May CPI is “less bad,” but bad enough to edge consumers closer to recessionary income levels

 

 - by New Deal democrat

Just as forecast by the Cleveland Fed, the CPI in May increased 0.5% - less than the increases in March and April, but still too high. Core CPI, which excludes food and energy, increased only 0.2%. The YoY% gains both also increased, to 4.2% and 2.8% respectively. to increase to 3.8%. 

As per the last several months, in addition to my usual practice of focusing on shelter and any other “problem children” with outsize numbers, this month even more than last month it is important to note the impact on real wages and incomes. 

Let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which is up 4.7% YoY, the highest in over three years:

Last month shelter costs unexpectedly increased 0.6%. That was not revised down this month. Meanwhile the monthly gain was 0.3%, on the higher end of readings for the past year. This caused YoY shelter to increase another 0.1% to 3.4% (blue in the graph below). Rent rose 0.4% in the month and 2.9% YoY (gold), while Owner’s Equivalent Rent (red) rose 0.3% monthly and 3.3% YoY:

This is disconcerting, because all the other leading indicators for shelter has been telegraphing further declines. This could well go back to ramifications of the shelter inflation “kludge” used to estimate this sector during the government shutdown.

Now let me look at a few other present or former “problem children.” 

There was good news on several fronts, which I’ll note without accompanying graphs. First, both new and used vehicle prices continue to be asleep at the wheel, with new car prices *declining* -0.3%, and used car prices only up 0.1%. On a YoY basis, new car prices have only increased 0.2%, and used car prices have actually *declined* -2.0%. In fact, both new and used car prices have been virtually unchanged for the past 3 years. Since the onset of the pandemic, new car prices are up about 25% and used car prices up 20%, while hourly wages are up about 35%.

Next, food at home prices are only up 2.7% YoY, and food away from home only up 3.5%. Both of these had been rising over 4% YoY until recently, but now both are increasing less than wage growth.

But several other sectors continued show inflationary problems.

Transportation services (mainly vehicle repairs and insurance) followed vehicle prices higher, but had calmed for a brief period before the last several months. This has almost entirely been driven by motor vehicle maintenance and repair prices (likely becuase consumers are holding on to older cars for a longer period of time). In May, while insurance premiums declined -1.7%, and YoY were down -2.0%, maintenance and repair prices increased 0.8% for the month and 6.1% YoY.  In the entire sector prices declined -0.6% for the month, but were up 4.1% YoY:

Secondly, and more importantly, electricity prices jumped another 0.6% in May after a 2.1% in April, and have risen 5.9% YoY:

This is almost certainly due to the impact of the building of AI data centers.

Finally, let’s look at what this means for incomes. In May, nominally the average hourly earnings for nonsupervisory workers increased 0.2%, meaning that in real terms they declined -0.3%. Further, aggregate nonsupervisory payrolls increased 0.4%, meaning that in real terms they declined as well, by -0.1%. Here’s what real wages and payrolls look like in absolute terms normed to their recent peaks:

Real wages are down -1.1% from their peak and real aggregate payrolls are down -0.6%.

Neither of these mean that we are in a recession now. But the YoY comparisons are further cause for great concern. On that basis, real hourly wages are down -1.1%, while real aggregate payrolls did improve YoY by 0.1% to +0.8%:

The former is frequently associated with a near in time recession, and the latter usually crosses the “0” line to the downside within a month or two before or after the onset of a recession. In fact, real aggregate nonsupervisory payrolls have only been higher YoY by 0.8% or less without a recession occurring shortly thereafter for one month apiece in the 1960s and 1990s, and the 2002-03 period. And note that real aggregate nonsupervisory payrolls are currently only 0.4% above what they were last July.

Last month I wrote that “both measures of real wages and payrolls are sending a ‘yellow flag’ recession caution.” The same is true this month, although the yellow flag is a shade more orange, because at -0.6%, payrolls are only 0.1% above the -0.7% decline from peak in real aggregate payrolls have been about the median decline at the onset of past recessions.

In conclusion, this was another poor report, although “less bad” than the reports in March and April. Although gas prices have actually abated during the past few weeks, both the ISM manufacturing and services indexes indicated that there were widespread upstream price increases in May, that presumably have not yet filtered down to the consumer level. In other words, price pressures on consumers are likely to continue for at least several more months, even under optimistic scenarios where the Strait of Hormuz opens back up in the next few weeks. 

This has had a real, negative impact on ordinary consumer finances. In fact, I would go so far as to say we would already be in the opening month of a recession if consumers had not coped with this - so far - by very large increases in credit card balances.

Existing home sales report shows a sub-optimal equilibrium with rangebound sales, prices, and inventory

 

 - by New Deal democrat

First of all, my usual caveat: although they constitute about 90% of all housing sales, I don’t pay too much attention to existing sales because they are not nearly so important as new home sales, since the latter involve much more economic activity in the building process, plus more landscaping and furnishings.

But more than sales, since the pandemic the dynamics that have been more important have been prices and inventory. Because during the pandemic prices skyrocketed, and inventory cratered. It has been a long, slow arduous process of rebalancing since then. 

For the record, let me start with sales. These have been rangebound between 3.85 million annualized to 4.35 million for the past three years. And although they increased from April by 13,000, and were 6% higher than one year ago, they remained rangebound with sales of 4.17 million annualized in May. This is also only 3.2% higher compared with one year ago:

As you can easily see, the current range is well below the pre-COVID average of roughly 5.5 million annualized sales.

So now let’s turn to the metrics that most need to be normalized: prices and inventories. Note that these are not seasonally adjusted, so the only good way to look at them is YoY.

The median price for an existing home in May was $429,300, up a mere 1.3% from one year ago:

This is consistent with the near record low YoY increases (outside of the Housing Bust) in the Case-Shiller and FHFA repeat home sales indexes, and the slight YoY decline in new home prices as developers downsize to meet the market.

But the inventory of existing homes for sale remain well below their pre-pandemic levels. In May these were 1.55 million units annualized, up only 10,000 from one year ago, a 0.6% YoY increase. This is nowhere near what is necessary, as shown in the 10 year graph below:

The current level is still only about 80% of what it would take to return to pre-COVID normalcy.

Finally, last week the NAR also updated its information on new (red, right scale) and total (blue) listing counts:

As you can see, these are also very seasonal. In general, the number of listings has been improving. But, as the YoY% graph of the same data shows below, the improvement has all but come to a halt in the last few months, with active listings only up 2.2%, and new listings only up 2.1%:

This year the housing market has appearred to reach a sub-optimal post-COVID equilibrium, with sideways sales and prices, and at best slowly increasing inventory. Needless to say, the increase in mortgage rates since the onset of the Iran war has not been helpful. The US simply needs much more housing to be built to return to some kind of affordability.

Scenes of strength and weakness from the May jobs report

 

 - by New Deal democrat

It’s the Monday after the jobs report, and as usual there is no new data today. So let’s take a look at a few of the salient trends from Friday’s report.

First of all, this was the fourth good report in a row. Furthermore, it isn’t just goods producing jobs (red in the graph below, *2 for scale) that have rebounded (as has been signaled by the regional Fed and ISM reports since late last year), but service jobs (blue) as well:

To some extent, this may have been signaled by the uptick in monthly real retail sales (light blue in the graph below), which typically lead employment (red) by several months:

In the above graph, I also included real personal spending (dark blue), which have been steadily increasing YoY, and don’t seem to provide much explanatory power.

But in support of the idea that increase retail spending has led to an increase in service producing jobs, here is the last year of the weekly Redbook retail sales report:

The increasing trend in YoY sales is apparent. In fact, since the first of the year, there were only two weeks (in January) that saw gains of less than 6% YoY. And every week in the past six have been prints of over 7% YoY.

I trace this all back to the AI Boom (or bubble), which has led to a sharp YoY increase in stock prices, which in turn has likely led to a pronounced “wealth effect.”

Next, the unemployment rate remained steady at 4.3% for the third month in a row. So has my forecast for a decline towards 4% been busted? I don’t think so, as shown in the below graph of initial+continuing jobless claims (blue, right scale), the unemployment rate (orange, left scale) and the raw data on which it is based; namely, the number of unemployed vs. the number of people in the entire labor force (red):

The trend in the raw data is indeed a decline, especially if we look on a three month moving average basis. The steadiness in the unemployment rate has been a function or rounding. The bottom line is that I still expect the unemployment rate to decline towards 4% in the next few months, based on 60 years of history.

Finally, let’s look forward to how this Wednesday’s CPI report might impact important employment data. 

Friday’s report showed a nearly .25% increase in average nonsupervisory wages, and a nearly .45% increase in aggregate nonsupervisory payrolls, that rounded to 0.2% and 0.4% respectively:

Two important forecasting tools I use are real nonsupervisory hourly wages (blue in the graphs below) and real aggregate nonsupervisory payrolls (red). The first graph shows their absolute values, normed to 100 as of their recent peaks:

Real wages are down -0.9% from their February peak, and real aggregate payrolls down -0.7% from January.

As of today, the Cleveland Fed is forecasting that May inflation will be reported up 0.5% on Wednesday, which would increase those declines to -1.2% and -0.8% respectively. These would be significant declines frequently - but not always! - consistent with the onset of a recession.

Here’s the same data YoY for the past three years:

Real wages are already down -0.1% YoY, while real payrolls are up 0.7%.

Here is the historical pre-pandemic look at both:

A YoY decline in real wages has been a feature of every recession except for the shallow, producer-led 2001 recession; but from the 1980s through at least 2015 they were also negative for extended periods without there being a recession.

On the other hand, a YoY decline in real aggregate nonsupervisory payrolls has been a perfect indicator with the exception of the extended decline during 2002-03 (the one month each of nearly negative readings in the 1960s and 1990s were strike related).

Last May real average wages increased 0.4%, while real aggregate payrolls were unchanged. If inflation is as per forecast by the Cleveland Fed, YoY real average wages will be down -0.4% YoY, and real aggregate payrolls will be up 0.6%. If that happens, those will be yellow “caution” signals, but not “red flag” recession indicators.

Weekly Indicators for June 1 - 5 at Seeking Alpha

 

 - by New Deal democrat

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

The large majority of the high frequency indicators remain positive. Interestingly, though, one of the early warning signals for credit tightening, the Chicago Fed’s Leverage Index, is now at a level that in the past has more often meant a recession was approaching within the next year than not.

As always, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a little lunch money for putting it all together in organized fashion for you.

May jobs report: a solid positive report, with the important (likely) exception of wages

 

 - by New Deal democrat

My Big Theme for the past few months has been that the AI Boom (or possibly bubble) is counterbalancing a stagnant or even shallowly recessionary rest of the economy. The bottom line is that the May report was the third in a row that not only confirmed that, but suggested the labor market as a whole - against all odds - might be firming. With the major exception of real wages.

Below is my in depth synopsis.

HEADLINES:

• 172,000 jobs gained, Private sector jobs increased 120,000, while government jobs added 52,000, a disproportionately large number. In fact, local government accounted for 55,000 jobs, suggesting a major seasonality glitch in the education sector. The three month average rose sharply to 188,000.
• The pattern of downward revisions to previous months completely reversed this month. March was revised higher for the second month in a row, by 29,000 to 214,000, and April was revised upward by 64,000 to +179,000, for a total increase of 93,000.
• The alternate, and more volatile measure in the household report, rose by 149,000 jobs. But on a YoY basis, this series was negative for the fourth month in a row, by -473,000 jobs, or an average of -39,000 monthly.
• The U3 unemployment rate remained steady at 4.3%. 
• The U6 underemployment rate declined -0.1% to 8.1%.
• Further out on the spectrum, those who are not in the labor force but want a job now rose 76,000 to 6.187 million, about average for the past 12 months..

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn vs. rebounding. These were mixed but mainly positive.

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was unchanged at 41.6 hours, tied for the highest number in 5 years, as it equalled its 2021 peak.

• Manufacturing jobs rose 7,000, the 3rd increase in the last 12 months.
• Truck driving resumed its decline, by -4,400.
• Construction jobs rose +17,000.
• But Residential construction jobs, which are even more leading, declined -1,700, but stayed within the stabilizing trend since last April.
• Goods producing jobs as a whole rose +26,000. 

• Temporary jobs, which have declined by over -650,000 since late 2022, rose by 1,400, continuing to improve from their post-pandemic low set last October.
• The number of people unemployed for 5 weeks or less declined -286,000 to 2.210 million, about average for the past 12 months.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.08, or +0.2%, to $32.31, for a YoY gain of +3.6%, still above its 5 year low of 3.4% set in March. Importantly, this is -0.2% *lower* than the YoY inflation rate through April. We will have to see what next week’s report for May CPI brings.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers increased +0.2%, and is up 1.3% YoY, the best such showing in over 2 years.

• The index of aggregate payrolls for non-managerial workers rose +0.4%, and is up 5.0% YoY, also its highest comparison in almost 2 years.

Other significant data:

• Professional and business employment rose for the second month in a row, by +7,000. These tend to be well-paying jobs. This remains above its October low, it still remains lower YoY by -35,000, which in the past 80+ years - until now - has almost *always* meant recession.
• The employment population ratio declined another -0.1% to 59.1%, vs. 61.1% in February 2020, and its lowest since October 2021, helped by an extremely low comparison month last May.
• The Labor Force Participation Rate was unchanged at 61.8% , vs. 63.4% in February 2020, but tied for its lowest since October 2021.

SUMMARY

This was the third good monthly report in a row, and probably the best of the three, with several significant exceptions. 

Let’s start with the positives. These included not just the headline employment number, but the increase in the leading manufacturing, construction, and the general goods producing sectors. Temporary help jobs and professional and business jobs increased. Short term unemployment decreased. Revisions, for a change, were positive.  

The most noteworthy negative as the low increase in wages, which most likely means that real wages declined again, and that real aggregate nonsupervisory payrolls were most likely flat or negative as well, meaning that very important short leading indicator will remain below its January peak for the 4th month in a row. Also of interest is that the unemployment rate did not decline, despite the extremely low level of jobless claims. Finally, if we deduct the likely seasonality glitch of local education employment, the monthly headline increase would be only 117,000, which while positive is hardly a blowout.

But again, with the important exception of wages, this was a solid positive report.