Two cheers for increasing manufacturers’ new orders

 

 - by New Deal democrat

This is another one of those weeks when most of the important new data is crammed into one day, in this case Q2 GDP, personal income and spending, and jobless claims all will be released on Thursday.

Today we did get some further information on manufacturing, and the positive news in that sector continued, as new orders for durable goods (blue) increased 0.3% in June, and core capital goods orders (red) increased 0.9%. Since these are “official” (short) leading indicators, it is worth paying attention to them:

The former series in particular is noisy; hence the increased emphasis on the core. But it’s easy to see that both have been in an increasingly sharp positive trend since late 2024, interrupted somewhat in the months surrounding the T—-p Administration’s first imposition of widespread tariffs in April of last year.

This is in accord with what we have been seeing in the new orders components of the regional Fed manufacturing indexes. The average of the NY and Philadelphia indexes (gold, right scale) are shown below for comparison:

With the exception of early 2022, the regional Fed indexes have maintained a trend similar to the monthly durable goods orders reports.

The picture becomes more complicated, however, when we compare the durable and core capital goods orders metrics with the industrial (gray) and manufacturing (gold) production data (right scale):

Durable and core capital goods orders have risen over 35% since just before the pandemic, while production is up less than 1%, and manufacturing production slightly *below* their pre-pandemic level.

This brings up something that is important in the current environment, which is that the durable and capital goods orders metric are reported in nominal $ terms. Which means that, adjusted for inflation, the situation might be quite different. Below I show what both new orders metrics look like deflated by the PPI for finished goods, in comparison with manufacturing production:

Now the series look very similar, not only in terms of the trend, but also in their absolute values compared with just before the pandemic. Let me state right up front that there may be a better deflator or combination of deflators that may be better than the one I have used above, but it demonstrates that inflation has been distorting to the upside the positive trend in new orders. 

In other words, postive, but not so much. 

The NY Times finally tells its readers what I’ve been telling you for the last 6 months: wealth effect edition

 

 - by New Deal democrat

Via Ben Casselman, who authored the piece, here is the headline for a NYTimes article from last Wednesday:

As he summarizes it:

In other words, the Times finally got around to telling its readers what I’ve been telling you for about the last six months.

—-

And while I am at it, here is a link to the blog post I had to upload as an addition to the “Weekly Indicators” link one week ago, on the day when Blogger for some reason said I was unable to add a new post; on the pitfalls of mistaking the aggregate economy (and especially the stock market) as a proxy for the condition of average American working or middle class households:

 In which I defend the criticism of ‘bloodless quants’

Weekly Indicators for July 20 - 24 at Seeking Alpha

 

 - by New Deal democrat

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

With the renewed warmaking in the Middle East, the price of oil and gas shot up, and interest rates across the board as well. It looks increasingly likely that the Fed will have to hike rates to fight inflation soon, maybe as early as next month.

As usual, clikcing over and reading will bring you up to the virtual moment as to all of the data on the economy, and reward me with a penny or two for collecting and organizing it for you.

June new home sales, prices, and inventory are more evidence for a subpar housing equilibrium

 

 - by New Deal democrat

In last month’s note on new home sales,  I concluded that “This is all but unique. Historically a recession will not occur until inventory turns down again. But to reiterate, housing has been recessionary for a year, and yet no recession has occurred.”

Earlier this month, I described the housing market as being in a subpar equilibrium, with sales, construction, prices, and finall inventory moving more or less sideways - but at a level of building not nearly enough to meet the needs of the millions of mainly younger potential buyers who are unable to move out of apartments or maybe even their parents’ home.

This morning’s new home sales report for June was yet more evidence for both of the above theses. Sales, prices, and inventory all generally stayed on their recent trend level.

First, sales increased 10,000 on a seasonally adjusted basis to 628,000 annualized. Because new home sales, while perhaps the most leading metric in the housing market, are very volatile and sharply revised, below I also show the much more stable, if slightly less leading, single family permits (red, right scale):

Single family permits have been stable for a year. Meanwhile single family home sales have downshifted slightly (by about 5%) this year. In June sales were down -5.6% YoY.

The dynamic is similar in median prices, which declined -$13,700 to $398,300 on a non-seasonally adjusted basis:

This continues the very slow declining trend in new home prices ever since 2022, down -2.7% YoY in June. By contrast, repeat existing home sales as typified by the FHFA index (red, right scale) have continued to rise at a very slow pace (currently up less than 2% YoY). The difference is because builders of new homes have been able to cut lot sizes, square footage, and amenities to make their homes more affordable to potential buyers, whereas those selling their existing homes obviously cannot. Since, as noted above, this series is not seasonally adjusted, here’s the YoY comparison:

Finally, inventory has also stabilized, down only -1,000 in June. This has been almost completely stable since last September:

For the past few years, I’ve been repeating that prices follow sales, and inventory follows prices. Inventory has historically been the last shoe to drop before a recession; but as shown in the below historical graph, only once in the past 60 years has a period of stability about this long been shortly followed by a recession, in 1991 - and in that case, inventory declined again for several months before the recession:

Otherwise, a bottoming in inventory is something we typically see towards or even after the end of a recession.

 So, to sum up and repeat: unless inventory turns back down, it is not forecasting a recession. With sales relatively stable and prices slowly deflating, the new home market is meeting the existing home market in a equilibrium, which is likely to remain unless something significant happens upstream, like an increase in mortgage rates back to 7%, possibly driven by a Fed rate hike. 

The “no fire” economy sets a new, 55+ year record low

 

 - by New Deal democrat

[Administrative note: yesterday’s problem, in which the platform would not allow me add a new post, seems to have spontaneously resolved, although “officially” the blog metrics show “0 posts” in all its history, Cross your fingers that this issue has gone away permanently.]

I discussed the stock market’s very positive performance earlier this week. This morning’s update to jobless claims means the second half of my “quick and dirty” economic forecasting tool is also positive in the extreme.

To wit: only 187,000 new jobless claims were made last week. If this level holds up in revisions next week, it will be the lowest since 1969. In fact, only about 20 weeks in 1968 and 1969 were lower in this series’ entire history. And remember, in the 1960s, the US population was only about half of what it is now.

The four week moving average also declined sharply to 207,500, and continuing claims, with the typical one week delay, declined under 1.8 million again, to 1.796 million:

And the YoY% changes more important for forecasting purposes came in very positive as well, with initial claims down 14.2%, the four week average down -7.6%, and continuing claims down -7.5%:

We’re far enough along in the month now to see what that suggests about the unemployment rate going forward. Unsurprisingly, it adds to the evidence that the unemployment rate is likely to move even lower from its last 4.2% reading:

Geopolitical events, driven by the ramshackle chaos emanating from Washington could upend all of this, but endogenously the economy in the aggregate is in surprisingly good shape.

Regional Fed reports indicate elevated inflation is likely to continue

 

 - by New Deal democrat

[Note: Blogger has (hopefully) temporarily prevented me from putting up new posts. So if you scroll down to last weekend, I’ve amended my “Weekly Indicators” update with the new post I had planned for today. Cross your fingers that this goes away by tomorrow]

In It appears that both producer and consumer inflation are going to continue at elevated levels, despite the actual *de*flation in June.

Here’s a look at the average of the New York and Philadelphia Fed’s prices paid (blue) and prices received (orange) diffusion manufacturing indexes: 

In July, the average for prices paid decelerated from 57.1 to 53.1, while that for prices received accelerated from 26.1 to 29.3. Keeping in mind that 0.0 is the equilibrium point, these are both very elevated numbers, although - like last week’s PPI vs. CPI numbers - they indicate that producers are not able to pass on all of their upstream price increases, meaning pressure on profit margins.

Here’s what the prices paid average (/4 for scale) looks like compared with commodity prices YoY:

While the correlation isn’t perfect, especially last year, it is usually pretty close, e.g., an increase in the prices paid average correlates very well with a YoY% increase in commodity inputs.

Similarly, the prices paid average (/8 for scale) correlates well with the YoY% change in the final demand prices for producer goods (yellow) and in a more muted way with consumer prices YoY (violet):

That translates into a possible 0.5% advance in producer prices for July, and a 0.2% or 0.3% advance in consumer prices, in order to maintain the YoY averages of 6.7% and 3.5% respectively.

If both the prices paid and prices received components of the regional Fed reports suggest that elevated inflation levels continue to be likely, the collapse of the fragile “cease fire” in the Persian Gulf region has caused oil prices to increase to over $80/barrel again, and more importantly, average gas prices at the pump to go back over $4/gallon:

I do not see any real abating of inflation at any point in the immediate future, and further, it will put more pressure on the Fed to defy the Administration’s wishes, and raise interest rates.

The manufacturing sector of the economy continued to improve in June

 

 - by New Deal democrat

There’s a brief hiatus from new data early this week, so let me briefly look at the manufacturing economy, for which industrial production was reported on Friday.

To briefly recap my overall position: despite the chaos coming out of Washington, the economy has been on a moderate rebound this year, albeit with inflationary problems in part still due to tariffs and in part due to the continued closure of the Strait of Hormuz. Meanwhile the AI Boom (or, more likely, bubble) in the building of data centers has been powering stock market gains, which in turn are powering “wealth effect” spending by the upper income tier. If either or both of those trends reverse, we’re in trouble. But they haven’t stumbled, yet.

And manufacturing continued to improve in June, according to the report. While manufacturing production (red) was unchanged, gas and electric utility production (most closely tied to the data center Boom, gold, right scale) increased 0.4%, leading the total figure (blue) to increase 0.1% to a new post-pandemic record:

On a YoY basis, manufacturing production was up 1.1%, while utility production was up 2.8% - again showing the strong influence of data center building. Total industrial production was also up 1.1%:

Interestingly, the YoY change in utility production suggests that the Boom in data center construction may be abating somewhat.

This is similar to what we see in the average of the New York and Philadelphia Fed headline manufacturing indexes (blue) and new orders component (red):

Both of these are at 4+ year highs, suggesting that the improvement in manufacturing that we started to see late last year is continuing.

In which I defend the criticism of “bloodless quants”

 

 - by New Deal democrat

The other day a cartoonist named hausofdecline created a little stir on Bluesky with this cartoon:

As you can already see from the two notes above the cartoon, it was quickly dunked on by data types. Here’s a further sample of the pile-on:

Well, your correspondent is one data nerd who will rise to the defense of hausofdecline.

What their cartoon highlights is the difference between the economy *as a whole* and the distribution of gains or losses within the economy. In response to the womans’s complaint that “I can’t afford to feed my family” the “bloodless quant” replies “that’s ludicrous” because “the stock market is at an all time high.” 

Touché. 

Indeed, the economy *as a whole* IS doing relatively well, especially considering the destructive chaos emanating from Washington. But the stock market helps describe the K-shaped economy.

Let me step back a little bit and put the market in context. One of the data relationships I noticed over a decade ago, and continues to be consistently true is that the stock market, a short leading indicator (blue) does not *anticipate* corporate profits, a long leading indicator (red) so much as it *reacts* to them, especially when averaged on a quarterly basis, shown below for the last 10 years:

Corporate profits in the GDP were last reported for Q1, but so far the indications are that Q2 is going to be another blowout quarter. As the graph below shows, corporate profits have more than doubled in the past 10 years. Measured from just before the pandemic, they have increased on average about 10% *every year.* But even that was outdone by the stock market, which over the same time rose an average of *13%* every year:

In fact, it has been very rate over the past 10 years for the stock market not to have risen over 10% a year, as shown below by subtracting 10% from its YoY performance:

Apropos of my “quick and dirty” forecasting method, the S&P500 has only been negative YoY during periods of economic stress, with recession (caused by the pandemic) or near-recession conditions.

And although there are serious concerns about whether it is approaching or already in a bubble, the advance-decline line (red below) has actually been increasing in the lastest market advance:

Typically when there has been a bubble in the past, the large majority of stocks are declining, with advances concentrated in the bubbly sector.

So yes, the stock market is showing that the economy as a whole is continuing to expand at a decent rate. But while those whose main wealth is tied up in stock ownership have seen it increase by about 14% a year for the past 10 years, by contrast here’s what has happened to house prices compared with income:

Deflated by average nonsupervisory hourly wages, house prices shot up over 20% in the aftermath of the pandemic, and even now are still up over 17% in real terms. And that’s just the price of the house, not accounting for the fact that the monthly mortgage payment in interest alone has doubled, as mortgage rates increased from 3% to 6%. By the way, the same obtains if I deflate by median household income or median usual weekly earnings:

And finally, let me repeat, although I won’t bother with the graph this time, that both real average nonsupervisory wages and real personal income are *down* YoY at present, and aggregate real nonsupervisory payrolls have only risen 0.7% during that time. Something that hausofdecline alluded to in their rebuttal:

I feel a little seen. Is hausofdecline a reader?

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

Despite oil prices heading back north of $80/barrel this past week, the underlying fundamentals in all time frames remain positive, including most importantly consumer spending.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two for compiling and organizing it for you.

Housing permits and starts continue to show a sector at an equilibrium

 

 - by New Deal democrat

Last week I wrote at length about how the entire housing market had reached an equilibrium, where almost all of the metrics were more or less flat. Meaning that this important long leading sector for the economy was about as neutral as it could be.

This morning’s data on housing permits, starts, and units under construction continued that trend, with very little change YoY.

Housing permits issued declined -43,000 in June to 1.367 million annualized, while the much more volatile number of starts rose 223,000 to 1.427 million annualized. Single family permits, which are the least volatile metric conveying the most signal, declined -21,000 to 871,000 annualized. What is most important is that both single family and total permits stayed within their 12 month ranges of 864,000-929,000 and 1.347 million - 1.540 million annualized:

The generally flat trend shows up even more clearly when we compare the numbers YoY:

Permits are down -2.3%, starts higher by 3.5%, and single family permits down only -0.2%.

The generally flat trend is now showing up in the most lagging metric in this report, which is housing units under construction. These declined only -2,000 to 1.264 million units annualized. This series has been virtually unchanged for the past six months:

As I have frequently pointed out over the past 24 months, this metric is the last one to turn down before recessions. And last year it was consistently in territory consistent with recessions in the past. But just as interestingly, in the past it has only flattened out, and started to improve on a YoY basis, only at the end of recessions and beginnings of expansions. That is exactly what the YoY comparison shows now:

Units under construction are still down -6.2% YoY, but the YoY comparison has improved sharply since the end of last year. Again, this is most consistent with recession danger passing.

This is not a great equilibrium, because as a society we need much more housing built. But this is not a sector that is sliding further towards recession.

June retail sales: more evidence of a Boom in consumer spending (even ex-gas)

 

 - by New Deal democrat

Let’s take a look at retail sales, especially real retail sales, one of my favorite economic indicators, which was updated for June this morning. This is because consumer spending is about 70% of the economy, and also because historically consumption leads employment. Let’s see what happened during a month that gas prices declined sharply.

Nominally, total retail sales rose 0.2% in June. But since there was actual *de*flation in consumer prices by -0.4%, real retail sales rose 0.6% (blue):

Since gas prices have been a major driver of inflation in the past few months, here’s a look at the monthly % changes in nominal retail sales excluding gas stations (orange) vs. total retail sales (blue). Retail sales excluding-gas increased a very strong 0.7%:

In other words, real sales ex-gas increased over 1% (!) in June.

On a YoY basis, nominal total retail sales were up 6.7%. In real terms they were up 3.1%. 

This is the highest YoY comparison since 2022. As we have seen with the weekly Redbook sales reports, consumer spending is simply Booming.

As I wrote last month, it is *very* likely that this is “wealth effect” spending by upper income consumers triggered by the near 20% rise in the stock market since the end of March. Recently Menzie Chinn at Econbrowswer reposted a report from economists at the Bank of France that about 50% of all US consumer spending in 2025 was fueled by the wealth effect from rising stock market prices:

 

Needless to say, if the stock market gains have reflected a bubble in AI data center construction spending, then this could all reverse quite sharply.

Finally, since consumption leads employment, here is the update of YoY real retail sales (/2 for scale) together with employment (red):

Last month, I said that “this suggests that on a YoY basis the rebound we have seen in the last three jobs reports is likely to continue in the next several months.”  Despite the relatively poor June jobs report, that remains the case.

Jobless claims continue to portray a “low hire, *no* fire” economy

 

 - by New Deal democrat

Let’s take our usual weekly look at jobless claims, along with stock prices 1/2 of my “quick and dirty” forecasting method.

And they continued to forecast expansion. Initial claims declined -8,000 for the week to 208,000, with the four week moving average declining -4,750 to 214,250. With the typical one week delay, continuing claims declined -16,000 to 1.805 million:

On the YoY% basis more important for forecasting, initial claims were down -5.9%, the four week average down -6.4%, and continuing claims down -7.4%:

We continue with the “low hire, *no* fire” economy. Here’s what that suggests for the unemployment rate in the next several months based on the historical record:

This suggests that the unemployment rate is going to decline further in the next several months.

Producer price declines are “less good” than consumer price declines, and on net that’s “bad”

 

 - by New Deal democrat

I pay a lot less attention to producer prices than to consumer prices. Partly that is because in the past few decades, the PPI has tended to be coincident with the CPI rather than leading it, and partly because so long as the YoY PPI is less than CPI, producers do not feel under pressure to make cost (i.e., payroll) cuts.

Which means unfortunately that since the start of the Iran war I’ve had to pay more attention to the PPI release.

And that continued with June’s release this morning — because, while it was “good,” at a decline of -0.3% for the month, it wasn’t *as* good as the -0.4% CPI decline. In other words, there’s a net +0.1% further pressure on producers. Here’s what the monthly change in CPI (blue), PPI for final demand (gold), and PPI for commodities (red, /2 for scale) which declined -1.2%, look like:

Of more concern is that while the YoY measure of final demand producer prices also declined slightly to +5.6%, it remains higher than the 3.5% YoY for CPI in June:

Although it hasn’t been a uniform rule, as this historical graph shows, when the YoY% increase in PPI exceeds CPI, more often than not that spells trouble:

Breaking down final demand between goods (red) and services (gold), for the month for former declined -1.2%, while the latter increased 0.2%:

Unsurprisingly on a YoY basis producer prices for goods (red) tend to be more more volatile than for services (gold):

But what is of concern in this breakdown is that the PPI increase for final demand services has been 4.6% or higher YoY for the past few months, higher than any such reading aside from the immediately inflationary post pandemic period, and briefly in the summer of 2024 

This strongly suggests that there is strong underlying inflationary pressure that has gone well beyond energy related prices. It also confirms what we have seen for a number of months now in the regional Fed indexes: widespread price increases in inputs, which are only incompletely being based on to buyers downstream.

And with the war flaring up again, it seems very unlikely that there will be another benign month for inflation when July’s numbers are crunched.

Last month I concluded in part: “Faced with a spike in price for inputs, producers can either absorb the increases, pass them on to consumes, or some of each. The regional Fed indexes for the past few months have indicated rampant input price hikes, with much - but not nearly complete - pass-throughs to consumers. That seems to be what we are seeing in the comparison of producer and consumer price spikes so far.”

If producers stay squeezed, they are going to begin to make cost cuts where they can. And if what I read elsewhere yesterday is true, that as much as 1/2 of all consumer spending recently has been due to the stock market’s wealth effect, the continuing economic expansion is considerably more fragile than it might appear on the surface.

June CPI: never look a gift horse in the mouth

 

 - by New Deal democrat

Never look a gift horse in the mouth. June’s CPI was that kind of gift horse, reversing all of the factors that have recently surged during the Iran war. As a bonus, inflation in shelter (1/3rd of the weight of the index) continued to abate.

Let’s start with the overall view. For the month, headline consumer prices declined -0.4%. Excluding food and energy, they were unchanged. Excluding shelter prices they declined -0.6%(!). On a YoY basis, headline prices gains (blue) decelerated from 4.2% to 3.6%. Core price gains (red) decelerated -0.2% to 2.6%. And ex-shelter, price gains (gold) decelerated -1.0% to 3.6%:

Shelter is 1/3ed of the entire index, and the good news continued there, as shelter prices increased only 0.1%, as did both of its components, rent and “owners’ equivalent rent.” This was one of the lowest increases in over five years. On a YoY basis, prices were still up 3.3%:

But of course the big reason for the decline in headline prices was energy costs (including gasoline), which declined -5.7% in June alone, reducing the YoY gains to 15.7%:

Although I won’t bother with graphs, the former problem children of new and used vehicles continued to sleep, with the price of new vehicles unchanged, and used vehicles down -0.2%. On a YoY basis, they are up only 0.5% and down -1.8%.

There was good news on our other recent “problem children” as well. Tansportation services (including car insurance and repairs) declined -0.3%. On a YoY basis they are now only up 2.9%:

And the AI data center related categories of electricity and utility services declined -1.0% and were up 0.5% respectively. On a YoY basis they are up 4.0% and 3.0% - not great but not as bad as in the past few months:

Finally, the decline in headline inflation was good news for both real nonsupervisory hourly wages (blue), up 0.6% for the month and slightly below unchanged YoY; and real aggregate nonsupervisory payrolls (red), up 0.3% for the month and up 1.0% YoY, although both remain about -0.5% below their February and January peaks respectively:

Recall that real appgrate nonsupervisory wages are an excellent short leading indicators for recession, and the fact that they rebounded in June means that, for now, recession risk is receding.