The post-pandemic affordability crisis and the election of 2024

 

 - by New Deal democrat

There are times when there is little new economic data of import, and not too much else to say. At other times, the import of particularly striking data on even long term historical trends could justify entire book chapters almost overnight. Right now is one of the latter. Bear with me a little bit while I lay the groundwork.

This particular moment got started when Jamelle Bouie took Michelle Cottle to the woodshed over the issue of “wokeism” in a podcast I saw reported late last week. Here’s the essence of the exchange:

Cottle: My guess is that you then completely reject the idea that we wound up with this wretched administration in part because the backlash to the excesses of woke, especially alienating young men who were like based told they were the problem, just generally speaking.

Bouie: I completely reject that for like simple reasons of like linear time. That like this administration was elected in 2024 at peak woke when like Nancy Pelosi was wearing Kente cloth, Democrats won a trifecta, right? …. I think that if you look at the 2024 election and you ask yourself, why did Trump win? The very obvious answer is he won because inflation was high and people didn't like it. And people backfilled a lot of cultural reasons. [P]eople [we]re mad about inflation, and that directly tracks with President the President's declining approval.”

G. Elliott Morris amplified that in a substack article, which I excerpt below:

The reality of the 2024 election is that it was going to be hard for a Democrat to win, regardless of who they were or how they campaigned. The broader economic and political conditions were so favorable to Republicans that you would have expected Trump to win about 90% of the time, regardless of campaign or candidate effects.

Political scientists have been pointing out for decades that you can predict presidential elections reasonably well using just two pieces of information: how voters feel about the incumbent president, and how voters feel about the economy. There are many variants of this model — such as the “Bread and Peace” model (Douglas Hibbs), the “Time for Change” forecast (Abramowitz), Ray Fair’s “Fair” model, and Wlezien/Erikson’s work with “Leading Economic Indicators” — but all use a similar set of economic and political “fundamentals” to predict the result of the election.  

….

In 2024, Kamala Harris received about 49.3% of the two-party vote. The model — fit on data from 1956 through 2020, with 2024 held out — predicted she’d get about 48%, with an 80% prediction interval of 46.6% to 49.9%. Harris’s vote share lands on the upper end of this range, but still squarely inside of it.”

Here is the model that Morris is talking about:

He concludes: “[G]enerally speaking, ‘inflation was high, and Harris was going to lose anyway’ is a much better explanation for 2024 than anything else in isolation.”

That is a very unpopular opinion in many progressive quarters, especially when you look at the breakdown in the 2024 vote by race. It is very obvious that T—-p was popular with, and remains generally popular with, Whites, and in particular White men. But elections are decided at the margin. Rock solid bigots are going to vote bigot, no matter what. More broadly speaking, people tend to have unmovable opinions about what are generally called “social issues,” vs. more malleable opinions about the broad economy. And so generally it is the latter group of people who wind up deciding national elections. And incidentally, I tracked both the “bread and peace” and “leading economic indicators” models during 2016, and both - unlike the political pundity - forecast a very close election, with Clinton getting slightly more votes. She did, but lost in the Electoral College.

Even during 2024, that the economy was not actually doing all that well in terms of delivering goods to the people, broadly measurered, was something I argued many times.

What are the two most important purchases that average consumers ever make? Houses and cars. And younger people in particular were priced out of the market during most or all of Biden’s term.

Here is what happened to the average price of existing homes, as measured by the FHFA repeat sales index (blue) vs. average hourly nonsupervisory wages (red) normed to 100 as of just before the pandemic:

The average price of a house increased 38.2% by June 2022, while average wages were only up 14.5%. And that imbalance has never resovled. Even as of this past June, house prices were up 57.8% since February 2020, while wages were up 34.7%.

Here’s the same comparison applied to the average of new and used car prices:

At their peak difference, in February 2022, vehicle prices were up 28.4% compared with just before the pandemic, vs. 12.2% for wages. The difference did not finally resolve until May 2024, when both were up 24.8%.

And that’s not all, because the interest rate to finance mortgages (purple) and vehicle loans (orange) increased sharply as well [note: the latter are dots because the data is only reported once a quarter]:

Just before the pandemic, mortgage rates averaged 3.47%. At their peak in October 2023, they were 7.62%. Vehicle loans averaged 5.29% just before the pandemic, and peaked in February 2024 at 8.65%.

Finally, here is what the graph of monthly real median household income, compiled by Motio Research, looked like through December 2024:

Real median household income languished below its pre-pandemic 2019 peak all the way until the end of 2023. By Election Day 2024, it was only about 1% higher.

It’s true that job creation was red hot and even white hot throughout Biden’s term. And it is also true that real wages rose stoutly from their June 2022 trough linked to gas prices during the initial Ukraine invasion by Russia. But it is not true that average consumers, and in particular younger ones, prospered during Biden’s term - particularly as to the items they needed to be most affordable - at least not until 2024, by which time it was too late.

There is much more to say of a much broader issue that is led into by the above. For now, let me just give you a quick foretaste. The below is the updated graph through last Friday of corporate profits reported to Wall Street through last Friday:

At an index value of 110.26, they are almost 50% higher than they were even one year ago. And they are almost double their index value of 54.45 from only three years ago, in Q2 2023.

Weekly Indicators for August 24 - 28 at Seeking Alpha

 

 - by New Deal democrat

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

The big story continues to be the upward move in Treasurys. The spread that became most salient this week is the very wide 0.73% spread between the 2 year note and the Fed funds rate. In the past this has normally suggested that the Fed has gotten “behind the curve” and will hike rates soon. In other words, another sign of an “inflationary expansion.”

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 in lunch money in return for collecting and organizing the data for you.

The “gold standard” QCEW jobs report suggests employment all but stalled during most of last year and early this year

 

 - by New Deal democrat

The Quarterly Census of Employment and Wages (QCEW) is “the gold standard” of US employment measures. It is an actual census of 95%+ of all employers, who must report new employees for purposes like unemployment and disability benefits. Because of this, it is used for the final revisions, a/k/a benchmarks, for monthly jobs numbers, which are estimates based on surveys. Its drawbacks are that it is not seasonally adjusted, and is delayed months after the end of the quarter.

This morning the QCEW was updated for Q1 of this year, and last year’s preliminary QCEW numbers were finalized. The (very lagging) news was mixed.

The first piece of bad news was that the YoY comparisons through the first nine months of 2025 were even worse than currently shown by the monthly nonfarm payrolls data. The good news is that the last three months of last year were better. But then the second piece of bad news is that - preliminarily - the good employment reports for the first quarter of this year were considerably overstated.

Unfortunately, FRED doesn’t include the national QCEW numbers in its vast graphic database, so I will have to show charts and a few lists. But let me start by comparing the YoY% changes in jobs as shown in the non-seasonally adjusted (blue) and seasonally adjusted (red) nonfarm payrolls reports for last year through this March:

Now here is the chart of the YoY% changes as shown in this morning’s update to the QCEW:

Here is the list comparing the two as of the end of each quarter since the end of 2024. The first number is the nonfarm payrolls YoY% value; the second is the QCEW value:

Q1 2025  0.6%  0.5%

Q2 2025  0.5%  0.4%

Q3 2025  0.4%  0.2%

Q4 2025  0.1%  0.3%

Q1 2026  0.2%  0.1%

Note that, with the exception of Q4 of last year, the QCEW indicates that YoY job growth was -0.1% or 0.2% less than indicated by the monthly payrolls reports.

In terms of the actual change in the number of persons employed, through Q3 of last year, on a YoY basis NSA payrolls showed a gain of 618,000, and seasonally adjusted a gain of 636,000; but the QCEW indicates that only 274,000 new jobs were added.

As per the above, the good news is that, as of the end of 2025, NSA payrolls showed a gain of 69,000, and seasonally adjusted a gain of 164,000. The QCEW increases that gain to 454,000.

But through the end of March of this year, NSA payrolls show a 211,000 twelve month gain, and seasonally adjusted a gain of 164,000. But on a preliminary basis the QCEW only shows a 12 month gain of 86,000 jobs. [ADDENDUM: The BLS has updated their preliminary benchmark to indicate that -69,000 fewer jobs were added in the first three months of this year than as of the last report. That is still a 12 month gain of 194,000 jobs.]

How bad is a 12 month gain of only 86,000 jobs (or 7,000 a month)? The below graph of the entire nonfarm payrolls series going all the way back to WW2 up until the pandemic indicates that with the exception of one month in 1952, such a paltry YoY gain has only been seen during recessions:

In summary, the finalized 2025 QCEW employment numbers add credence to the notion that there was a “mini-recesson” during the second half of last year. And they also suggest, preliminarily, that this year may have had a shakier start than we have heretofore believed. This is also more evidence for the “K-shaped” economy, in which employment has all but stalled and income has declined; but sales and production are moving ahead like a normal expansion.

Heavy truck sales and durable goods orders also confirm an expansion is underway

 

 - by New Deal democrat

There was more evidence yesterday that, far from sliding into recession, this year we came our of last autumn’s “mini-recession” and are in an inflationary expansion now.

Both metrics have to do with durable goods. In general, durable goods are the second items to turn down or up after housing. They can be noisy on a month to month basis, but at present that’s not an issue.

In July, durable goods orders by manufacturers rose 1.1%, and core capital goods orders rose 0.2%. Both have been in a clear rising trend since the middle of 2024:

Much of this is likely related to AI data center building, so I question its durability; but for now the trend is clear.

Secondly, motor vehicle sales for July were reported by the BEA. Here there was a slight decline in light vehicle sales, down -1.4% for the month, and a sharper one in heavy truck sales, down -9.5%. But as the below graph shows, the trend since late last year is sharply higher for trucks, and moderately higher for light weight passenger vehicles:

In fact, on a YoY basis (not shown), sales of heavy weight trucks are higher by 3.6%.

The historical graph below shows why I pay particular attention to heavy weight truck sales:

They are much less noisy than passenger vehicle sales, and tend to turn down earlier, and higher later, than passenger vehicles. Note that there has *never* been a time when heavy weight trucks sales have turned higher YoY when a recession has closely followed. Rather, they tend to confirm that an expansion is underway.

Jobless claims continue very positive; here’s the historical record of why I pay so much attention to them

 

 - by New Deal democrat

Let’s take our usual weekly look at jobless claims. Why do I always do this? Because they are a very good and very timely short leading indicator with nearly a 60 year history; particularly when paired with YoY stock prices as my “quick and dirty” economic forecast.

To the numbers: last week initial claims declined -4,000 to 203,000, continuing their string of extremely low numbers, especially when compared with population growth over the last 60 years. The four week moving average increased 1,250 to 205,500, also very low historically. And continuing claims, with their typical one week delay, declined -18,000 to 1.778 million:

As per usual, it’s the YoY% changes which are more important for forecasting purposes. Let me show you why, with the long term historical YoY% changes dating back to the late 1960s:

The blue line (initial claims, averaged monthy) *always* rises and falls before the unemployment rate (red). It is simply an excellent leading indicator for the unemployment rate, with a 60 year history. Continuing claims (gold) are more coincident with the unemployment rate, but have the virtue of being less noisy.

Now here is the post-pandemic YoY look at jobless claims:

As of this morning’s report, initial claims are lower 11.4% YoY, the four week moving average down -9.9%, and continuing claims down -8.4%. These are extremely positive numbers for the economy.

Here is how initial and continuing claims YoY compare with the unemployment rate post-pandemic:

Jobless claims turned lower YoY about 6 months before the unemployment rate followed, and the suggestion is that there will be even better YoY comparisons with the unemployment rate.

Here’s the look in absolute terms:

Jobless claims are forecasting that over the next several months the unemployment rate will move even lower than its last 4.1% reading, or at worst remain steady.

And with stock prices higher 18.4% YoY (not shown), there is almost no chance of any recession in the next few month

Incomes remain recessionary and spending expansionary, as real sales increase and corporate profits soar

 

 - by New Deal democrat

Along with the employment report, real income and spending are probably the most important monthly reports as to the health of the average American household. This year there has been a real split between the income and spending sides of that ledger, which continued in this month’s report for July.

To summarize:

 1. Real income improved for the month (reflecting lower gas prices) but continues being recessionary.

 2. Real spending was tepid and in some important respects negative for the month, but continues being expansionary.

 3. The savings rate increased, possibly reflecting increased consumer caution, while real sales continued to climb.

Here’s a more in-depth look.

Real Income:

Nominally income rose 0.4% in July, and was up 3.7% YoY. But after adjusting for the price deflator (blue), they only rose 0.2% for the month and were totally stagnant YoY. Further, once we take government transfers into account (red), while the monthly change was also 0.2%, on a YoY basis they were down -0.4%. Here is what the absolute numbers look like:

The big increase in gas prices in March and April pushed incomes down, while the declines in prices thereafter have helped push them up. But they remain significantly below last year’s peaks.

Here is the post-pandemic look YoY:

As I’ve pointed out in the past few months, this historically has been recessionary. Here is the historical graph of both, showing that current YoY levels have with the exception of 2013 (when a Social Security payroll tax holiday ended) and 2022, this has always been recessionary:

Real spending:

But while the income side of the ledger is poor, the spending side remains decent. Nominally spending rose 0.2% and was up 5.9% YoY, but in real terms (blue) was unchanged for the month, but up 2.1% YoY. As I’ve noted many times in the past, the leading indicator in this data has to do with spending on goods (red), as real spending on services (gold) frequently increases all the way through recessions. In July real spending on goods declined a sharp -0.6%, but was higher 1.3% YoY, while real spending on services increased 0.3% for the month and is up 2.5% YoY. As you can see, the trend in all three continues to be higher this year compared with last year:

Real spending on durable goods historically tends to peak even before goods spending as a whole. As shown in the below graph, real spending on durable goods (blue) declined a sharp -1.4% in July, while real spending on nondurable goods (gold) rose 0.3%:

Again, the trend this year vs. last year is higher. On a YoY% basis (not shown), real spending on durable goods was higher 1.0%, and on nondurable goods higher 1.4%.

Savings, real sales, and profits:

The difference between income and spending is what is saved. And in July, the saving rate increased 0.4% to 3.0%, still very low historically. Only the era of the housing bubble and in 2022 were lower:

One month could easily just be noise. Or possibly it could mark the beginning of a consumer retrenchment due to the durability of higher inflation. The former would be unimportant, while the latter could mark the very near onset of a consumer recession.

Finally, this morning’s report also enables the update of real manufacturing and trade sales, one of the other important coincident markers used by the NBER to date recessions. They increased 0.3% continuing their uptrend:

They are higher 2.2% YoY (not shown).

Concordant with that positive sales number is the rear view mirror update of corporate profits deflated by labor costs which was updated in this morning’s second estimate of Q2 GDP. Nominally profits increased a sharp 8.9% in Q2 alone, and were up 28.2% YoY. Even after taking labor costs into account, they were up 8.6% for the quarter, and up 26.4% YoY. This is a simply astounding number as shown in the historical YoY% graph below:

Normally such big increases only happen coming out of recessions. The exceptions were the Booms of the 1960s and 1990s, as well as after the Bush tax cuts. Likely both the tax cuts in the Big Billionnaire Bust-Out Bill, as well as windfall profits in the energy sector, have played important roles here.

To sum up, this morning’s report on income and spending, as well as the sales and corporate profits reports, reinforces the picture of a consumer sector where lower income households that do not have stock holdings are suffering, while the uppermost income tiers who own soaring stocks are continuing to hold up the spending part of the equation. I expect this situation to resolve in the very near future. Either incomes will pick up, or spending will falter if and when stock prices do.

YoY repeat home sales prices continue to firm

 

 - by New Deal democrat

While the current cycle may have dispelled the notion that “housing *is* the economic cycle,” it is nevertheless an important component of the long leading indicators. And while new home construction is far more important economically, existing home sales - roughly 90% of the market - are an important determinant of pricing equilibrium in housing, and the repeat home sales indexes, by S&P Case Shiller and the FHFA, are the best indicator of same. And in the last few months, their prices have seemed to be slightly firming.

That emerging trend continued in this morning’s data. After several months of decline, the seasonally adjusted Case-Shiller National index (blue in the graphs below) rose 0.1% for the three month period ending in June, while the FHFA index (red) was unchanged [Note: FRED has not yet updated the Case Shiller data]:

Often the FHFA Index slightly leads the Case Shiller one, and that appears to have been the case this year as well. In the past several months I have noted that “there is something of a divergence showing in the YoY comparisons of the two national indexes,” as the Case Shiller national index had increased less than 1% YoY, while the FHFA Index had accelerated to a 2.0% increase. With this month’s data,  on a YoY% basis, the Case Shiller national index increased to 1.5%, and the FHFA declined very slightly to 2.3%:

As of this month, both series appear to have ending their YoY declines, although neither one shows any sign of significant YoY acceleration. In the above graph, I have also shown the YoY% change in the median price for new homes (purple, averaged quarterly to cut down on noise). These are still in a slow decline, although the moving average of the last three months has been only -1% YoY.

Next, let’s take a look at how new (purple) and repeat home prices compare with households’ buying power, by adjusting for average hourly nonsupervisory earnings in the graphs below (median household income would be better, but is updated only once a year, and average wages are reasonably close for these purposes).

The bad news continues to be that existing houses remain unaffordable compared with most times in the past 30 years. But there is some “less bad” news in that measured by both the Case Shiller and FHFA indexes, existing houses have gradually become “less unaffordable” over the past 24 months. Nevertheless, it will take considerably more inventory on the market to bring existing homes down to just their average affordability compared with the past 30 years.

Finally, let me look at something I haven’t updated in quite some time. Way back in 2021, it became apparent that the Fed was way behind the curve, since house prices lead the official shelter measure in the CPI, “owners’ equivalent rent,” by 12 to 18 months. What if any message are house prices sending the Fed now? Below is the YoY% change in the the CPI using the FHFA index (dark blue) instead of OER to measure shelter compared with “core” inflation (light blue) and the Fed funds rate (red):

So measured, the Fed remained slightly behind the curve throughout 2023-25, as both core inflation and house-price measured CPI were close to the Fed’s 2% target during that time. But this year, as both house prices firmed, and energy prices took off due to the Iran war, the house-price measured CPI increased above 3%. In other words, at very least the likely pass through from house prices into inflation counsels against any lowering of interest rates.

A deeper look at the history and sources of interest payments on the national debt

 

 - by New Deal democrat

With 10 and 30 year Treasury bonds hovering close to 20 year highs in the past week, there has been a flurry of talk about how this will hamstring any future Democratic Administration from delivering economic programs, due to the increase in how much money will be needed to pay interest on the national debt, which crossed $40 Trillion last week.

Leaving aside that some economic programs, like “Medicare for All,” would likely be more efficient and thus a net cost saving for the American people, let me focus on the raw numbers and some information on how we (recently) got here.

Let’s start with the amount of quarterly interest payments that need to be made on the debt (blue, left scale) compared with nominal GDP (gold, right scale):

At the turn of the Millennium, quarterly interest on the debt was about $80 million, while GDP was about $10 Trillion. Ten years ago, interest payments had risen to about $120 million, but GDP had increased to about $16 Trillion. There was a spike during T—-p’s first term that subsided by the time of the pandemic, but since 2022 interest rates have risen rapidly to about $300 million, while GDP has risen to $32 Trillion. 

To see the stress that might put on the federal budget, let’s divide interest payments by GDP. This tells us what percent of GDP must be devoted to interest payments:

This tells a more interesting story, because between the turn of the Millennium and the pandemic, only 0.6% to 0.7% of the budget needed to be devoted to paying interest. But in the past five years through the end of Q2 this year, that has risen to almost 1.0%. While this isn’t quite as bad as the 1.25% required during Reagan’s 1980s Presidency, it’s definitely not good.

But before you put that down to strictly budgetary issues, here’s a comparison of the interest payments to GDP ratio as above with the 10 and 30 year Treasury bond yields:

While the correlation is by no means perfect (see especially the late 1980s), in general long term interest rates and the share of GDP that needs to be paid in interest have risen and fallen roughly in tandem.

And as the below graph shows, often 10 and 30 year Treasury yields respond strongly to changes in the Fed funds rate (blue):

Since the turn of the Millennium, the long end of the bond market had not reacted strongly to Fed funds rate hikes, increasing only about 1% in both the 2005-07 and 2018-19 episodes. But they *did* react very strongly to the Fed’s rate hikes in 2022-23, rising from about 1.5% to almost 5.0% in late 2023, and remaining over 4.0% almost ever since.

Thus the biggest reason for the increase in interest payments due can be laid at the feet of the interest rate policy by the Federal Reserve.

But that isn’t the entire story, in part because the Fed itself was reacting to heightened inflation during that period (itself largely a byproduct of soaring house prices as measured with a 12-18 month delay by the official CPI measure). But in the last 18 months, a good part of the explanation can be traced to the inflationary “policies” of the T—-p Administration.

Because beginning in late 2024 the Fed started to lower interest rates. But despite that, the 10 and 30 year bond yields remained stubbornly elevated, and the 30 year has been on an increasing trend:

And below I show both the 30 year mortgage rate (blue) vs. the 10 and 30 year bond yields over the last four years, with all three normed to “0” as of the week of T—-p’s inauguration: 

 Yields have not only remained elevated, but increased first at the time of the “Liberation Day” tariffs, and then again with the onset of the iran war. This is the effect of what I dubbed “Guns and Butter 2” last week - raiding the cookie jar to pay for military adventures and upper class tax cuts.

Here (via Wolf Street) is the last 60 years of federal government deficits and (rarely) surpluses as a percent of GDP:

The era of the Reagan tax cuts stands out, as do the Great Recession and COVID stimuli. But also note that during T—-p’s first term, even before COVID, and even with a strong economy, deficit spending was rising. The same thing happened in the last two years of Biden’s term, and so far in the first two years of T—-p’s second term. It is this last episode which is ultimately unsustainable, and is likely to give rise to rising interest payments as a share of GDP, much as was the case during and after “Guns and Butter 1” during the 1960s and 1970s.

And where is the money going to have to come from to fix this problem? The below graph norms interest payments (blue) to 100 as of the beginning of T—-p’s first term, and compares that rate of increase with median household income (red), average hourly wages (gold), corporate profits (purple), and stock market prices (orange):

Only stock prices have risen at a higher rate than interest payments. Ordinary households are in no condition to shoulder further rates of increases in interest payments. Corporate profits haven’t risen at the same rate either, although those are in much better shape (and in Q2 may have increased another 10%).

The bottom line is that the US economic situation will suffer greatly if we have entered a period of accelerating interest rates and inflation. And to be clear: this isn’t the lower classes voting themselves money out of the national treasury, but rather the uppermost of the wealthy and cronies connected to this Presidency who have effectuated this biggest mafia-style bust-out even perpetrated.

Weekly Indicators for August 17 - 21 at Seeking Alpha

 

 - by New Deal democrat

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

I don’t have much to add to the conventional wisdom this week. The rise in long term interest rates to near-20 year highs, and the continued inflationary pressure from the T—-p Administration’s “policies” are the overarching story. That sound you hear is some of the birds starting to come home to roost.

As usual, clicking over and reading will bring you up to the virtual moment as to the status of the data, and reward me with a penny or two in lunch money for my efforts.

The latest on the inflationary expansion of 2026, a/k/a “Guns & Butter 2”

 

 - by New Deal democrat

Today let’s take a look at the first reads of August business activity, from the New York and Philadlephia Feds, and put those in context of our current economic and fiscal situation, which I have been describing as an inflationary expansion.

Both of those components, both the expansion and its inflationary aspects, were given further confirmation by both Fed regional districts’ manufacturing reports. 

First, here is the average of the headline number for both indices (blue) and the more leading new orders component (red):

Any number above 0 indicates expansion. For August, the headline average was 34.0 and the new orders average was 23.7. The last several months have been on par with the post-pandemic Boom in 2022. Here is further context with the long term historical graph:

Again, the past two months’ averages have been as good as the very best readings since the turn of the Millennium (as far back as the FRED numbers go). 

That’s the good news. The bad news is that inflationary pulse continued as well. Here’s the historical graph of the diffusion indices of both prices paid by producers (blue) and prices received by them downstream (red):

The current widespread pricing pressures on the incoming end, which is only partially being passed on downstream, is also as bad as at any time since the turn of the Millennium, with the exception of the post-pandemic period and the gas price-driven spike during the first seven months of the Great Recession.

The close-up of the last several years shows that the inflationary pulse began with the “Liberation Day” tariffs of April 2025, but was subsiding a little earlier this year, until the Iran war sparked a second round of more widespread price increases beginning in March:

In other words, the inflationary expansion continues.

But let me put this in some wider context as well, because it occurred to me that the T—-p Administration’s policies, with one major exception, are very similar to LBJ’s “guns & butter” fiscal policies during the Vietnam War.

Wars are expensive, and anytime a government wages one, generally it must either raise taxes (guns) or else cut other budget items, like goodies for the populace (butter). Hence, typically the choice is “guns *or* butter.” But if a government chooses to fund a war via the national credit card, and maintain its domestic priorities as well, that is the “guns and butter” approach. And both LBJ and T—-p have chosen the latter. In the case of T—-p, this also includes the Big Bad Budget Bust-out Bill’s upper income tax cuts, and also the stagflationary tariff impositions. Another huge difference is that LBJ’s “butter” was aimed at the poor and the working classes via the “Great Society” programs, while T—-p has directed a firehose of benefits to the ultra-wealthy and his cronies while (literally) taking the food out of the mouths of the food-insecure.

So now let’s look at what happened to interest rates on the 10 year Treasury (blue, left scale) vs. YoY consumer inflation (red) and Federal government expenditures (orange, normed to 100 as of January 1, 1964, right scale) during LBJ’s Presidency and beyond:

By the end of LBJ’s Presidency, Federal outlays had grown by 45%. By the end of the 2nd Quarter of his second year in office, they had grown by 4.2%. In early 1964, just after LBJ assumed the Presidency, the long-dated Treasury interest rate was just over 4%. By the end of his Presidency in January 1969, it has climbed as high as just over 6% in May 1968. In January 1964, consumer prices were rising at 1.6% YoY. By January 1969, inflation was 4.7%.

Now here is the same data for the last four years, plus the yield on the 30 year Treasury (which wasn’t issued until the mid-1970s):

So far in T—-p’s 2nd Administration, Federal outlays are up 6.2% (and that’s just 1 Quarter into the Iran war). Long-dated treasurys via the 30 year bond have risen from as low as 4% in late 2024 to over 5.3% earlier this month, and the 10 year has risen from 3.7% to 4.7%. And inflation, which was 2.4% YoY at the beginning of 2025, is currently at 3.4% after having risen as high as 4.2% several months ago.

There is no indication that T—-p has any consciousness of, let alone desire to change, any of the dynamics in “Guns & Butter II.” Thus there is every reason to expect a similar inflationary and interest rate record, with the exception that the ramifications of the closure of the Strait of Hormuz, or some other blunder, may unlike LBJ’s term, result in a stagflationary recession.

Some day the positive trend in unemployment claims will end —- but not this week

 

 - by New Deal democrat

As per usual on Thursdays, let’s take a look at the very good short leading indicator of jobless claims.

The bullet point take is that they continue to be among the most positive indicators of all at the moment. Last week only 206,000 people filed initial claims, down -6,000 from the week before. The four week moving average increased 4,250 to 204,000. And with the typical one week lag, continuing claims rose 18,000 to 1.799 million:

All of these continue at historically very low levels.

On the YoY% basis more important for forecasting, initial claims were down -11.6%, the four week moving average down -9.5%, and continuing claims down -8.1%:

This continues to be very positive for the economy.

Finally, let’s take our first look at what this likely means for the unemployment rate beginning in September:

Note this week instead of the usual representation of the unemployment rate, which is rounded to the first decimal, I used the actual numbers that make up the rate, showing how it has declined fairly consistently since the end of last year. The input from jobless claims suggests that there is still room for the unemployment rate to decline further, to 4.0% or even lower, and very little chance of any significant increase.

The mini-recession of 2025 vs. the AI wealth effect inflationary expansion of 2026

 

 - by New Deal democrat

No significant economic news today, so let’s take the proverbial “35,000 foot” look at the US economy in the past two years.

One of the things I have gone back and forth on over that time is whether there was a “mini-recession” late last year. As of the lastest revised data, I believe there was, from a peak in July through the end of the government shutdown in November.

Here’s a look at four important data series the NBER uses to date recessions: employment (blue), industrial production (red), real total sales (gold), and real income less government transfers payments (purple) for the past two years:

Two of the series, production and sales, hit interim peaks in July. The other two, employment and income, made peaks in September only slightly higher than their interim peaks in July. [Note, by the way, that I’ve had to amplify the volatility in employment *2 simply so that it doesn’t appear as a squiggle]. The average decline in the four series through the end of November was about -0.5%.

I haven’t included real GDP in the graph, partly because the NBER doesn’t particularly give it importance, and partly because real GDP can and has in the past - notably in 2001 - risen between the beginning and the end of recessions.

Last summer and autumn were only a “mini-recession” in part because the downturn only lasted 4 months, and partly because the -0.5% average decline was not sharp enough to qualify. By contrast, here are the same metrics for the shallow 2001 recession:

From peak to trough, in 2001 all four metrics declined at least -1.0%, and three of them by at least -1.5%.

Aside from not being deep or long enough, fundamentally why didn’t the mini-recession of 2025 manifest as a full-blown consumer-led downturn, despite real income declining more than -1.0% through April of this year? In addition to real total sales and industrial production trending higher by over 1% so far this year, the below graph tells the tale:

If real income has been down over -1%, and real aggregate payrolls only up 0.7%, stock market wealth has increased almost 25% since July of last year. 

This is the “K-shaped” economy. In addition to the inflationary tax cuts in last autumn’s Big Bad Bust-out Budget Bill, this 25% increase in stock market wealth has been driving a splurge in spending, the austerity being visited on those without stock market holdings be damned.

In conclusion, an important caution: these are coincident indicators; i.e., this is a nowcast, and should not be projected forward. Aside from a further geopolitical shock, per my commentary earlier this week, I would be looking for a downturn in corporate profits, and a downturn in real sales per capita, plus a continued stall in real aggregate payrolls, before I would change my current short term forecast. In other words, the above describes an inflationary expansion.

The positive trend in manufacturing production continues, but are there signs of flagging AI-related growth?

 

 - by New Deal democrat

If housing permits and starts are in the forefront of long leading indicators, then industrial production and its components are among the most important coincident indicators, even if they are not as important as they were back when the US was the world’s industrial powerhouse.

And if earlier this morning we saw housing continue its neutral trend, with industrial production we saw the goods-producing sector of the economy continue its upward one. To wit: headline production (blue) increased 0.2% in July to a new post-pandemic high, joined by manufacturing production (red) which increased 0.1%. Meanwhile, electric and gas utility production (gold), most closely aligned with AI data center construction, increased 0.7%. The below shows all three normed to 100 as of just before the pandemic:

You can see just how much utility construction has outpaced the manufacturing sector as well as the headline number in the past few years.

On a YoY basis, headline production was up 1.1%, its manufacturing component up 1.3%, and utilities up 0.7%:

There are two important takeaways from this month’s data: (1) manufacturing continues to improve at trend. There is no sign of it slowing down, but (2) the utility component most closely aligned with the construction of AI data centers shows significant signs of deceleration this year. The second may be critically important, since it is the driver of AI stock price gains and further downstream the spending driven by the wealth effect based on those gains.