January personal income and spending: treading water, leading metrics sinking

 - by New Deal democrat

Before I get to the main event, a couple of quick comments on the other data released so far this morning:

 1. Real GDP as revised only grew at 0.7% annualized in the 4th Quarter of last year. This is often, but by no means always, recessionary. And since there was a government shutdown for over a month of that quarter, there will be something of a rebound this quarter.

 2. Durable goods orders are very noisy month to month. The unchanged readings for January in both headline and capital goods orders are obviously not good, but they follow an almost unbroken chain of increases dating back to late 2024, and especially the 2nd half of last year. So, one punk month, could mean something, could be just noise.

UPDATE: 3. The January JOLTS report was more of the same we have seen for over a year. While the only negative month over month metric was quits; the measures of job openings and hires remained in the same range they have been since late 2024, i.e., they were basically flat. Layoffs and discharges have declined sharply beginning in November, mirroring the excellent jobless claims reports that began then. Also, a flat quits rate (but one that has improved slightly in the last few months) implies flat to slightly improving wage growth, currently at 3.7% YoY.

Now on to the most important data release….

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

This morning’s data was for January, so it is still several weeks later than usual. In January, nominally both personal income and spending rose 0.4%. But the PCE deflator increased 0.3%, both only increased 0.1% in real terms. Here is what they look like since the pandemic:

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

Real personal income is only up 1.5% YoY, the lowest in three years; while real spending improved to 2.4%. But the trend in both measures remains deceleration.

Once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income rose 0.2%:

On a YoY basis, this was up 0.6%. This was an improvement from last month’s initial look of 0.1% YoY, which has now been revised higher. Nevertheless, with only three exceptions — 2022 and 2013 (which was an artifact of a change in Social Security withholding), and one month in 1995 — such a low rate has only happened during recessions:

In 2022, the economy was saved by the hurricane strength tailwind of deflating producer prices, which enabled a continued Boom in consumer spending. Needless to say, with the war with Iran that is not going to happen now. While the 0.3% increase in PCE prices for the month cause the YoY change to decline -0.1% to 2.8%, the increasing trend remains intact:

The leading portions of consumer spending are also flashing red warning signals. Historically, the pattern has been that real spending on goods (red in the graph below) turns down in advance of recessions, and in particular spending on durable goods (orange), which tends to turn down first. Real spending on services (blue) has tended to rise even during all but the most prolonged or deep recessions. In January, while real spending on services rose 0.3%, real spending on goods declined -0.4%, and on durable goods declined -1.1%. The below graph shows the post-pandemic record, normed to 100 as of one year ago:

The trend in goods spending was flat all last year. To smooth out some of the noise, I have been tracking the three month average. That average was almost completely flat in the period from July through December, and made a six month low in January.

The updating of the PCE deflator also allows for an update to another important coincident indicator used by the NBER to consider whether the economy is in recession or not; namely, real manufacturing and trade sales, which is delayed by one additional month. These increased 0.8% in December, and were up 1.3% for all of 2025:

The three month average also increased, but keep in mind this has been a very volatile metric. 

Finally, one double-edged sword is that the personal saving rate - i.e., the portion of income left over after spending - increased sharply, from 4.0% to 4.5% in January:

On the one hand, this is good because it means that consumers are in somewhat less precarious position, after saving less in late 2025 than at any time since the turn of the Millennium except for the several years before the Great Recession and 2022. But on the other hand, a sharp retrenching by consumers is also something that typically happens just before the start of a recession.

To sum up, as of January real personal income was just barely improving, while real spending on goods, and in particular durable goods, have not just flatlined, but have declined. It is not likely that real sales of goods will continue to increase in such a scenario. Meanwhile, consumers increased their saving. 

Last month I concluded by writing that “Any further deterioration would be clearly recessionary — and a downturn in the stock market, which has delivered so much ‘wealth effect’ spending, could be just such a blow.” The leading portions of the report did turn down - and yesterday the stock market made a new three month low.

Batten down the hatches.

Housing permits, starts, and construction: signs of both imminent recession and “green shoots”

 

 - by New Deal democrat

This morning’s important data on housing construction contained two apparently contradictory trends: on the one hand, it continues to be - even more intensely - consistent with an imminent or ongoing recesssion. On the other hand, it suggests that the sector is bottoming, meaning that (except for the lunacy of the T—-p Administration) a recovery should be near.

Let me address this by taking things in reverse chronological order, by which I mean focusing on the most coincident economic metrics first, and then working backward towards the most leading.

The most important of the more coincident (really, short leading) aspects of the report is housing units under construction. These both peak and trough significantly after permits and starts. These declined another -11,000 to 1.365 units annualized, the lowest number in over 5 years, and -26.1% below their 2022 peak (red in the graph linked to below), which also shows the same metric in YoY% terms (blue):

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1Tmm6&height=490 

Only once in the past 50 years has such a decline not *yet* given rise to a recession: in 1991, when the decline was -28.2%. On the other hand, while units under construction are down -9.6%, this is less of a decline than one year ago, when the YoY decline was -15.9%. With the important exception of the 1991 recession, when the YoY decline became “less bad,” it has typically occurred after the recession has ended. 

Typically, the final housing-related metric to decline before a recession actually begins has been employment in housing construction (red in the graph linked to below):

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

As you can see, this has indeed happened, but only by -1% (vs. a more typical -5% decline prior to past recessions), and although you will need to zoom in on the above graph, that is about a 1% improvement since last August — again, a recessioin marker on the one hand, but a potential sign of incipient “green shoots” on the other.

Now let’s turn to the more leading permits and starts. The latter (blue in the graph linked to below) are noisier and slightly less leading. These increased 100,000 annualized for the month to 1.487 million, and they are 9.5% higher than they were 12 months ago, although the below graph really shows them as being mainly volatile with an overall flat trend. Permits (gold) are less noisy and more leading, and these declined -79,000 to 1.376 million, and were down -5.8% YoY. The trend here has been slightly negative, as the current reading is only higher than last July and August’s. Finally, the least noisy indicator of all is single family permits (red, right scale), and these declined another -8,000, but are higher than they were in late 2022 into 2023, and in June and August last year:

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

Nevertheless, as the graph shows, permits and starts remain in territory below their peaks sufficient to be consistent with a recession. On the other hand, in the past it has taken a more severe decline of greater than -10% to be consistent with with a recession:

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

Only single family permits, down -11.6% YoY, meet this criterion.

Finally, the most leading component of all is mortgage rates, currently just above 6%, just above their 3.5 year low of 5.98% made last month:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1TmF7&height=490 

Unsurprisingly, the gradual decline of mortgage rates from their 2023 highs (with a peak of 7.79%) has led to an increase, albeit a tepid one, in mortgage applications over the past 15 months:

 https://tradingeconomics.com/united-states/mba-purchase-index 

Again, the decline in mortgage rates has given rise to “green shoots” in purchase mortgage applications.

So let me sum up: in the longest leading data, we see signs of *relative* easing, which has given rise to some improvement off the bottom in mortgages (in 2023), mortgage applications (in 2024), and permits (in summer 2025). But among the less leading data, in particular housing units under construction and employment in housing construction, we see declines consistent with a recession now, or imminent, along with signs that, if there were not other complicating factors (like the Iran war), any such recession if it occurred at all would be a short and shallow one.

Jobless claims continue at very low levels (plus an update on tech enshittification)

 

 - by New Deal democrat

I’ll post on the updated housing situation later this morning. Meanwhile, before I get to jobless claims, a brief update on the tech situation.

It turns out that I am not the only person having this problem. Basically anyone who uses an Apple platform and attempts to post photos on a Google-aligned site is having this same issue. Yesterday with an assist from my local tech guy we ripped both my browsers and photos apps down to the studs and reinstalled them. It worked! - for one time only. The moment I navigated away from this site, the connection was broken. Google would not even permit me to post photos stored on Google under the same account set up for this purpose. This is our enshittified world.

I am going to try one more workaround, but if that does not work, I am probably going to have to do something drastic like setting up a new site on substack. I will certainly give you a link if something like that happens.

Now, to jobless claims …. Which continued to be lower YoY, which is the most important metric. Initial claims declined -1,000 to 213,000 for the week. The four week moving average declined -4,000 to 212,000. Continuing claims, with the usual one week delay, declined -21,000 to 1.850 million:

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

On a YoY basis, initial claims were down -4.5%, the four week average down -7.2%, and continuing claims down -0.1%:

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

That jobless claims are down near their 50+ year lows is one of three dynamics keeping the economy from keeling over. The second metric is the continued increasing trend in stock prices, which even after the Iran situation, are up 21.0%! The third is consumer spending by the upper echelons, which has been higher by 5%-7.5% YoY for the past six months as measured weekly by Redbook. Both of these latter two metrics have probably been driven by the AI data center boom

February CPI: a likely last hurrah for relatively tame consumer price increases

 

 - by New Deal democrat

Much like last month, February benefited from shelter and gas prices - for a change - pulling in the same, disinflating, direction. Needless to say, I do not expect that to be the case for March! But in the meantime, let’s look at the continued (more or less) good news.

Beginning in late December, gas prices fell below $3/gallon, and they were still under $3/gallon at the end of February. Meanwhile, as I have been pounding the table for several years, I expected shelter CPI to follow house prices to minimal YoY gains. In February, both delivered as shelter increased only 0.2%, and gas declining -0.3%. As a result YoY headline CPI came in at 2.4%, tied with January for the lowest except for one month since the pandemic, and core CPI came in at 2.5%, also tying its January reading for the absolute lowest since the pandemic.

IMPORTANT CAUTIONARY NOTE: Because the October-November kludge in shelter prices of a mere 0.1% increase for two months is still present in the YoY calculations, and will be until this coming November, this is probably continuing to lower those comparisons by roughly -0.2%. In other words, take out that kludge and YoY headline CPI would probably be 2.6%, and core at 2.5%.

But to the slicing and dicing: 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 2.1% YoY. The below link goes to the relevant graph [Note: I expect this tech issue to be solved by the end of the week, as soon as my local tech guy has time to meet with me. Also cross your fingers that this does not happen every time Apple updates its OS]:

The good news is that all three of these measures have decreased since September. This has continued to be a significant disinflationary pulse.

As per my comment above, rent increased only 0.1% for the month, the lowest such increasse in 5 years, and owners’ equivalent rent only 0.2%, the lowest since April 2021 except for last September. On a YoY basis, rent (red) was up 2.7% and Owner’s Equivalent Rent (blue) up 3.2%, the lowest YoY increase for both since late 2021::

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

One of the very best things I have been telling you since way back in 2021 is that the YoY% changes in the repeat home sales indexes lead shelter CPI by about 12-18 months. It did that on the way up, and it has been doing that on the way down. YoY home price increases continue near or at multi-year lows, the FHFA at 1.7%, and Case Shiller’s national index at 1.3%. And shelter inflation has followed (additionally yesterday we found out that the median price for existing homes had increased only 0.3% for the second month in a row). The graph linked to below includes several years before Covid to show its 3.2%-3.6% range during that time:

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

Shelter inflation has declined to *below* its pre-pandemic YoY range. Needless to say, because of the leading/lagging relationship of house prices to shelter inflation, we can expect even *further* deceleration in the shelter component of inflation during this year.

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

Although I won’t bother with a link to a graph, as noted above gas prices declined -0.3% in February. Energy as a whole increased o.3%, but for the entire last 12 months is only up 0.5%. Enjoy it while you can!

Additionally, new car prices (red) were unchanged for the second month in a row, and up only 0.5% YoY, while used car prices (gold)declined another -0.4%, and are *down* -3.2% YoY. The graph linked to below also shows  the post-pandemic trend by norming both series to 100 as of just before the pandemic:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1TjV2&height=490 

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

Two recent “problem children,” I.e., sectors that have increased in price by 4% or more YoY, have been transportation services, mainly vehicle parts and repairs as well as insurance; and electricity and gas prices. The former is now only up 2.3% YoY. This divides into insurance, only up 0.2% YoY (not shown below), and motor vehicle maintenance and repairs, still problematic at up 5.6% YoY (red):

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

Electricity prices, which have become a significant problem, likely a side effect of the building of massive data centers for AI generation, declined -0.7% in February, but on a YoY basis are up 4.8%. Additionally, piped utility gas increased another 3.1% in February, and is up 10.9% YoY:

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

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

One new significant problem child is medical care services (blue in the graph linked to below), which increased 0.6% for the month and 4.1% YoY. The dental care component (not available on FRED) increased 1.3% on a monthly basis and hospital care (red) increased 0.9%. On a YoY basis they are up 6.5% and 7.6% respectively:

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

There were several other minor “problem children” in the form of nonalcoholic beverages, tobacco products, and airline tickets, but all of these are small fry in the larger CPI scheme.

Needless to say, given what has been happening with gas prices in the past two weeks, I do not expect a quiet headline number in March. So enjoy this tame consumer inflation report for the second month in a row , driven by disinflating shelter and (temporarily) energy costs. It is pretty clear that no further progress is likely in the near term towards the Fed’s 2.0% target, although disinflation in the shelter component (1/3rd of the total) should continue. I am additionally concerned about the increase in medical services costs. I don’t have any particular insight into those, but if they continue they will be an important new drag on consumers, whether directly or by insurance premiums.

The “gold standard” QCEW for last Q3 strongly suggests no job growth whatsoever in 2025

 

 - 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 finally updated for Q3 of last year. And there was bad news, even compared with the benchmark revisions last month.

On a non-seasonally adjusted basis, even after the benchmark adjustment, seasonally adjusted, 70,000 more jobs added during the quarter. On a non-seasonally adjusted basis, -590,000 jobs were lost (unsurprising, given big layoffs happen in July). More importantly, on a YoY basis, the number of jobs increased 0.4% from Q3 2024.

Why is that bad? Because, according to the QCEW, on an NSA basis, -787,000 jobs were lost during Q3, and on a YoY basis, the number of jobs only increased 0.1%. Which means that the nonfarm payrolls numbers, even after the last seasonal adjustment 9show below), were still too optimistic:

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

And the YoY comparison was too optimistic as well:

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

In my review of the 2025 Q1 QCEW, I concluded that it was “suggesting there might not have been any job growth at all this year.” When I reviewed the update for Q2, I wrote that “it seems likely there was a very small gain, but not even keeping up with prime employment age population growth, i.e., firmly supporting the increase in the unemployment rate this year. And it is still possible that there have been no net employment gains whatsoever this year.” The Q3 update once again suggests there was no job growth whatsoever last year, not even the paltry 296,000 indicated by the latest benchmark revisions.

How $4/gallon gas could take the economy from a nearly complete stall into outright recession

 

 - by New Deal democrat

So, first some bad news: my tech issue has resurfaced, so only links to graphs rather than graphs themselves, hopefully just for a day or two. Basically, unless I keep a bar up open to the blog page, Google and Apple sever their “handshake,” and I have to start from scratch to drag them back into it. Think of it as the tech version of herding cats.

And it’s a particular shame because, well, it’s always a bad day for the economy when the most exciting drama on TV is the financial channel. So today let me take a look at the state of the economy, ex-gas prices; and then what gas prices of $4/gallon or more might do to it. In that context I’ll also update an important graph on real retail sales, which were reported for January on Friday.

First, a couple of months ago I mentioned that gas prices under $3/gallon were a new, real tailwind for the economy. I showed this by dividing that cost by average hourly wages for non-supervisory workers. The resulting graph showed how much labor it required for an ordinary worker to be able to buy a gallon of gas. In January it was close to the lowest since the beginning of the new Millennium.

Here’s the link to an updated graph. Since as of last week’s report gas was just over $3/gallon, I’ve normed the result so that gas at $4/gallon divided by the average hourly wages shows at the 0 line:

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

The simple summary is that gas prices at $4/gallon would no longer be a tailwind, but they wouldn’t be much of a headwind either. Rather, they would be about average (compared with wages) for the past 25 years.



All things being equal, gas prices deteriorating from a significant positive for the economy to merely neutral wouldn’t be that big a deal. But all things are never really equal. 

Because the economy as of the end of 2025 was balancing just at the edge of recessionary readings. The below link goes to a graph of the four main monthly datapoints used by the NBER to determine whether or not a recession is underway - jobs, real personal income minus government transfer payments, real manufacturing and trade sales, and industrial production. Because business sales have only been updated through last November, I also include real retail sales, which as I noted above were just updated through January last Friday (declining -0.3% for the month, and -0.8% below their most recent interim peak last August). Additionally, I wanted to show the impact of AI related data center construction by removing utilities from the industrial production measure: 

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

All of the above metrics went basically sideways in 2025. *All* of them are below their respective peaks in various months from April through September. It’s already been an open question whether the government shutdown last autumn formed the peak of last expansion. Either the expansion just barely scraped by, or we were already in a very shallow recession.

In other words, gas prices turning from a tailwind to simply neutral, even if they don’t go much above $4/gallon, may well be enough to tip over the above metrics into outright recessionary readings.

In that regard, my final link is to one of my usual real retail sales graphs, showing how it (and similarly real personal spending on goods) typically leads employment by a number of months: 

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1TeU4&height=490 

Both Real retail sales and real spending on goods were negative YoY in December, before the former rebounded to +0.7% YoY in January (because January 2025 was even worse). Jobs are only up 0.1% YoY as of last Friday’s release for February. Except for the near “double-dip” of 2002-03, going back 85 years job gains have *never* been only higher by 0.1% YoY without a recession being either imminent or already in progress.

Weekly Indicators for March 2 - 6 at Seeking Alpha

 

 - by New Deal democrat

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

Unsurprisingly, the big news of the week was the skyrocketing of oil and gas prices. A little surprisingly, the US$ gained as a “safe haven” or perhaps “least dirty shirt” trade.

As usual, clicking over an reading will bring you thoroughly up to date on the economy, and reward me with a penny or two for my efforts.

February jobs report: Main Street lays an egg

 

 - by New Deal democrat

I described last month as “the month the birds came home to roost…. In particular, the *entire* gains over the past year were reduced from 584,000 to 181,000 - an average of only 15,000 jobs gained per month.”

Well, this month the nesting birds, to butcher Edgar Allen Poe, started screeching “recession.” 

Below is my in depth synopsis.

HEADLINES:

• -92,000 jobs lost. Private sector jobs declined -86,000. Government jobs declined -6,000. The three month average declined to a puny +6,000.
• The pattern of downward revisions to previous months continued. December was revised downward by -65,000, and January was revised downward by -4,000, for a net decline of -69,000. 
• The alternate, and more volatile measure in the household report, declined by -185,000 jobs. On a YoY basis, this series *DECLINED* -426,000 jobs, or an average of -35,000 monthly.
• The U3 unemployment rate rose 0.1% to 4.4%, which is where it was in December. 
• The U6 underemployment rate declined -0.1% to 7.9%.
• Further out on the spectrum, those who are not in the labor force but want a job now rose by 166,000.

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 mainly negative:

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.1 hours to 41.5 hours, and is now down only -0.1 hour from its 2021 peak of 41.6 hours.

• Manufacturing jobs decreased by -12,000, the 11th decline in the last 12 months. It is now at a 3+ year low.
• Truck driving, which had briefly rebounded early in 2025, declined another -500.
• Construction jobs declined -11,000.
• Residential construction jobs, which are even more leading, rose 2,400, continuing the trend of stabilizing since last April.
• Goods producing jobs as a whole declined -25,000.. 

• Temporary jobs, which have declined by over -650,000 since late 2022, declined again this month, by -6,500, but remained above their post-pandemic low set last October.
• The number of people unemployed for 5 weeks or fewer rose 153,000.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.09, or +0.3%, to $32.03, for a YoY gain of +3.7%, its lowest YoY% gain since the pandemic. Nevertheless, this continues to be significantly above the YoY inflation rate.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers declined -0.2%, and is up 1.2% YoY, about average for the past two years.

• The index of aggregate payrolls for non-managerial workers rose 0.1%, and is up 4.7% YoY, also about average for the past two years.

Other significant data:

• Professional and business employment declined another -5,000. These tend to be well-paying jobs. While this remains above its October low, it remains lower YoY by -0.4%, which in the past 80+ years - until now - has almost *always* meant recession.
• The employment population ratio declined -0.1% to 59.3%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate declined -0.1% to 62.0% , vs. 63.4% in February 2020.

SUMMARY

As I wrote at the outset, this was a recessionary report, partly because of the monthly change, and partly because of the sideways to downward trend in employment it represents since last spring.

There were some bright spots, including another increase in the average manufacturing work week, and residential construction jobs, which like much other data in the housing sector, shows signs of “green shoots,” i.e., that the bottom is being or has been formed. The U-6 underemployment rate* also declined slightly. And hourly wages continued to increase at a good clip.

But the vast majority of leading and coincident indicators in the report were negative: manufacturing, construction, trucking, and temporary help employment all declined, as did the goods-producing sector as a whole. Total hours work declined, and it is almost certain that once we get the inflation report, we will see that real aggregate payrolls also declined. The employment/population ratio* and labor force participation rate* declined. Revisions continued to be negative, and the unemployment rate*, against expectations, increased slightly.

[*These figures come from the Household Survey and may have been affected by the annual revisions, which were delayed a month and were reported this morning. But they were applied to the January numbers, so the month over month changes should not have been affected.]

Finally, please note that these figures are from *before* the war with Iran and its affect on gas prices started - so be prepared for worse in the next several months.

To conclude by returning to my opening comments about birds coming home to roost: this month Main Street, in the form of jobs, laid an egg.

“New regime” of lower jobless claims continues - a good sign (but for geopolitical idiocy)

 

 - by New Deal democrat

Let’s take our weekly look at jobless claims. As a reminder, I pay attention to these because they are a good short leading barometer of the economy in general, and the jobs market in particular.

And the news this week continued to reflect the “new regime” of lower YoY claims that we have seen for the past 8+ months, as well as the post-pandemic unresolved seasonality in which claims generally rise from the beginning of the year until mid-year. 

Initial claims were unchanged at 213,000, and the four week moving average declilned -4,750 to 215,750. With the typical one week delay, continuing claims rose 46,000 to 1.868 million:

As per usual, the YoY% change is more important for forecating purposes. Here, the news was all positive. Initial claims were down -4.9%, the four week moving average down -4.7%, and continuing claims down -1.3%:

All of which is very inconsistent with any near term onset of a recession.

Finally, as per usual let’s take a look at what this might mean for the unemployment rate in the next several months:

Jobless claims continue to forecast downward pressure on the unemployment rate towards 4.2% or even 4.1%. We’ll find out tomorrow. 

The bottom line is that initial claims, like some of the other short leading data like the improvement in manufacturing, suggest that although it is touch and go, the US economy would be increasingly likely to avoid a recession this year. 

I said “would be” rather than “will” because of the ongoing geopolitical idiocy that is the war with Iran — and I believe “war with Iran” is the appropriate term. This is not a “touch and go” like Venezuela. Yesterday our navy sank an Iranian frigate near Sri Lanka, 1000 miles away from the Persian Gulf. And since we just killed all of the immediate family of Iran’s new Supreme Leader, I do not think he is going to be interested in a cessation of hostilities anytime soon.

Strongly positive ISM services report for February gives the best economically weighted reading for the economy in a year, (but also with a big dose of inflation)

 

 - by New Deal democrat

If Monday’s ISM manufacturing report was good (but with a dose of inflation), today’s ISM services report for February was even better (but also with a dose of inflation). Together they negative the likelihood of an economic downturn in the next several months (geopolitical idiocy aside). 

Let’s take a look. Recall that services represent about 75% or all economic activity, with the goods producing sector the other 25%. Also, typically I average the last three months of each reading to reduce noise. As we will see today, I really don’t need to do that, because the message is pretty clear. In all the graphs below, the services reading is in blue, the equivalent manufacturing one in grey.

Let’s start with what has been the most moribund reading — that on employment. On Monday, we saw that manufacturing employment got “less bad,” improving to 48.8. This morning’s services employment diffusion reading was 51.8:

There is strong evidence that there was a bottom in employment last July, and an improving trend since. The three month average in services has been 51.3, i.e., weakly positive. The economically weighted average vs. manufacturing employment’s 47.2 three month average is 50.3 - just barely positive, but nevertheless the best reading in a year.

As similar pattern shows up in the headline number, which for services came in at 56.1 for February. The three month average is 54.6:

The bottom in the headline number was a little before employment, in the May through July period. The economically weighted three month average including manufacturing is 53.7, solidly if not sharply positive.

The more leading new orders component improved to a strong 58.6. The three month average also increased to 56.1:

New orders bottomed in the March through May period of last year. Their economically weighted three month average including manufacturing increased to 55.4, a very positive number — and the most positive number in over 3 years. Needless to say, this is an excellent development for the economy.

But nothing is perfect, and the problem child in both ISM indexes is inflation, in the form of prices paid. The services component did decline to 63.0, bringing the three month average down to 64.9 (which is still a very concerning number for prices), the lowest in over a year:

The economically weighted three month average of prices paid is 63.2, suggesting inflation remains entrenched in the broad economy.

Two final points: first, the ISM services reports have been wildly divergent from the regional Fed services indexes, which have been very negative for months, most recently averaging -10. One of these is giving a false signal.

The second is that the ISM services reports *are* confirming what I have been seeing for months in the Redbook weekly retail spending report, which has not just been positive, but increasingly so in the latter part of 2025 into this year:

Again, I suspect the very strong retail spending data, as well as the services diffusion indexes reported above, has almost everything to do with a wealth effect generated by stock price increases in the past year, which in turn were the result of AI data center related spending. 

In any event, mark down this morning’s services report in the solidly positive column, and hope it does not get derailed by idiocy in the Middle East.