Strong Q3 GDP, but long leading components are mixed; first preliminary positive signs for production in October

 

 - by New Deal democrat

Because today is a travel day for me, I am going to keep my comments about the much-delayed Q3 GDP report brief.

As was obvious, a 4.3% annualized real GDP print is very good, as was the real final sales to domestic purchasers number. One of the comments I made repeatedly at the time, as the summer regional Fed reports came in, as well as the weekly consumer retail spending numbers, was that they were surprisingly good - probably reflecting a rebound from the weak spring numbers immediately after “Lbieration Day” tariffs. Basically I think the excellent GDP numbers reflect that.

As usual, my focus is on the more forward looking components of the GDP release: real private residential fixed investment (housing) and corporate profits.

The story in housing continued to be negative, as real private residential fixed investment declined -1.3% in the Quarter:

  https://fred.stlouisfed.org/graph/fredgraph.png?g=1P5Bk&height=490 

 

This means housing is down -15.3% from its 2021 peak, and -3.5% from its secondary peak in early 2024. And keep in mind that the best forecasting model is to deflate this metric by real GDP - and since there was strong improvement in real GDP in Q3, the relative decline is even worse.

The story on the second long leading indicator, corporate profits, was completely different, as they grew by a strong 4.2% after accounting for inventories to another new all-time record:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1P5Bo&height=490 

The bottom line: if the rear view mirror, coincident reading of Q3 GDP was very positive, the measures which forecast where the economy is headed in 2026 were mixed.

Keep in mind, though, this is a report covering July through September, i.e., 3 to 5 months ago. In other words, more stale data. We still have very little data from the period of the government shutdown months of October and November. On that score, manufacturers new durable goods orders for October were reported this morning. The headline number increased 0.5%, but the core capital goods number declined -2.2%:

 https://fred.stlouisfed.org/graph/?g=1P5Ae 

The YoY trend for both remains in strong expansion, up 4.8% and 6.2% respectively:

  https://fred.stlouisfed.org/graph/?g=1P5Aw 

I have been very concerned that the government shutdown may have tipped the economy into recession. The jobs numbers have certainly been recessionary. But the weekly consumer spending data has, contrarily, been very healthy. This morning’s two reports make it all but certain that there was no recession in Q3, and are the first -preliminary - positive indications that at least in the first month of the shutdown, the economy continued to make progress.

Two important employment indicators from November: one says continued expansion, the second recession

 

  - by New Deal democrat

This is going to be a sparse week for data, with the exception of tomorrow’s long-delayed Q3 GDP report, and jobless claims on Wednesday. Sadly, so much of the data is still missing or stale that the best source for up-to-date information is in the regional Fed reports, most of which will be updated by this Friday (so stay tuned for that). And don’t be surprised if I play hooky for a day or two.

That being said, one important - and positive - data point can be updated based on last week’s November jobs and CPI reports: real aggregate nonsupervisory payrolls. To recapitulate, these always peak before a recession begins, usually within 3 to 6 months. And there is a very good fundamental reason for that: once the average American household has less cash to spend in real terms, consumption promptly gets tightened, and that downturn in consumption typically brings about all the other indicia of recession quickly.

But the news from November was good. For the two months covered by the updated jobs report, nominally aggregate payrolls increased 0.9%. Meanwhile, the official cpi index only increased 0.2% for the two months from September through November, meaning that real nonsupervisory payrolls increased 0.7%. In the graph linked to below, November’s level is set to 100, which is the only visibleway to show  the increase since September:

 https://fred.stlouisfed.org/graph/?g=1P3Jp 

Note that even if the much-criticized shelter increase of 0.1% were instead changed to 0.3% each month, the average over the previously reported months this year, real aggregate payrolls would still have increased 0.2% for the two month period, still a new high.

Nevertheless I recommend taking this will a heavy dose of salt.

On the negative side, it is difficult to imagine such a weak labor market not being on the cusp of, if not already in, a recession. As of November, service providing jobs were only up 0.7% YoY, while goods producing jobs were down -0.15% YoY. A shown in the graph linked to below, which normalizes both readings to zero, only once in the past 85 years - in 1944 - has employment in both sectors been this low YoY without either being already in, or at least on the doorstep of, a recession:

 https://fred.stlouisfed.org/graph/?g=1P3KS 

Keep in mind, by the way, that this data is not yet adjusted for any of the QCEW reports this year, which have suggested at by the end of June, employment was only up 0.3% compared with 12 months before, as opposed to the 1.0% higher indicated by the current nonfarm payrolls surveys.

We are still in many ways flying blind. In particular, we really need to see reliable real sales, production, and consumption data through the period of the government shutdown to determine whether or not that self-inflicted wound pushed the economy into contraction or not. Without it, any conclusion I might reach would just be speculation.

Weekly Indicators for December 15 - 19 at Seeking Alpha

 

 - by New Deal democrat

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

All of the trends that we have been seeing for the past several months appear to be becoming more entrenched. That includes the re-normalization of the yield curve on the positive side, and weak withholding tax payments and transportation metrics on the negative side. One trend that doesn’t seem to be affected: consumer spending, which is still chugging along as it has for the past several years.

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 towards my lunch money.

The “gold standard” QCEW through Q2 suggests little if any employment growth this year

 

 - 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.

The important news is that, after a considerable delay due to the government shutdown, it was released for Q2 this morning.  And there was good news and bad news.

The good news is that, on a non-seasonally adjusted basis, 2.3 million jobs were added in the 2nd quarter of this year, the same number as was the case in for the NSA private monthly payrolls number. After seasonal adjustment, that translated into just under 200,000 jobs net for the three months, as per the below graph of SA and NSA private nonfarm payrolls over the past four years through June:

 https://fred.stlouisfed.org/graph/?g=1OXVJ 

The bad news is that, in contrast to the 1.286 million jobs added in the 12 months after June 2024, only 237,000 were added per the QCEW for the entire 12 months period. In other words, beginning in late 2024, the jobs sector has been dead in the water.

Per previous releases of the QCEW, even at the end of 2024, on a year over year basis employment grew by about 1.4 million, or 0.9%. Then in the first quarter of this year, comparisons fell off a cliff again. Based on the most recent updated QCEW data, only about 427,000 jobs were added NSA YoY through the end of March. So there was further deceleration in Q2. 

These are not seasonally adjusted numbers, so it is entirely possible that the NSA gain turns into an actual decline. In my August review of the Q1 QCEW, I concluded that it wss “suggesting there might not have been any job growth at all this year.” Updated through Q2, 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. 

Consumer inflation went to sleep in October-November, driven mainly by a steep deceleration in shelter price increases

 

 - by New Deal democrat

A truncated version of the CPI was reported for November this morning. Since no data was collected for October, the monthly change in those values was not calculated, the Census Bureau apparently having elected not to publish with the cumulative two month changes since September. Nevertheless, the two month numbers are easily calculated, and the important ones are all the same: headline, core, shelter, and headline minus shelter all rose 0.2% in the last two months.

All of which means any calculations except for YoY ones have to be taken with numerous grains of salt. The only exceptions are for data that was privately collected and then integrated into the calculations, which were not affected by by the government shutdown.

With those caveats out of the way, by far the most important component of the CPI this month was shelter, and in particular the sharp deceleration in its YoY increase. Actual rent YoY declined from a 3.6% increase in September to 3.0% in November. Imputed Owner’s Equivalent Rent decelerated from a 3.8% YoY increase in September to 3.4% in November. The total for shelter decreased from 3.6% to 3.0%. Note that in the graph below the November readings do not appear:

 https://fred.stlouisfed.org/graph/?g=1OVTF 

All of these are the lowest since summer 2021, and are in line with their pre-pandemic ranges. And they are very big declines for only two months, so I am treating them with extra caution. It would not surprise me at all to see a signficant revision of these numbers next month.

This big decline in the shelter component of CPI, which is over 1/3rd of the entire calculation, is what drove the headline and core numbers down. YoY headline inflation was only 2.6%, the lowest since July, and core inflation YoY was 2.6%. YoY inflation ex-shelter was 2.5%:

 https://fred.stlouisfed.org/graph/?g=1OVSF 

All of these are equivalent to their readings back in July, i.e., lower than either August or September. 

Collection of data for new and used vehicles was not affected by the shutdown. New vehicle prices rose 0.1% in October and 0.2% in November. Used vehicle prices rose 0.7% in October and 0.3% in November. As a result their YoY increases were 3.6% and 0.6% respectively:

 https://fred.stlouisfed.org/graph/?g=1OVUz 

Another recent problem child for inflation was transportation services, mainly vehicle parts and repairs as well as insurance. These also have gone somnolent, with an incrrease of only 1.7% YoY, the lowest since early 2021:

 https://fred.stlouisfed.org/graph/?g=1OVUT 

Finally, prices for gas home service, and electricity have also become a problem, the latter likely a side effect of the building of massive data centers for AI generation. Electricity prices were up 6.9% YoY in November, the highest increase since 2008 except for the post-pandemic inflation:

 https://fred.stlouisfed.org/graph/?g=1OVV5 

This has already created a backlash, and I expect that backlash to intensify.

In summary, November’s CPI report covering two months showed a big slowdown in all major components of consumer inflation, and in particular that for shelter. This in turn drove the YoY comparisons back down to where they were last summer. That being said, treat this month’s report with extra caution, and look out for significant revisions next month.

Jobless claims continue to paint a much more positive picture than the unemployment rate

 

 - by New Deal democrat

[Note: An update to my OS the other day has nuked my ability to post graphs. For now, I will post links to FRED graphs that you can access. For this post, I am only using one such link. If I am unable to resolve the problem, drastic action may be reqeured.]

The return to normalcy in jobless claims after a skewed reading for Thanksgiving week due to unresolved seasonality continued. Initial claims declined -13,000 to 224,000, very close to the midpoint of its range since the beginning of July. The four week moving average, which still includes the outlier Thanksgiving week, rose 500 to 217,500. Continuing claims, which are delayed one week and thus only one week out from the Thanksgiving skew, rose 67,000 but were still below 1.9 million at 1.897 million.

On the YoY% basis which is more important for forecasting purposes, initial claims were up 0.9%; the four week average still down, by -3.5%, and continuing claims higher by 1.9%.

It will be two more weeks before the skewed week is out of the four week average, so I would discount that reading.

Still, very slight YoY increases in new and continuing jobless claims are neutral and do not portend an imminent recession.

Last week I noted that the unresolved post-pandemic seasonality that was so apparent in 2023 and 2024 has been much more muted, especially in the second half of this year. Claims did rise into June, but then sharply declined in July, and have generally remained in that range since. I further noted that in the first half of this year, jobless claims typically were in the +10,000 range YoY. That all changed since the end of June. In the 23 weeks through one week ago, jobless claims averaged just under -4,000 lower YoY.

This week’s initial claims number was only 2,000 higher than last year’s for the equivalent week, which adds another week of evidence for the idea that there has been somewhat of a change in regime for jobless claims since the middle of this year. Significantly, it also suggests a serious disconnect between what has been happening with both initial and continuing claims vs. the unemployment rate, which as you recall increased to a multiyear high in the jobs report released for November the other day. Here is the update on that comparison:

 https://fred.stlouisfed.org/graph/?g=1OVPM 

An unemployment rate 0.4% higher than one year previous has in the past almost always meant that a recession has begun. The exceptions were one month in the 1950s, two months in 1963 - and five months last year. The jump in the unemployment rate is consistent with the significant increase in continuing claims that started in June. 

It is also possible that this is a reaction to the anomaly last year in the unemployment rate, which was put down (rightly I think) to a miscalculation of the impact of immigration on the population numbers. But this year all the evidence is that has reversed. The answer apparently lies in the 0.6 million surge in the unemployment level as well as a 1.2 million surge in the civilian labor force calculation in the Household Survey since July, especially in comparison with very low increases calculated last November. I suspect we are going to have to wait for January for YoY comparisons to be more valid, since they will not be against the big immigration undercount of 2024. Since that undercount does not affect jobless claims numbers, at very least we have to take the alleged triggering of the “Sahm Rule” in November’s jobs report with extra grains of salt.