Regional Fed services indexes suggest future expansion, but weak employment in the face of strong inflationary pressures

 - by New Deal democrat 

Although the federal government shutdown has been over for a month and a half, most of the data that has been released has lagged badly, especially including data on sales, spending, and business orders. That means that the most current measures of these are the ISM manufacturing and non-manufacturing reports, due Friday of this week and Monday next week; and the regional Fed banks’ manufacturing and services indexes.

While certainly not perfect, in the aggregate they at least sketch on outline of where the economy has been going in the past month. On Monday I looked at the goods producing sector. Now that the Texas Fed has reported, here is the Services sector.

As with the manufacturing chart, month over month changes are in parentheses, showing momentum (the 2nd derivative), with the absolute diffusion values for November following. The final number is the average change and absolute number for all 5 together. The chart includes, in order, NY, Philadelphia, Richmond, Kansas City, and Texas:

Regional Fed:     NY.           PHL.           RVA.       KC.      TX.       Avg

Headline:  (+1.7) -20.0; (-0.5) -16.8; (+4) -11; (+10) 3; (-1) -2.3; (+2.8) -9.6     

Cap Ex   (+0.2) -6.9; (+10.6) 10.6; (-6) -9; (+14) 9; (+3.6) 23.6; (+3.5) 5.5

Prices Paid  (+10.2) 72.1; (+5.6) 40.3; (+1.3) 6.1; (+2) 34; (-1.4) 26.2; (+3.3) 35.7

Prices Rec’d (+10.4) 30.5; (-3.0) 19.0; (+0.1) 3.2; (-4) 10; (+1.4) 7.9; (+0.9) 14.1  

Wages (-1.7) 23.7; (-3.2) 46.1; (+5) 17; (-11) 13; (-3.9) 10.8; (-3.0) 22.1 

Employment (-1.2) -7.4; (+7.1) 9.6; (+4) 5; (+10) -6; (-3.9) -0.8; (+3.2) 0.0

The only clear positive trend is strong CapEx growth, implying building capacity for increased demand in the future. Wages also continued to show broad growth, although they may be growing too fast for the underlying business conditions. By contrast, headline business conditions continued to indicate contraction, although less than in November, and employment was dead in the water. Meanwhile both prices paid and prices received continued to show broad increases, the former more than the latter. This suggests sustained services inflation will continue, and even perhaps amplify in the months ahead. 

On Monday I summarized the manufacturing situation thusly: “The December regional Fed reports suggest that while new orders have continued to be positive, the increasing trend has abated, with overall actual contraction of production. Prices paid by manufacturers continue to increase, but at a slower pace, while the prices they receive have firmed. Meanwhile employment is barely positive, but wage growth continues.”

When we examine both the manufacturing and services sector in full as reported by the regional Feds in December, giving much more weight to services as per their share of the economy, we see promising signs of future expansion,  but stalling present production and employment, in the face of continued inflationary prices both at the commodity and final demand levels. Whether wage growth can continue to match this is very much at issue, as wage growth tends to follow employment growth (or lack thereof). If the trends continue, strong inflation and weakening wage growth are a recipe for a consumer led recession.

Positive trend in jobless claims continues through year end

 

 - by New Deal democrat

[Note: Yesterday was a travel day, and I didn’t get around to posting the regional Fed services survey averages for December. I’ll try to get to that later today.]

The last weekly jobless report continues the trend of an improved picture - as in, very few people are getting laid off - that has typified the second half of this year.

Initial jobless claims declined -16,000 to 199,000, the second best reading all year, and one of the very best in the entire last 50 years. The four week moving average increased 1,750 to 218,750, still close to the lowest readings this year. With the typical one week delay, continuing claims declined -47,000 to 1.866 million, among the best readings in the past six months. Here’s a link to the last four years of data:

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

The above view shows how post-pandemic seasonality has not been expunged from the seasonal adjustments. Claims have risen in the first half of the year, peaked in early summer, and then declined towards the end of the year. Such has been the case this year as well, although the trend has been more muted. Additionally, note that this was for Christmas week, which like Thanksgiving week is notoriously hard to seasonally adjust, so take this big weekly decline with extra caution. The four week average, while very good, is likely giving a truer picture.

As per usual, the YoY% changes are more important to my forecast. There, initial claims were lower by -4.8%, and the four week average down -1.6%. Continuing claims remained higher, by 2.1%:

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

Since mid-year, more weeks than not initial claims have been lower YoY, while continuing claims have been higher, but even that increase has faded since the beginning of November. Needless to say, this suggests the economy will continue to expand over the next several months.

Although I won’t bother with the graph this week, since jobless claims typically lead the unemployment rate, and one year ago the unemployment rate was 4.1%-4.2%, the improvement in claims over the last six weeks suggests that the unemployment rate is likely to decrease from its November high of 4.5%.

Regional Fed manufacturing indexes suggest 2025 trends are slowly abating

 

 - by New Deal democrat

Although the federal government shutdown has been over for a month and a half, most of the data that has been released has lagged badly, especially including data on sales, spending, and business orders. That means that the most current measures of these are the ISM manufacturing and non-manufacturing reports, due later this week and next week; and the regional Fed banks’ manufacturing and services indexes.

While certainly not perfect, in the aggregate they at least sketch on outline of where the economy has been going in the past month. With the last regional manufacturing index reported this morning, here is the December update for that sector.

The below chart includes, in order, NY, Philadelphia, Richmond, Kansas City, and Texas. Month over month changes are in parentheses, with the absolute values for December following. The final number is the average change and absolute number for all 5 together.

Regional Fed:     NY.           PHL.           RVA.       KC.    TX.    Avg

Headline:     (-22.6) -3.9; (-8.5) -10.2; (+8) -7; (-7) 1; (-0.5) -10.9; (-7.5) -5.2          

New Orders (-15.9) 0.0; (+13.6) 5.0; (+14) -8; (+2) 0; ( -11.2) -6.4; (+0.5) 1.9 

Prices Paid  (-11.4) 37.6; (-13.5) 43.6 (-0.3) 6.5; (+4) 40; (+0.7 ) 36.0; (-4.1) 31.5 

Prices Rec’d (-4.2) 19.8; (+6.7) 24.3; (+1.9) 5.0; (+9) 22; (-2.6) 6.2; (+2.1) 15.5

Wages* (n/a) n/a; (n/a) n/a; (0) 24; (n/a) n/a; (+6.4) 21.8); (+3.2) 23.0

Employment  (+0.7) 7.3; (+6.9) 12.9; (+6) -1; (-15) -4; (-3.3) -1.1; (-0.9) 2.8

____

* only 2 of the banks report this information

Last week durable goods and core capital goods orders were updated through October, showing a -2.2% decline and a 0.5% gain, respectively. On a YoY basis, the trend of increasing strength has continued, at +4.8% and +6.2% respectively:

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

The December regional Fed reports suggest that while new orders have continued to be positive, the increasing trend has abated, with overall actual contraction of production. Prices paid by manufacturers continue to increase, but at a slower pace, while the prices they receive have firmed. Meanwhile employment is barely positive, but wage growth continues. 

Tomorrow the Texas Fed will report on that region’s service sector, and that (larger) portion of the economy for December can be examined as well.

Weekly Indicators for December 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

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

The year ended with a magnification of several trends that have been a theme all year: the US $ is down almost 10%, largely responsible for a nearly 15% rise in commodity prices, while consumer spending ended with a bang as well.

As usual, clicking over and reading will bring you up to the virtual moment as to all these trends, and reward me with a penny or two for my efforts.

How the “wealth effect” fueled Q3 GDP

 

 - by New Deal democrat

In Q3, personal spending rose 1.6%, or 6.4% annualized, while personal incomes only rose 0.8%, or 3.3% annualized. A little more precisely, personal spending rose 0.75% more than personal incomes.

Just how much more did spending rise than the income to fuel it compared on a historical basis?

In the past 80 years (or 280 quarters), spending only exceeded income by 0.75% or more only 29 times. In other words, in only 10% or all quarters has spending exceeded income so much:

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

Needless to say, this is not sustainable. This is particularly so when real disposable personal income did not grow at all last quarter, and real personal income excluding government transfer payments has not increased at all in the past two quarters:

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

As I have written a number of times in the past few months, this is probably spending driven by the “wealth effect” which in turn is driven by stock market gains. 

Unless you think we are headed for AI-driven nirvana, this is not going to last.

The low pace of firings continues to Christmas

 

 - by New Deal democrat

Our last bit of news before Christmas continued the positive news, as initial jobless claims declined back to 214,000, while the four week average also declined to 216,750. The last three weeks collectively have had the lowest seasonally adjusted numbers since January. Meanwhile, continuing claims rose back above 1.9 million to 1.923 million.

As is usual, for forecasting purposes the YoY% changes are more important. Here, initial claims were -2.3% lower than one year ago, the four week average down -4.2%, and continuing claims higher by 2.2%:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1P7pl&height=490 

Although per the recent QCEW update through Q2 as well as the recent nonfarm payrolls reports show that on net almost no hiring is happening, jobless claims tell us there is very little firing as well. This is a positive report.