Household balance sheets are in good shape

 - by New Deal democrat

 One of my fundamentals-based systems for monitoring the economy is to look at the health of household balance sheets.

Most recessions happen when consumers are under stress. If real wages are growing, if assets that can be leveraged or cashed in (mortgage payments, home equity, stocks) are increasing in value, if monthly debt payments are not increasing, then there is no reason for consumers to pull back, and economic expansions continue. It is only when all of these conduits for spending are constricted that recessions typically occur.

And at present, households are generally in good shape. None of the avenues of spending power have been constricted.

To begin with, real hourly and weekly wages have been increasing steadily since their June 2022 lows:

Values in the above graphs are normed to 100 as of January 1973, the previous all time high for both series. There is also some immediate post-pandemic distortion due to the fact that the 2020 layoffs were heavily tilted towards lower income laborers. Thus the averages increased. Even so, real average hourly wages are presently at all time highs except for several months in spring 2020, while real weekly wages are at 2.5 year highs, and above all pre-pandemic levels except for 1973.

In terms of assets that can be cashed in or borrowed against, I’ll spare you the graphs, but suffice it to say that both real, inflation adjusted home prices, and stock prices, are at all time highs - the latter having made another such all-time high only yesterday.

Finally, here is the long-term historical look at mortgage, non-mortgage (left scale), and total (red, right scale) debt services payments of households as a percent of disposable income:

While these have risen through Q2 of this year, the last data available, along with the Fed’s interest rate hikes, they are at pre-pandemic average levels.

Here is a close-up of the last five years:

What is noteworthy in this zoomed in look is that total debt service payments as a percent of income stabilized once the Fed was done hiking rates. If a recession were in the offing, I would expect this ratio to be continuing to increase. What this tells me is that average households’ debt service payments are well in line, despite being higher than their immediate post-pandemic historic lows.

In summary, real household wages and asset values are in good shape. The Fed rate hikes did not overly stress their balance sheets. There is no evidence households have been reining in spending. There is every reason to believe that the economic expansion will continue in the next few months.

For Indigenous Persons Day: a review of “A Brave and Cunning Prince” by James Horn

 

 - by New Deal democrat

Recently I read the above entitled book, and found it fascinating. Below are excerpts from an online book review, to which I have added further detail in brackets. I highly recommend it:

“In the mid-sixteenth century, Spanish explorers in the Chesapeake Bay kidnapped an Indian child [whose name they wrote as ‘Paquiquineo’] and took him back to Spain and subsequently to Mexico. [He may not have been kidnapped at all. There is evidence that many of the Indians who went to Europe did so of their own free will, especially younger warriors who were up for a Big Adventure.]  The boy converted to Catholicism and after nearly a decade was able to return to his land with a group of Jesuits to establish a mission.’ [During that time, he was treated as a  prince, I.e., visiting nobility, in Spain, even having an audience with Emperor Charles V. In fact, Indian nobility was treated similarly in Spain. There are descendants of Montezuma who married Conquistadors, settled with them in Spain, where the mansions and estates survive to this day. When he was taken to Mexico for several years on his way home, he got to know some of the Aztecs and other tribes, and both learned and saw how the Spanish treated them as virtual slaves. 

Based at least in part on that experience,] “Shortly after arriving, he organized a war party that killed the Spaniards.”[one Spaniard - a young servant/altar boy - was spared, despite his desire to be martyred rather than live among the heathens. When the next Spanish vessel arrived, he escaped and told the Spanish what happened. In an ensuing battle, many Indians were killed, and about 30 warriors were hung from the ship’s yardarms. But Paquiquineo’s plan succeeded in stopping any further Spanish exploration of the Chesapeake.]

“In the years that followed, Opechancanough (as the English called him), helped establish the most powerful chiefdom in the mid-Atlantic region, [including possibly killing some of the survivors of Raleigh’s ‘lost colony’. About 4 decades after the Spanish,] When English settlers founded Virginia in 1607, he fought tirelessly to drive them away, leading to a series of wars … and came close to destroying the colony. [His strategy was the same, engaging in a ‘long con’ designed to lull the settlers into complacency, even admitting Indian visitors into their dwellings often with no concern, after which his warriors suddenly and all at once fell upon the settlers at multiple locations, killing at least 1/3rd of them.]

[In an echo of what happened with the Spanish, his plans were thwarted by an Indian boy named Chanco, who had been sent to live at a settler’s farm in order to learn their language and customs. When a warrior told him of the planned massacre, Chanco warned his English friends instead. They in turn warned the Jamestown settlement in time to defend itself. Chanco was rewarded with 100 acres of land, which to this day is known as “Chanco’s Hundred” on the outskirts of Williamsburg.]

[As an aside, an English boy named Thomas Savage was sent to live with Powhatan’s tribe. He was well treated, but ultimately fled when he feared a massacre was impending. Powhatan was emotionally wounded, telling Savage he had nothing to be afraid of. Ultimately Savage was given a large tract of land by a friendly Chief on the eastern shore of the Chesapeake. The farm stayed in the family for 200 years, and even now is known as Savage’s neck.]

“He [Opechancanough] survived to be nearly a hundred years old and died as he lived, fighting the invaders [he was captured and imprisoned, and one of the guards shot him to death. He is buried near Chief Powhatan in a mound in a small reservation on the Pawmunkey River in Virginia.]”

Opechancanough‘s story raises some interesting questions for today’s Israel vs. Palestine conflict. What are the just limits of even violent resistance to displacement of an indigenous group by settlers?

 A Brave and Cunning Prince

Weekly Indicators for October 7 - 11 at Seeking Alpha

 

 - by New Deal democrat

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

The long end of the yield curve has steepened, and that means longer term interest rates are higher. Meanwhile the Hurricanes have played havoc with some of the high frequency data.

As usual, clicking over and reading will help sort through the noise, and reward me a little bit for organizing and categorizing it for you.

September producer prices almost entirely benign; very little upward pressure in the pipeline

 

 - by New Deal democrat

Sometimes producer prices lead consumer prices; sometimes they don’t - but in the sense that sometimes there is no lag at all before increases show up in consumer prices. In any event, overall the message from the producer price index this morning was benign, with very little pressure “in the pipeline” for consumer inflation.

To begin with, raw commodity prices (red) declined -1.2% in September, continuing their 2+ year downtrend; while final demand prices (blue) increased less than 0.1%:

On a YoY basis, commodity prices are down -2.5%, while final demand producer prices are only up 1.8%:

About the only place where any  (slight) upward pressure shows up is in final demand producer prices for services (gray), which increased 0.2% in September. Final demand producer prices for goods (gold) declined -0.2%:

On a YoY basis, goods prices are down -1.1%, while services prices are up 3.1%:

There appears to be a slight upward trend in services inflation, but it is within the range of noise as well.

In short, today’s producer price report, like yesterday’s consumer price report, was almost entirely benign.

I should also point out that typically a decline in commodity prices is taken as a sign of weakening demand (bad) rather than, as it was in 2022-23, a glut of supply (good). And on a global scale, the decline in goods prices probably is more about weakening demand now. But that weakening demand, so far as I have read, is all about China. And since the market is global, this is almost certainly a net boon to the domestic US economy. 

September consumer inflation: headline closing in on the Fed’s target, shelter decelerates, medical services become a problem child

 

 - by New Deal democrat



Today’s CPI report for September came in almost exactly as I suggested it would in my preview yesterday. To wit:

 - Headline CPI continued increased 0.2% for the month, and decelerated to 2.4% YoY, its best showing since February of 2021. 

 - On a 3 month annualized basis, prices are increasing 2.1%. On a 6 month annualized basis, they are only increasing 1.6%. 

 - energy inflation remains non-existent, with another decline of -1.9% for the month, resulting in a decline of -6.9% YoY.

-  excluding shelter, prices were also up 0.2%, and were once again up 1.1% YoY, the 17th month in a row the YoY change has been below 2.5%.

 - shelter inflation decelerated sharply for the month, up only 0.2%, tied for the least increase in 3 years, and up 4.8% YoY, the lowest YoY increase since February 2022.

- but core inflation, which includes shelter but excludes gas and food, remained elevated, up 0.3% for the months and 3.3% YoY, an increase of 0.1%.

Let’s break this down graphically to better show the trends.

Here are headline (blue), core (red), and ex-shelter (gold) inflation YoY:

Yet again, the only reason for the Fed not to treat inflation as well within its target zone is shelter.

The good news on shelter inflation this month puts it back on the deceleration track (blue in the graph below), and is in line with what we could expect vs. the FHFA Index YoY (red):

Now let’s take a look at the former and remaining problem children, plus why core inflation had a bump upward this month. 

The former problem child of new (dark blue) vehicle prices declined -0.1% this month and are down -1.3% YoY. Used (light blue) vehicle prices rose 0.3% and are down   -7.5% YoY (shown as the change since right before the pandemic, below). I also show average hourly nonsupervisory wages (red) for comparison, showing that wage growth has actually outpaced vehicle prices (meaning the remaining problem there is interest rates for financing):

Note again that used vehicle prices have given back over 50% of their post-pandemic gain.

Next, here’s a look at the remaining problem children. Electricity (gold) gained back the 0.7% it declined one month ago, but decelerated to being up 3.7% YoY, a six month low. Food away from home (blue) increased 0.3% again, and is up 3.9% YoY. Finally, transportation services including vehicle maintenance, repair, and insurance (red) increased 1.4%, the most in six months, and is up 8.7% YoY, an acceleration of 0.8% from last month:

This is the first month that both electricity and food away from home have been below 4% inflation YoY post-pandemic. As I have previously pointed out, transportation services inflation is a typical delayed reaction to the previous big increase in vehicle prices.

If several of the old problem children are fading, a new one - medical care services - appeared this month, increasing 0.7%, tied for the biggest increase in two years, causing the YoY% gain to increase to 3.6%, the highest in 21 months:

Finally, the CPI release allows me to update the very important metric of real aggregate nonsupervisory payrolls, which as anticipated increased 0.2% and once again made a new record high, up 8.2% since just before the pandemic:

To reiterate, there has *never* been a recession without real aggregate payrolls turning down first.

In conclusion, this was in almost all respects a good inflation report, with headline inflation closing in on the Fed’s 2% target, and the shelter component resuming its deceleration. The only fly in the ointment was the persistent 3%+ level of core inflation, which was hurt by the increase in medical care expenses.

Initial jobless claims: welcome back to hurricane season

 

 - by New Deal democrat

Step away from the ledge, everybody; and pay no attention to the DOOOMers, who are surely out in force this morning: the big increase in initial claims was almost all about Hurricane Helene.

By the numbers, initial claims increased 33,000 to 258,000, the highest number since August 2023. The four week moving average increased 6,250 to 231,000, the highest in a month. Continuing claims, with the usual one week delay, increased 42,000 to 1.861 million, the highest since mid-August:

On a YoY basis, initial claims were up 22.3%, the four week average up 8.7%, and continuing claims up 3.4%:

I won’t bother with the “Sahm Rule” unemployment rate comparison this week, partly because this is only the first week of the month, and partly because of what I discuss below.

If there were no special factors, I would be very concerned about a jump In claims as occurred this week. But my very first thought when I heard the numbers was, “Was there a natural disaster last week?” And of course there was, in the form of Hurricane Helene, which hit the panhandle of Florida with a record storm surge before pummeling the southern Appalachians, especially western North Carolina.

So I immediately went to the table of state by state changes, and here are the five biggest increases (*not* seasonally adjusted) in state level claims for last week:

MI +9,490

NC +8,534

CA +4,484

OH +4,328

FL +3,842

For contrast, here are the other two big States:

TX +1190

NY +544

I’m not sure what the story was in Michigan and Ohio, but it’s pretty clear why North Carolina had such a big jump. Neighboring TN, also impacted by Helene, also increased by +1,836. NC and FL alone were responsible for 23% of the entire non-seasonally adjusted increase of 53,570. 

We have seen similar increases after past hurricanes. In 2005, claims increased 96,000 just after Katrina. In 2012, they increased 81,000 right after Sandy. And in 2017, they jumped 50,000 immediately after Harvey. In all these cases, the big increases were in the States most impacted by the storms.

All of which means that next week we can expect to see a further sharp increase, driven by more Florida claims in the aftermath of Milton. We’ll see what happens with Michigan and Ohio, but unless I find a specific reason for their jump, I’ll expect a decline back to normalcy there.

So take a deep breath. Initial jobless claims are not signaling recession this week. They are signaling hurricane season.