Repeat home sales continue to show almost no shelter inflation at all

 

 - by New Deal democrat

Besides affordability being of great importance for potential homebuyers, housing also forms about 1/3rd of the entire CPI. House prices are not a component of the CPI, but historically their trend has led the official component, “Owners’ Equivalent Rent,” by about 12 to 18 months. And for about the last year, I have been beating the drum that housing prices have ceased being an engine of inflation. In fact, changes in repeat home sales prices as measured by both the Case-Shiller National Index and the FHFA Purchase Only Index are at levels that with only one exception have been at levels typically only seen during or after recessions.

This month’s report for April continued that trend.

The seasonally adjusted Case-Shiller National index (blue in the graphs below) declined once again, this month by -0.1% for the three month period ending in April, and the FHFA index (red) had the identical -0.1% decline [Note: FRED has not yet updated the Case Shiller data]:

There is something of a divergence showing in the YoY comparisons of the two national indexes, however. The Case Shiller national index increased only 0.8% YoY, slightly more than the 0.7% YoY gain last month; while the FHFA Index rose 0.3% on a YoY basis to a 2.0% increase. Either way, as the graph below shows, outside of the Great Recession’s housing bust, the 1991 recession, and briefly in 2022, these remain among the lowest readings ever:

Given the lead time between house prices and the official CPI shelter component, here is an upate on the historical comparison [Note: CPI*2.5 for scale]:

Just as in the similar episode back in 1991, the trend in house prices has been continued slow disinflation. This has been complicated by the “shelter kludge” that the Census Bureau performed last November as a result of the government shutdown. Thus I suspect the CPI shelter readings from November through March may have been artificially low, and the April and May readings of +3.3% and +3.4% may be closer to the ground truth. Nevertheless this continues to show disinflation from the 3.6% reading immediately before the shutdown. Thus I continue to believe that the repeat sales indexes point to continued slow deceleration in the shelter inflation in the CPI.

In this regard, it’s worth noting that the median price for an existing home as most recently reported by Realtor.com was only higher by 1.3% YoY, and for new single family houses as reported by the Census Bureau there was no change whatsoever [Note: Realtor.com only allows FRED to post the last year of data]:

The good news is in the real world housing is barely contributing to inflation at all. The bad news, as shown in this final graph below, is that measured by prices housing continues to be more unaffordable than at any time before the pandemic, including during the bubble of 2001-05, currently 2.6% above that peak:

And that doen’t even take into account the increase in mortgage rates from 3% right after the pandemic to over 6% now.

Re-examing the long leading indicators: the effects of fiscal and commodity price shocks

 

 - by New Deal democrat

Several weeks ago, I wrote that “after 20 years, I think it’s time to examine whether the broad range of long leading indicators hold up.” This was primarily because, while when they have been positive the economy has followed suit 12 to 24 months later, several times they have been negative with no endogenous recession occurring thereafter: once in 2018-19 (COVID being the decisive external factor), and once in 2022-23. Historically they also had a false positive in 1966.

In that post I examined the 4 identified by Prof. Geoffrey Moore in the 1980s (and subequently used by ECRI), which were corporate bonds, corporate profits deflated by labor costs, real money supply, and housing permits; plus common measures of the yield curve, and also real retail sales per capita.

At the end of that post, I made mention of the impact of fiscal, i.e., government spending. In this post I want to take a more detailed look at the two exemplar misses: 1966 and 2022.

Here is what Prof. Moore’s four long leading indicators, plus the yield spread between the 10 year Treasury and the Fed Funds rate looked like in the 1960s, normed to 100 as of December 1965 (I’ve also inverted corporate bond yields, so that an increase shows as a negative, and recalibrated the scale of the yield curve so that an inverted curve shows below value “100”):

As you can see, in 1966 every long leading indicator turned negative with the exception of real money supply, which was flat. This was a very strong recessionary signal. And yet, among other things, neither real GDP nor employment turned down:

Additionally, while real retail sales turned negative YoY, real income less government transfers did not:

Similarly, in 2022, every indicator declined for almost the entire year. Thereafter, several turned neutral, while corporate profits rebounded beginning in 2023:

Again, this was a strong recessionary signal. But real GDP only declined slightly for one quarter at the beginning of 2022, was flat the next, and then recovered, while employment never declined at all:

In 2022-23, both real retail sales and real income less government transfers did briefly decline YoY, but not in sync:

So, what overcame these recessionary signals? It appears that two even more powerful forces were in play.

The first was a positive price shock in the form of declining producer prices. 

To put this in context, here is the long term historical look at the YoY% change in PPI for finished goods (red) vs. CPI (blue):

With the exception of 1970, the onset of every other recession since the end of World War II has featured producer prices increasing faster than consumer prices. How this affects the economy is fairly straightforward: if producer input prices cannot be passed through to consumers, corporate profits will suffer, and cutbacks in hours and employment will begin.

But especially since 2000, there have been times where PPI inflation has equalled or exceeded CPI inflation without any recession. The simple dynamic going on here has been the decline in the labor share of producer income generated:

Now let’s look at 1966. There was a surge in PPI vs. CPI during 1965-66, but thereafter the PPI index abated:

In fact, beginning in September 1966, producer prices declined -1.1% through April 1967, relieving the pressure on employers.

A similar dynamic played out in 2022-23. From July 2022 through December 2023, producer prices declined -4.7%:

Both of these were “positive” price shocks, enabling corporate profits to increase without cutbacks to employment or an ensuing recession.

The second commonality to both episodes was huge government stimulus. Once again, here is the long term historical look, in log scale:

It’s easy to see that the mid-1960s, plus the stimulus payments during the Great Recession and COVID have been the three biggest expansions in government expenditure during this entire 75 year period. 

In the 1960s, from the beginning of 1965 through the end of 1966, even accounting for inflation, there was a 25% increase in government spending per capita:

This was LBJ’s “guns and butter” spending on both the VIetnam War and Great Society domestic programs.

The COVID stimulus was even bigger, with the 2020 stimulus increasing real per capita government spending by over 80% and the 2021 stimulus by almost 70% compared with just before the pandemic:

As a result, in 2021 real spending was 15% higher than before the pandemic, while real income even without the stimulus payments was up about 4%. Although each of these declined at differing periods during 2022 and 2023, employment (gold) never caught up even to its pre-pandemic level until the middle of 2022:

In other words, there was still a huge shortfall in the number of employees needed to fulfill all the consumer spending that had been unleashed by the stimulus. 

Finally, it’s worth noting that we do have the contrary example, of a contraction in federal spending leading to a recession, in the -10% reduction in New Deal spending that took place in 1937 through to be primarily responsible for the deep recession of 1938:

Let’s put this all together: the long leading indicators have been reliable in forecasting continued expansion, but several times have suggested a recession was likely ahead, but none materialized. In each of those cases, however, the endogenous progression of the economic cycle has been overcome by both (1) a positive supply shock in the form of disinflating or even deflating commodity prices; and (2) huge government stimulus programs. 

Because we don’t have enough examples, it’s impossible to know which of these two factors was more important, or whether both were necessary. Additionally, because the former is an exogenous event and the latter is often geopolitical, it is very unlikely that they could be forecast. On the other hand, in both 1966 and 2022 the government stimulus programs were already in place, meaning they can be taken into account in long leading forecasting.

I still plan on doing some further re-examination, so stay tuned.

Weekly Indicators for June 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

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

Unsurprisingly, the most significant high frequency indicator of the week was the 10% YoY increase in consumer spending as measured by Redbook. Despite all of the chaos and own-goals emanating out of Washington, the economy is incredibly resilient - although I continue to worry that nearly the only driving force is what looks like a Bubble in construction of AI mega-scale data centers.

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 little lunch money for curating the data for you.

Real personal spending on durable goods rebounds from near recessionary levels, including motor vehicle purchases

 

 - by New Deal democrat

Yesterday we saw a slew of data releases, including durable and core capital goods orders, jobless claims, personal income and spending, and motor vehicle sales. I reported on all but personal spending and motor vehicle sales yesterday. Today let’s take a look at the last two.

Let me start with the same overview graph I used yesterday, showing a pronounced downturn in real income since early last year (blue) vs. a continued increase in spending (red):

As I pointed out, the difference can be explained by the decline in the personal saving rate to an extreme low:

What are consumers spending on? The order in which such spending has typically peaked in past expansions is: first, durable goods; second nondurable goods; and finally, consumer goods. As I have pointed out many times in the past, real spending on services usually continues to increase, or at least not decrease, even through recessions. So this first graph compares real spending on durable goods (red) vs. goods as a whole (gold) vs. services (blue) for the past several years:

Monthly spending on durable goods peaked at the end of 2024 and declined slightly during 2025. In the past several months it has recovered somewhat. By contrast, spending on goods as a whole continued to trend slowly higher, and spending on services has barely slowed at all.

Here is the same data shown YoY:

Durable goods spending, while volatile, has generally trended close to the 0 line in the past eight months. A historical look at YoY spending on durable goods and goods as a whole shows that, with a few exceptions (notably 1966 and 1987), when spending on durable goods is negative for longer than a month, it typically means a recession is either occurring or at least imminent:

Now let’s look at nondurable goods. Compared with durable goods, spending on nondurable goods (orange) has continued to increase throughout the last year:

On a YoY historical basis, real spending on nondurable goods has not turned negative during most recessions, but the YoY increase has slowed sharply:

In other words, sometimes spending on nondurable goods does peak prior to recessions, but sometimes the growth rate just slows down or turns flat, as shown in the two historical graphs below set in log scale:

If the signal from spending on durable goods is close to recessionary, that on nondurable goods suggests continued expansion in the immediate future.

Which brings us to motor vehicle sales, because they are the quintessential consumer durable good. In general, in the past purchases on passenger cars and pickup trucks (blue) have slowed down noisily before recessions, typically by about 10%, while purchases of heavy weight trucks (red) have slowed first and more sharply:

But just as with spending on durable goods, purchases of heavy weight trucks in particular have rebounded in the past few months:

Purchases of passenger vehicles have picked up slightly, but are within the range of noise and are generally trending sideways.

In sum, real personal spending, unlike real personal income, is not giving a clear recession signal, and if anything has rebounded slightly in the past several months, in particular for durable goods. That is also showing up in the purchases of heavy weight trucks, which tracks with the broader rebound in core capital goods spending, and the noisier uptrend in durable goods orders, as well as other manufacturing series like industrial production and the regional Fed indexes, that we have seen over the past six to eight months. Which, to reiterate, likely has very much to do with the building of massive AI data centers.

Real personal income in May was recessionary (again); depleting savings (temporarily?) “saves” the day

 

 - by New Deal democrat

The third item from this morning’s torrent of economic data I want to address is personal income and saving. I’ll update the spending side tomorrow, including an updated look at motor vehicle sales, which were also released this morning.

On a nominal basis, personal income rose 0.7% in May, as did spending. But since prices as measured by the PCE deflator rose 0.3%, in real terms the former rounded to only a 0.2% increase (blue) and the latter a 0.3% increase (red). It is easy to see that the two metrics diverged sharply about a year ago:

Indeed, on a YoY basis, while real spending is up 2.1%, real income is *down* -0.2%:

As indicated above, I’ll withhold further comment on the spending side until tomorrow. But for real incomes to be negative YoY is dismal. As shown in the below graph, for the entire 60 year period between the inception of data and the pandemic, with only one exception (described below), real personal income was *never* negative YoY except during or immediately after the worst recessions:

The sole exception was in 2013, when a temporary Social Security tax withholding holiday that had been put in place for one year in 2012 as a stimulus measure expired. Note, however, that it was also negative in 2022 without a recession having taken place.

Similarly, real income less government transfer payments rose 0.3% for the month (blue, right scale), but is down -0.4% YoY (orange, left scale):

Similarly, before the pandemic except for 2013 and 2022, real income less government transfer payments was only negative during or immediately after recessions:

Similarly to 2012, in 2021 there were large direct one-time stimulus payments to households. Thus the 2022 income numbers suffered in comparison. 

How is it that spending can continue to be so positive, with no recession occurring, despite the actual decline in real inocme? Because consumers have dipped into their savings in a big way. The personal savings rate was 3.0% for the second month in a row:

As shown in the above graph, which subtracts 3 from the saving rate so that the current level shows at the 0 line, aside from 2022 and the 2005-07 period just before the Great Recession, the personal saving rate has never been this low during the entire history of the series.

Tomorrow I’ll dig deeper into the spending side, but for now the takeaway is that the US economy would almost certainly be in a recession except for the consumer spending spree, which is almost certainly in large part funded by stock market gains and the ensuing “wealth effect” which is in turn a byproduct of the AI data center boom - or Bubble.

Manufacturing sector continues to be positive through May

 

 -by New Deal democrat

Per my post earlier this morning, I am going to delay until tomorrow reporting on motor vehicle sales and an in-depth look at personal spending, but let’s look at the second significant data release from this morning: manufacturers’ new durable goods orders for May.

To cut to the chase, this was another good month, at least on a nominal basis, continuing the string of positive, even somewhat Booming reports so far this year. While total orders declined -4.5% for the month - still within the range of noise - core capital goods orders increased 1.6% to another all-time high. And even with the decline, the headline number was only lower than one month ago and one month last year:

Headline orders are up about 25% from their pre-pandemic all-time high in 2018, while core capital goods orders are about 37% higher. And as the below YoY% comparison shows, the rate of increase has been accelerating for core capital goods orders in the past few months:

I need to caution again that these are nominal numbers. But even if I were to adjust for CPI, PPI, or PCE inflation, the three month average of orders would be higher YoY, and core capital goods would still be about 6% higher YoY.

Meanwhile, real manufacturing and trade industries sales were also updated this morning for April, showing a -0.9% decline monthly to the lowest level in four months. But real sales remain about 13% higher than before the pandemic:

On a YoY basis, real sales are up 1.3%:

This is among the poorest showings since the pandemic, eclipsed only by the 2022 manufacturing downturn and several months last year. Further, a historical look shows that before the Millennium, a 1.3% increase in real sales only happened shortly before or during recessions. Since the accession of China to normal trading status, it has been lower in 2002, the industrial recession of 2016, and the 2019 period that had some pre-recessionary characteristics as well:

Keep in mind this is for April, while the durable and capital goods release was for May. Further keep in mind that new orders are a forward-looking, short leading indicator, while real sales are a coincident indicator. In other words, the main import of all the data remains positive for the manufacturing sector.

Jobless claims: seasonality returns, but remains very positive for the economy

 

 - by New Deal democrat

This morning a plethora of economic data was released, including personal spending and income, manuacturers’ new orders, motor vehicle sales, and jobless claims. Since tomorrow sees no significant data releases, I’m going to hold the in-depth look at spending and motor vehicle sales until tomorrow, and update the other releases today.

Let’s start with the typical weekly look at jobless claims, 1/2 of my “quick and dirty” forecasting method. To reiterate, the issue I’ve been looking at is whether post-pandemic seasonality is reappearing, or whether the “regime change” of signficantly lower YoY claims that started last July is intact.

And the apparent answer is: both.

Initial claims declined -12,000 to 215,000, while the four week average rose 750 to 224,250. With the typical one week delay, continuing claims rose 21,000 to 1.821 million:

Excluding the immediately preceding three weeks, this week’s initial claims number is the highest all year except for two week in February and one in April; and the four week average is the highest since last November. This very much looks like the return of post-pandemic residual seasonality.

But on a YoY basis, the very positive comparisons continue, as initial claims are down -8.9%, the four week average down -7.4%, and continuing claims down -7.1%:

This is in line with the excellent YoY comparisons we have seen almost all of this year.

To synthesize, it would appear that while post-pandemic seasonality has reappeared, it is at a lower level that from 2023-2025. Which is very positive for the near term economy.

Finally, let’s do our update of what this might mean for the June unemployment rate when that report is released next week. Unsurprisingly, it continues to show that downward pressure will continue to be exerted on that rate. I would not expect the rate to increase from 4.3%, and there is a very good chance it declines:

The positive news continues.