to shelter inflation, as I wrote Monday we can expect even further deceleration in the shelter component of inflation during this year.

Another bright spot, as I wrote above, is that gas prices declined -3.2% for the month, resulting in a -7.5% YoY decline, which is welcome news to consumers:

Energy prices as a whole declined -1.5%.

Let’s take a look at a few other areas of interest.

First, new car prices (red) continue to be largely unchanged, flat for the month and up only 0.1% YoY, while used car prices (blue)declined another -1.8%. On a YoY basis new cars are up only 0.2%, and used car prices are *down* -2.0%. The graph below shows the post-pandemic trend by norming both series to 100 as of just before the pandemic:

Both new and used car prices have been basically flat for the past three years. Above I also show average hourly wages for nonsupervisory workers (gold) to show that in real terms, car prices are actually *lower* than just before the pandemic (interest rates for car loans are another issue!).

Every month I check the detailed breakout for “problem children,” I.e., sectors that have increased in price by 4% or more YoY. This month it once again included several minor irritants including non-alcoholic beverages (something that has been very apparent at grocery stores) and tobacco. Another big irritant is hospital services, now up 6.0% YoY. 

Another recent problem child for inflation had been transportation services (blue), mainly vehicle parts and repairs as well as insurance. Of these, only repairs and maintenance (red) are still problematic, as while they only rose 0.1% in January following a -1.3% decline in December, they remain higher YoY by 4.9%:

Electricity prices, which have become a significant problem, likely a side effect of the building of massive data centers for AI generation, declined -0.1% in January, but on a YoY basis are up 6.3%, the highest increase since 2008 except for the shutdown kludge and the immediate post-pandemic inflation. Additionally, piped utility gas increased another 1.0% in January, and is up 9.8% YoY:

As I wrote in the last few months, the electricity issue has already created a backlash, and I expect that backlash to intensify.

In conclusion, this was a tame consumer inflation report, driven by disinflating shelter costs and declining energy costs, although I would continue to treat the YoY headline and core numbers with caution, since they both remain affected (probably by about -0.2%)  by the situation with shutdown shelter kludge. Last month I concluded that “More likely YoY inflation is roughly steady in the 3% range, above the Fed’s target and with employment growth dead in the water.” This month it declined from that range, which would suggest that the weak labor market may also be having an effect. Whether this CPI decline in inflation continues, or is a passing artifact of the sharp recent decline in gas prices, remains to be seen.

Leading sector benchmark job revisions were almost all seriously negative

 

 - by New Deal democrat

Before I get to the main point at hand, let me make a quick note about this morning’s existing home sales report for January: it was more of the same. Sales remained within the sideways range they have been in for nearly the past three years; prices were nearly flat YoY, up only 0.3%; and inventory was above its post-pandemic levels but well below pre-pandemic levels. 

But on to the main course. I have seen a surprising amount of commentary on the Seeking Alpha investment site that yesterday’s jobs gain of 131,000 for January means that employment is on the upswing, completely neglecting that one month does not make a trend, that revisions have been relentlessly downward, and that January is perhaps the most difficult month for the BLS to accomplish seasonal adjustments — in January there were 2,649,000 layoffs! It’s just that the adjustment mechanism expected even more.

By far more important for the trend, and in particular the trend for the leading indicators within the jobs report, were the revisions to the past 12+ months of data. And as we saw from the headline adjustment, it was very large and very bad. So let’s start there, and then go through the most important leading sectors and metrics.

The total adjustment over the relevant data was nearly a -1,000,000 jobs. For the year 2025, the adjustment was just over -400,000, causing a previous 584,000 gain to turn into only a 181,000 gain, for an average of only 15,000 jobs added per month:

Even worse, for the eight months from April through the end of the year, a grand total of only *12,000* jobs were added, and no that’s not a typo. That’s 1,500 jobs per month! That’s about as close to recessionary as you can get without actually being in one (that we know of, at this point).

So let’s turn to the leading sectors, starting with manufacturing. There a -166,000 decline through December since Mary 2024 turned into a -251,000 decline, before its very slight 5,000 increase in January:

Next, here is construction. There, a slightly increasing trend throughout the year that added 14,000 jobs turned into a declining trend through October that ended up with a net -1,000 decline for the year:

But even the rebound since October disappear when we look at the even more significant residential construction sector. There, an increase through March followed by a slightly declining trend thereafter, resulting in a -1,400 decline for the year turned into a nearly relentless decline since March 2024 that ended with a -12,900 decline during 2025:

The entire rebound in construction was because of nonresidential building construction (and asociated specialty trades, not shown below):

Through October of last year revisions added 3,700 jobs, and then 12,000 more since.

For the goods producing sector as a whole, the -90,000 decline from its April peak through December turned into a nearly relentless-184,000 decline from a peak in July 2024 through last October, before increasing 49,000 since (again, all due to nonresidential building construction and associated specialty trades):

In short, *all* of the leading employment sectors of the economy declined during 2025. The only significant leading indicator in employment that remained postive was the average workweek in manufacturing, but even that did not improve:

Finally, let’s turn to aggregate nonsupervisory payrolls. We won’t know what the “real” number was for January until we get tomorrow’s CPI report, but since there was a nominal 0.8% gain last month, it is likely the “real” number will be positive as well. Here the revisions subtracted roughly -1% from the previous trend, but retained an almost identical positive trajectory:

Decomposing the metric, revisions indicated a -0.6% decline compared with the previous index for aggregate hours worked:

But the previous vintage showed a 0.7% gain for the year, which was reduced to 0.4%, but still a gain.

This further compensated for by a 0.2% increase in average hourly earnings over the year ending in December:

In other words, while the absolute number for aggregate payrolls was revised downward, the upward *trend* remained intact. That, along with the intract trend of increased average weekly hours in manufacturing, were the sole leading positives that came out of the benchmark revisions. All of the others were negative.

This feeds into the dominant “K-shaped economy” narrative which I believe is correct: the AI data center boom has led to a stock market boom, which - aside from being a likely source of the increase in nonresidential construction employment - has been feeding a “wealth effect” increase in spending by the top 10%-20% of consumers.

Unresolved post-pandemic seasonality likely continues in jobless claims

 

 - by New Deal democrat

Unresolved post-pandemic seasonality likely continues to rear its head. This is a probable explanation for yesterday’s strong monthly gain in employment, and it appears to be behind the trend in this morning’s jobless claims report as well. 

Later this morning as promised yesterday I will discuss at some length the nature and implications of the revisions to the last 12+ months’ employment data in yesterday’s jobs report. But first, let’s take our usual look at weekly jobless claims. 

Last week initial claims declined -5,000 to 227,000, while the four week moving average increased 7,000 to 219,500. With their typical one week delay, continuing claims rose 21,000 to 1.862 million. The below graph shows the last three years to highlight the post-pandemic seasonality issue:

In case it isn’t apparent immediately, for the last three years claims have risen from lows at the beginning of each year towards midyear, and then declined during the second half of the year. That appears to be happening again this year so far.

Which is yet another reason that I pay more attention to the YoY changes in this data. So measured, initial claims were higher by 4.5%, the four week average higher by 1.0%, and continuing claims by 1.3%:

This is the second week in a row that the data has been higher YoY, after a steady stream of lower YoY readings that began last July. It’s too soon to know if this is the beginning of a change in the trend or not, but it at least merits further attention. At the same time, unless readings go higher YoY by over 10%, it does not suggest economic contraction ahead.

Finally, particularly in view of yesterday’s -0.1% decline in the unemployment rate, let’s update the graph of comparison of that with initial and continuing claims, as to which there is a 60 year history of the latter leading the former:

The decline in claims that occurred all last autumn did indeed show up in the decline in the unemployment rate, with the important caveat that the annual revisions in the Household Survey data which gives rise to that rate were delayed until next month, so the numbers might change a little.

January jobs report: superb monthly gains, but the birds came home to roost for 2025

 

 - by New Deal democrat

This is the month the birds came home to roost, at least for the year 2025. While the month over month numbers were almost all positive, some strongly so (a repeat of what we saw last January as well, so beware unresolved seasonality), the benchmark revisions were brutal. Which is likely what the Administration was telegraphing in bright neon flashing lights the past few days. In particular, the *entire* gains for 2025 were reduced from 584,000 to 181,000 - an average of only 15,000 jobs gained per month. Also, the normal yearly revisions to the Household Survey, which gives us things like the unemployment rate, did not take place as usual this month, but have been delayed until next month. 

As per usual, I am going to report on the monthly changes below. But I anticipate there will be *much* more to say once I have digested the revisions for all of the important leading numbers. 

Below is my in depth synopsis.

HEADLINES:

• 130,000 jobs added. Private sector jobs increased 172,000. Government jobs declined -42,000. The three month average rose to +73,000.
• The pattern of downward revisions to previous months continued. November was revised downward by -15,000 to +41,000, and December was revised downward by -2,000 to 48,000, for a net decline of -17,000. 
• The alternate, and more volatile measure in the household report, rose by 528,000 jobs. On a YoY basis, this series increased 689,000 jobs, or an average of 57,000 monthly.
• The U3 unemployment rate declined -0.1% to 4.3% compared to its recent high of 4.5%.
• The U6 underemployment rate declined -0.4% to 8.0%.
• Further out on the spectrum, those who are not in the labor force but want a job now declined by -399,000 to 5.809 million..

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. These were almost all very positive:

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.3 hours to 41.4hours, now down only -0.2 hours from its 2021 peak of 41.6 hours.

• Manufacturing jobs rose 5,000.
• Truck driving jobs declined -4,300.
• Construction jobs rose 33,000.
• Residential construction jobs, which are even more leading, rose 300.
• Goods producing jobs as a whole rose 36,000. 

• Temporary jobs rose 9,100.
• The number of people unemployed for 5 weeks or fewer declined -134,000 to 2,155,000.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.12, or +0.4%, to $31.95, for a YoY gain of +3.8%, a rebound from its post-pandemic low of 3.6%. This continues to be significantly above the 2.7% YoY inflation rate as of the most recent report.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers rose 0.4%.

• The index of aggregate payrolls for non-managerial workers rose 0.8%, and is up 5.1% YoY.

Other significant data:

• Professional and business employment rose 34,000.
• The employment population was unchanged at 64.8%.
• The Labor Force Participation Rate increased +0.1% to 62.5%.

SUMMARY

On a monthly basis, this was a very good report. Almost everything moved in the positive direction. In fact, the only negatives were a decline in trucking jobs and the continuing drumbeat of downward revisions to previous months. Everything else — positive, coincident, and lagging indicators of the employment market — were positive. 

But before you break out the champagne, keep in mind that the revisions to the past 12 months were very bad. For all of 2025, less than 200,000 jobs were added. Even with this month’s good report, the 12 month increase was only 359,000 jobs, or an average of 30,000 per month.

I’ll have more to say either later today or over the next few days once I break out the revisions for each significant statistic.

Real retail sales turn down monthly and YoY in December, boding poorly for employment

 

 - by New Deal democrat

Real retail sales, one of my favorite broad-economy indicators, was updated through December this morning — still stale by one month, as under normal circumstances January’s numbers would have been released this week. 

Still, with consumer spending being about 70% of the entire economy, this is one of the most important economic reports of the month, and along with real personal spending, the two best measures of that sector. Further, because of their leading albeit noisy relationship with employment, they are particularly important right now, with job creation on the verge of turning down. 

Nominally, retail sales were unchanged in December, after a downwardly revised +0.5% in November. After taking the monthly 0.3% increase in prices into account, real sales were down -0.3%. Since there was no October CPI report, the best we can say about November is that in real terms sales (blue in the graph below) were higher by 0.2% compared with September:

But so calculated, real retail sales in December were down -0.4% from their September peak. Further, if you believe, as I do, that the shutdown shelter kludge removed about 0.2% from consumer inflation during the September-November period, then the comparison becomes similarly worse.

Note that the above graph also shows the similar but more comprehensive measure of real personal spending on goods (gold), which did make a new high as of its most recent report for November. 

Beyond that, real retail sales turned back negative YoY for the first time since September 2024. Going back 75 years (although I won’t bother with the long term historical graph), a decline in YoY real retail sales has almost always meant a recession (but both the obvious exception in 2023!):

This is particularly salient because as I wrote above consumption leads employment. With the YoY comparison deteriorating in late 2025 and now negative, needless to say this bodes poorly for employment in the early months of this year.  Here is the update of YoY real sales and real personal spending on goods (/2 for scale) together with employment (red):

Last month I concluded that “This sharp deceleration in YoY growth in consumption forecast the slide in employment, and suggests that the jobs reports in the next several months will get no better.” This month’s report adds to the evidence. We’ll find out if that was true in January tomorrow.

Expect shelter inflation to continue abating in the next few CPI reports

 

 - by New Deal democrat

There’s no significant economic news until Wednsday’s jobs report, as to which Scott Bessent gave an interview this morning on CNBC which amounted to, “Don’t Panic!!!” Which I am sure inspires confidence in everybody (I’ve been expecting downward revisions to much of last year as part of the annual benchmarking, so that could be primarily what we will see).

Anyway, another important report later this week will be an updated CPI, as to which the important dynamics are shelter (where I’ve been expecting disinflation) and all other components (as to which I’ve been expecting re-inflation).  In any event, the BLS finally updated its “New-“ and “All Tenants Rent Index” last week. 

To recapitulate, the “New Tenants” index is very leading, but very noisy; whereas the “All Tenants” index is less leading, but generally does follow the “new tenants” index, but leads with far closer correlation the shelter component of CPI.

In Q2, the new tenants measure fell off a cliff, with an actual negative YoY number, at -2.4%, while the All Tenants component remained  positive, at +3.3% YoY. As per above, both led the shelter component of CPI:

In the Q3 report released last week, the “New Tenants” component rebounded to +1.2%, while the “All Tenants” component disinflated further, to 2.9% YoY:

Unfortunately, I haven’t been able to find a graph showing the updated “All Tenants” component, which is why I showed you the first graph above.

As I’ve been updating over the past several months, the FHFA and Case Shiller repeat home sales indexes (not shown) have been at nearly 15 year lows in the vicinity of +1.5% YoY for the past few months. The latest New- and All-Tenants Rent index confirms that disinflation in the rental market.

Because both of these lead CPI for shelter with a substantial delay, this is potent information suggesting that this important component of the CPI is going to continue to show slowing inflation from its last reading of +3.2% YoY (itself a 4 year low) in the months ahead.

Weekly Indicators for February 2 - 6 at Seeking Alpha

 

 - by New Deal democrat

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

The main movement this week was in the speculative commodity or asset area, where Bitcoin crashed and gold and silver also broke trend, taking down the broad commodity baskets with them.

But as has been true for the past number of months, it really has been the case that “the stock market is the economy,” as paper wealth gains drive real spending by the top 10% of so of consumers.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and bring me a penny or two to buy my lunch.

December JOLTS report shows stabilizing at near stall speed, despite one negative “soft data” outlier

 

 - by New Deal democrat

I’m glad I waited a day to write about yesterday’s JOLTS report for December, because I got to read a lot of other commentary on the report, which convinced me to add some additional commentary about the entire JOLTS series. 

Let’s start with the fact that it was not “stale” inasmuch as the report was only delayed by two days. Still, it was for December, so a look in the rear view mirror. Secondly, too much commentary continues to focus on the “soft” job openings number, which over the course of its history has increased far more than any of the other series, as shown in this graph:

There are simply thousands of phantom job postings that are either permanent or designed to convince people that companies are hiring when they really aren’t. It has been a secular trend at least since the Great Recession. 

A second issue is that the monthly variations with all of the series are very noisy. For example,  for most of 2025, in contrast to much other data in the jobs sector, the JOLTS reports had been very much consistent with a “soft landing” jobs scenario. Then in October, all of the numbers were strongly recessionary. At the time I wrote that I would want confirmation for at least one or two more months before hopping on that bandwagon. And indeed, between revisions and improvements in November, October now very much appears to have been an outlier.

Similarly, yesterday there was a fair amount of commentary about a big decline in the job openings data to a new post-pandemic low. So let’s take my usual look at job openings (blue), hires (red), and quits (gold) all normed to 100 as of just before the pandemic:

 

The “soft” data of openings did decline -386,000 to 6.542 million, as indicated above a new low since the pandemic. On the other hand, actual hires rose 172,000 to 5.293 million, in line with the monthly average over the previous six months. Quits also rose 11,000 to 3.2.04 million, also solidly in their 18 month recent range. In other words, with the exception of openings, what we see is a sideways trend in all of these for the past 18 months, with a slight downward step in the past 6+ months.

On the negative side, layoffs and discharges increased 61,000 to 1.762 million, again right in the middle of its average for the past 6+ months, which range has been slightly higher than earlier in 2025:

In short, the numbers paint a picture of an employment sector that weakened in the second half of 2025, compared with the first half, but with no ongoing declining trend.

Now let me get to some additional commentary about the series as a whole. 

1. Historically, job openings have been much more volatile than hires, but on a YoY basis tend to cross the “0” threshold from expansion to contraction and visa versa contemporaneously with hires:

2. On a YoY basis, the one series for which there is some evidence of a slightly leading characteristic is layoffs and discharges (purple, inverted in the YoY graph below; all series averaged quarterly to cut down on noise):

Here is a close-up of the last year of all four data series YoY, monthly. Again, layoffs and discharges are inverted so that an increase shows as a negative number:

With just a few exceptions (March, September, November), the trend in all of the series has been negative, although quits has been positive for the past several months. This suggests a labor market which has continued to decelerate, but on a very slow basis, fitting a “soft landing” scenario.

3. Although layoffs and discharges may be slightly leading (and as I wrote a month ago, they generally lead the unemployment rate and continuing jobless claims), they are quite noisy as compared with the monthly average of initial jobless claims, which also generate fewer false signals. First, here’s the historical look:

And here is the post-pandemic look:

In other words, initial jobless claims YoY, especially as averaged monthly or on a 4 week average basis, continue to be the better indicator, and they are much more timely.

4. Finally, as I have pointed out before, the quits rate (left scale), which typically leads the YoY% change in average hourly wages for nonsupervisory workers (red, right scale), held steady in December, also in the middle of its range for the past 12+ months:

This suggests that nominal wage growth, is likely to remain stable with little variation in the next few months. at least this month. 

To conclude, December’s monthly report continued to be consistent with a “soft landing” despite the noisy downside lurch of job openings. Again, I would want to see another month or two of confirming lower readings before treating this as much other than noise in a “soft data” indicator. To the extent there is leading data in the JOLTS series which helps us forecast, as indicated just above the improvement in Quits suggests nominal wage growth will continue on trend. And layoffs and discharges suggest further slow deceleration in the employment market, but the much less noisy and current initial jobless claims data disagrees, suggesting stability albeit at a near stall over the next several months

Jobless claims rise, but still mainly lower YoY; post-pandemic residual seasonality still at work?

 

 - by New Deal democrat

The December JOLTS report that was delayed from Tuesday is scheduled to be released later this morning. I may cover it today, or may delay until tomorrow, since there won’t be a jobs report. In the meantime, let’s take our weekly look at jobless claims which, to reiterate, are a good short leading indicator for the economy, and specifically for the unemployment rate.

One issue I have talked about almost every week in the past several years is residual post-pandemic seasonality, whereby even after adjustment claims have risen in the first half of the year, and declined in the second half. Which comes in handy today, because initial claims rose 22,000 to 231,000, except for one week the highest since early November. The four week moving average rose 6,000 to 212,250, the highest since the end of December. And with the typical one week delay, continuing claims rose 25,000 to 1.844 million, which is still one of the three lowest readings since last April:

The above graph shows the last three years to help show the residual seasonality I have often spoken of.

On the YoY basis more important for forecasting purposes, initial claims were up 4.1%, but the four week average remained lower by -2.5% and continuing claims were down -1.6%:

Thus, despite the noisier one week number, the trend remains positive. Additionally, this adds to the evidence that post-pandemic residual seasonality remains at work.

Finally, although we won’t get the January jobs report until next week (unless something changes again), here is a look at initial and continuing claims, averaged monthly (blue and gold, right scale), compared with the unemployment rate (red, left scale) for the past three years:

Initial and continuing jobless claims have generally trended downward since September. That strongly suggests that the 4.5% unemployment rate in the November jobs report was the high water mark, and that the unemployment rate will trend downward over the next several months (although it might remain at 4.4% next week).

ADDENDUM: I was asked over the weekend at Seeking Alpha why initial claims are so low, even with job growth almost completely stalling. One possible explanation was the effect of ICE immigration raids on immigrant communities — but if that were the case, I would expect especial declines in the States targeted by ICE so far; mainly California, Illinois, and Minnesota. But the state by state breakdown does not show any such outliers. The best explanation is that demand (mainly by the top 10% of consumers) has still been growing, so there has been little incentive to lay workers off; but on the other hand, uncertainty due to the chaos in Washington, plus in some sectors an impact from AI on hiring has led to caution.

January ADP private employment and ISM services reports show increasing stagflation in a weakly growing economy

 - by New Deal democrat

[Administrative note: the good news is, graphs are back! The bad news is, it is extremely glitchy and energy consuming, so my fingers are still crossed. Basically it boils down to Apple and Google don’t want to interact with one another, and have to be repeatedly dragged, kicking and screaming, into a converation. AARRGH!!]

With official economic data delayed once again by the brief government shutdown, once again we must rely on private sources to at least sketch the contours of the economy.

This morning we got two important portions of that sketch. First, the ADP private employment report indicated an increase of only 22,000 jobs in January (blue), with only 1,000 of those in the goods-producing sector. Within that sector, manufacturing shed another 8,000 jobs (red), while construction added 9,000 (gold):

In the past year, only 280,000 private sector jobs have been added in total in the entire economy, an average of only 23,000 per month. The construction sector added 43,000, while manufacturing declined every single month and lost a total of -159,000.

But if the first report of the morning confirmed a moribund, if not outright contracting employment sector, the other news, in the ISM services report, showed that the 75% or so of the economy that is that sector continued steady if not strong expansion. The headline number was unchanged at 53.8, while the three month average was 53.4 (recall that any number above 50 means expansion) [Note that in each graph below I also show the equivalent sector reading from the ISM manufacturing report earlier this week in gray]:

 

New orders decelerated -3.4 to 53.1, with a three month average of 54.2:

Employment also decelerated by -1.4 to almost a complete halt at 50.3, while the three month average also came in at 50.3:

Note that the ISM manufacturing and services reports are in almost complete accord with the ADP private payrolls report. Both showed weak, but positive, employment growth in the services sector, while the nearly stagnant goods sector and contraction in manufacturing in the ADP report was similar to the continuing contraction indicated earlier this week in the employment reading from the ISM manufacturing report.

Finally, prices paid increased 1.5 to 66.6:

The (relatively) good news is that this is still well below the readings from earlier last year. The unequivocal bad news is that prices paid in both the manufacturing and services sectors showed marked increases over the course of the last year. In other words, inflationary pressures have been building in the pipeline at the same time as employment growth has stalled.

Finally, here are the three month averages for both the headline and new orders indexes, economically weighted at 75% for services and 25% for manufacturing:

Headline: services 53.4, manufacturing 49.5 -> economically weighted average 52.4

New orders: services 54.2, manufacturing 50.6 -> economically weighted average 53.3

Recall that I use this economic weighting as a short leading forecast for the economy as a whole; and needless to say this indicates that a steady if not strong expansion is likely in the next few months, despite the weakness in the jobs environment.

And speaking of job, when the official January report is released, I will be looking for a continued stall or even decline in goods-producing jobs, but also an increase if a lackluster one in service providing jobs. Note that the report will also include adjustments in last year’s numbers as well.

The State of Freight is Mainly Recessionary

 

 - by New Deal democrat

This morning we were supposed to get an actual, on-time JOLTS report for December. But with Pastor Mike Johnson having done what he does best, i.e., keeping the House of Representatives out of session while critical deadlines pass, the BLS announced yesterday that several reports, including both Friday’s jobs report for January, and the aforementioned JOLTS report, have been delayed. This is simply no way to run a first world government.

So in place of what had been scheduled, let’s take a look at the state of freight. To cut to the chase, it remains at least borderline recessionary.

To begin with, although heavy duty truck sales rebounded somewhat in December, up from their post-pandemic low of 336,000 annualized in November to 392,000, even on a three month average basis they are down -3.4% from their peak in 2023. As the graph linked to below shows, with the exceptions of 1996 and 2016, such a decline has otherwise in the past always meant a recession is near: 

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1RctU&height=490 

What hasn’t happened yet (not shown above) is for a significant decline in light vehicle sales to also decline significantly.

Another important way of looking at the components of transportation is the Truck Tonnages Index (blue in the graph linked to below), Freight Railcar Index (red), and Vehicle Miles report (gold), all of which are amalgamated into the Freight Tansportation Services Index (black), which was just reported yesterday showing a 1.2% increase in November:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1Rcsm&height=490 

Rail freight carloads have been in a secular declined for several decades, that that slow decline has generally continued since the pandemic, after a spurt in 2021. Meanwhile, truck tonnages have also declined. What has increased, and has steadied the overall Index, is vehicle miles traveled.

I have found that the best way to look at the Freight Transportation Services Index is to compare it with the privately compiled Cass Freight Shipments Index, both of which are shown in the graphs below. Because the latter is not seasonally adjusted, both are shown in YoY% terms. Additionally, in the past the Cass Index has been too volatile to the downside to be useful on its own as a recession predictor. So in both graphs linked to below, 5% is added to the calculation, because a Cass value of a bigger YoY decline than -5%, that continues for several months, and coincides with a negative YoY reading from the Freight Transportation Services Index, has been the best combined indicator.

First, here is the long term historical view before the pandemic:

And here is the recent, post-pandemic view:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1RcsU&height=490 

The Cass Index has indeed been lower by more than -5% YoY for the past six months. But the Freight Transportation Services Index has not confirmed the downturn, as it has been positive YoY for all but one of those months (note the Cass index has been updated through December while the government index has not).

Until the official index turns down for several months, the combined indicator while anemic is not showing recession.

ISM manufacturing for January breaks out to the expansionary upside, with a sidecar of stagflation

 

 - by New Deal democrat

As Although it ended almost three months ago, there are still many economic series that have not caught up, including construction spending, which would normally have been reported this morning for December. As of now, it is only updated through October, and November and December are not expected to be reported for several more weeks. Which continues to mean that the ISM manufacturing and services reports, as well as the regional Fed manufacturing and services reports, are our most complete contemporary picture of the economy.

Last month I wrote that the “ISM manufacturing report for December confirms what the regional Fed reports were telling us: the forward-looking situation is improving,” and boy-howdy did that ever continue in January! 

In more detail, the headline number rose 4.7 from 47.9 to 52.6 (recall that 50 is the dividing line between expansion and contraction). This is the highest reading since August 2022. The three month average, which I use for forecasting purposes, rose to 49.5, still slightly contractionary, but the highest average since one year ago:

 https://tradingeconomics.com/united-states/business-confidence 

The more forward looking new orders component exploded from 47.4 to 57.1, the highest reading sinc February 2022. The three month average is 50.6, expansionary for the first time since the end of 2024:

 https://tradingeconomics.com/united-states/ism-manufacturing-new-orders 

On the other employment continued to contract, although it too rose from 44.8 to the “less bad” 48.1. The three month average is 45.7, still contractionary, and equivalent to several readings last spring:

 https://tradingeconomics.com/united-states/ism-manufacturing-employment 

This suggests a further decline in goods-producing jobs when we get the January employment report at the end of this week.

The other big concern has been prices, particularly in view of the tariff situation. The diffusion index for these rose slightly from 58.5 to 59.0, lower than the readings approaching 70 last spring, but higher than all but one reading in 2023 and 2024. Their three month average is 58.7:

 https://tradingeconomics.com/united-states/ism-manufacturing-prices 

This suggests that inflationary pressures remain very present.

As I have noted in all of these monthly reports for the past year, for the economy as a whole the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. In the non-manufacturing report, the averages of the last two months for the headline and new orders numbers have been 55.2 and 55.5, respectively. 

If the services index, which will be reported on Wednesday, is in line with those numbers, it will suggest, as did the regional Fed manufacturing indexes for January, that this important sector is improving, and that the economy remains in an expansion, which may be improving as well. The caveat remains the important stagflationary pressures which have been showing up in almost all the recent data.