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.