Wednesday, February 21, 2024

Perceptions of inflation vs. wage growth: why the divergence?


 - by New Deal democrat

My recent travels included visits to cousins and their children on both sides of my family. Without any prompting from me, inevitably the table talk turned to the state of the economy.

Rather than Bigfoot the opinions of my relatives, I decided to sit back and listen until they were all done before I weighed in.

The most important thing I learned by far is that inflation remains the #1 topic across the board. Nobody seemed to think that incomes were keeping up. There was skepticism even after I pointed to the relative better performance of average hourly wages in the past three years vs. inflation, and even after comparing their best guesses for things like eggs with the actual data.

Although we’ve seen improvement recently across measures of consumer confidence, I suspect there are two reasons for the persistence in the beliefs that inflation has made people in general worse off.

The first goes back to a principle of psychology: to be more effective, reinforcement has to be more frequent and more recent. When it comes to prices and incomes, prices of things like gas and groceries are encountered almost every day. Thus there is constant reinforcement of that data. But paychecks (and social security payments for retired people) are typically only received biweekly or even monthly, and they typically don’t increase except for once a year. Thus the reinforcement of the price data is far more powerful than the reinforcement of income data. There’s also the fact that “job switchers” have received much bigger pay increases than “job stayers.” For people in stable careers - who are much more likely to be job stayers - it’s entirely likely that a large minority at least have not received pay increases that have equaled inflation over the past three years.

The second issue is that real median household income might not have followed the positive trajectory of real hourly wages. The former have averaged being up 1.4% YoY for the past half a year, which historically is very good improvement (note: graph subtracts -1.4% from values to show current average at the zero line for easier comparison):

But here is the comparison of the annual changes in real average hourly wages (blue) with real median household income (red):

Through 2022, hourly wages (annually) and median income were both significantly below their pre-pandemic levels. Partly this is due to the fact that, even with better wages, the number of jobs still had not recovered to their pre-pandemic level until the middle of 2022. It is only when we measure more currently - only available in the wage series until this coming September- that we see an increase.

In my opinion, the very delayed, and only annual update, in real median household income  is one of the biggest shortfalls in the official government data. As shown above, real median household income for 2022 was only reported five months ago, and we’re already in 2024! 

Over the years there have been several private economic firms who have used data from the monthly Household survey to provide estimates of monthly changes in real household income. For example, Ironman at the Political Calculations blog has done this for more than 15 years. Here’s his most recent update:

But while annual real median household income, as measured officially, rose over 14% between 2007 and 2019, Ironman’s calculations only show an increase of less than 5% for the same period.

Recently, he has begun linking to another estimate by Motio Research, which appears to track the official government series far more closely, but is also updated monthly. Here’s their data through January 2024:

Note that until the middle of last year, real median household income had fallen back to 2019 levels. It is only in the past 6 months that it has risen sharply again, better than all levels except for those months during the pandemic where income included government stimulus payments.

If real median household income’s recent gains remain intact, or even improve further, I would expect the popular impressions of the relative impacts of wages and incomes vs. inflation to improve in the coming months as well.

Tuesday, February 20, 2024

Weekly Indicators for February 12 - 16 at Seeking Alpha


 - by New Deal democrat

I am back from my travels, so it’s time to catch up. There’s no significant economic news until tomorrow, but in the meantime I neglected to link to my weekly high frequency indicator wrap-up, which was posted at Seeking Alpha.

As usual, if you haven’t already done so, clicking over and reading will bring you up to the virtual minute on the economic data and forecast, and reward me a little bit for my efforts.

Friday, February 16, 2024

Housing construction essentially stable in January


 - by New Deal democrat

I’m on the road, so I need to keep this brief, but fortunately I can give you the essence of this most important housing report with little difficulty.

Mortgage rates have declined about 1% from their peak during the autumn, and are about equal to where they were one year ago:

As a result, we should expect some improvement in the housing market from its worst levels. And that’s what we got.

Housing permits declined 1.5% for the month, but are about average compared with the past 10 months. The more significant single family permits increased 1.6% to their highest level in over 18 months. The much more noisy starts decreased a sharp -14.8% for the month, to a level equivalent to their worst in the past year:

Because starts lag permits slightly, I do not think this decline presages a trend, but rather is mainly noise.

Housing units under construction, which are a measure of the “actual” economic activity in the new home market, declined -0.4%, but are only down -2.2% from their peak one year ago. Single family units declined -9,000, but multi family units increased 5,000:

To signify a likely recession, units under construction would have to decline at least -10%, and needless to say, we’re not there. With permits having increased off their bottom, I am not expecting such a 10% decline in construction to materialize. 

Retail sales faceplant; industrial production continues 16 month streak of weakness


- by New Deal democrat

Let’s take a look at two the big short leading and coincident indicators that were reported yesterday, respectively real retail sales and inducatrial production.

Retail sales can be volatile monthly, and about once in a typical year they either faceplant or unexpectedly soar. Yesterday we got the facelpalnt.

Retail sales declined nominally -0.8% in January. Because consumer prices rose 0.3%, in real terms sales declined -1.1%:

This is the lowest level in 10 months. It’s important to note that January sales, on a non-seasonally adjusted basis, are always awful, and while this year was even poorer than last year, it was better than in the years before the pandemic hit. So the seasonal adjustment may be a little askew due to pandemic-era comparisons.

On a YoY basis real retail sales (blue) are down -0.8%. Below I also show real personal consumption of goods (gold) and nonfarm payrolls (red), since the former two although noisy tend to forecast the trend in jobs:

If this were to persist, usually in the past is has meant recession (but not in the last 18 months!) - and note the unusual big divergence between the sales and consumption measures (for now!), which will probably resolve.

Meanwhile industrial production, one of the most important coincident indicators, also declined, by -0.1%, and is down -0.9% from its September 2022 peak. Manufacturing production declined sharply, down -0.5%, and is now -2.1% below its October 2022 peak:

This is the lowest reading for manufacturing production since the beginning of 2023.

On a YoY basis, total production is unchanged, and manufacturing is down -0.8%:

In the modern era since China’s accession to normal trading status in 2000, the 2023 downturn was not quite as negative as the 2015-16 downturn, which did not lead to a recession, although it was definitely as soft spot. 

While we did not get a recession in 2023, it is nonetheless true that both manufacturing and housing did decline from their respective peaks after the Fed began raising rates, and have not recovered them yet.

I am treating these reports as “more of the same” weakness for manufacturing, and a one-off volatile downward number for sales unless it is confirmed by further weakness for at least one more month.

Thursday, February 15, 2024

Initial claims remain positive


 - by New Deal democrat

Initial jobless claims declined this week -8,000 to 212,000. The four week average rose 5,750 to 218,250. With the typical one week lag, continuing claims rose 30,000 to 1.865 million:

On the more important (for forecasting purposes) YoY basis, initial claims are down -1.9%. The four week average is up 5.4%. Continuing claims are up 10.3%:

Initial claims indicate continued expansions. Continuing claims would be a significant issue if supported by initial claims, but this is their lowest YoY increase in eleven months. 

While the last several weeks of initial claims are higher than in January, they remain very low by historical standards, and continue to suggest that the unemployment rate will stay steady or decline in the next few months:

These remain good reports.

Wednesday, February 14, 2024

The long leading forecast for 2024 at Seeking Alpha


 - by New Deal democrat

A couple of times a year I update my long leading forecast. With the latest GDP and Senior Loan Officer Survey data, there is enough to take a look at what the next 12 months probably have in store.

This article is up at Seeking Alpha.