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.

Weekly Indicators for July 13 - 17 at Seeking Alpha

 

 - by New Deal democrat

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.