Long leading indicators in Q4 GDP suggest worsening conditions for an economy barely keeping its head above water

 

 - by New Deal democrat

Last week’s Q4 GDP release, as usual, updated two long leading indicators: proprietors’ income (a placeholder for corporate profits, which won’t be reported until next month at the earliest), and private residential fixed investment, a proxy for housing. They were of particular interest this time because, while the normalized yield curve (except at the short end) brought about by the Fed’s lowering interest rates has been getting a lot of attention as forecasting a good economy ahead, the rest of the long leading indicators aren’t doing so well. And that is of further particular concern because most of the critical coincident indicators of the economy aren’t doing so well, either.

Let’s take a look at them, starting with the two in the GDP report.

First, real private residential fixed investment declined slightly, and — the more precise long leading indicator — as a share of GDP made not just a new post-pandemic low in Q4, but a new 10+ year low:

Further, proprietors’ income declined for the third quarter in a row. The below graph shows it deflated by the PCE index, but even nominally there was a decline during Q4:

Here is the historical view (in log scale) to put it in more perspective:

 

The message of these two metrics would suggest a recession could happen at any time. 

A third non-financial long leading indicator, real retail sales per capita, although not part of the GDP, after improving throughout 2024, was also faltering in the second half of 2025:

Although I won’t bother reposting graphs, as we know from last week, housing permits and units under construction also faltered during most of 2025. 

In other words, take away the financial-based indicators, and the “real world” long leading indicators are flat at best.

Now let’s turn to the monthly coincident indicators that the NBER is said to track. The graph below norms them — payrolls, industrial production, real personal income less government transfers, and real manufacturing and trade sales — to 100 as of September. I’ve also included real retail sales, since the reporting on real manufacturing and trade industries sales is lagging so badly:

With the exception of industrial production, the best any of them have done since September is a 0.2% increase in real personal income as of November (before declining in December).

Note that there was lots of volatility early in 2024 that had to do with front-running the imposition of tariffs. So this is the same series shown YoY:

 

All of them except for industrial production are converging towards 0, i.e., no gain at all since one year ago.

Finally, although it isn’t necessarily part of the NBER’s calculations, real disposable personal income, both in total and per capita, also barely advanced in 2025, and particularly since July:

This is the discretionary money that consumers have to spend. As I pointed out last week, increased spending has only been as a result of consumers going into their savings, which renders them more vulnerable to any adverse shock.

In sum, we have an economy that is barely holding its head above water, and more compartments (to mix in a Titanic metaphor) are flooding.

Weekly Indicators for February 16 - 20 at Seeking Alpha

 

 - by New Deal democrat

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

It is striking that the (generally) non-governmental high frequency data point to a strong consumer-led economy, while the official, generally monthly data point to a stall in sales, income, spending, and jobs, with only production growing. This almost has to be resolved one way or the other soon.

As usual, clicking over and reading will bring you all of the most timely information, and bring me a penny or two to put towards lunch money.

December personal income and spending: on the very cusp of recessionary

 

 - by New Deal democrat

Personal income and spending are among the most important monthly indicators of all, because they give us a detailed look at consumption by the broad range of American households. And since consumption leads employment, they also give us an idea of what is likely to happen with regard to jobs in the near future.

This morning’s data was for December, so it is almost one month stale. For the month, nominally personal income rose 0.3% and spending rose 0.4%. But the PCE deflator also increased 0.4%, so in real terms income rounded to unchanged, and spending rounded to only a 0.1% increase. Here is what they look like since the pandemic:

Note that real personal income has been flattening for months, and has been lagging spending, which becomes even more apparent on a YoY basis:

Real personal income is only up 1.4% YoY, and real spending is up 1.7%. And both measures are decelerating.

Further, once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income actually declined -0.1%:

Real personal income excluding transfers was only up 0.1% YoY, and completely flat since last January. With only two exceptions — 2022 and 2013 (which was an artifact of a change in Social Security withholding) — such a low rate has only happened during recessions:

How is that spending being sustained? Households are digging into their savings. The personal savings rate declined -0.1% to 3.6%, the lowest rate since 2022. In fact, as the below long term historical graph, which subtracts -3.6% so that the current rate shows at 0, the personal saving rate has only been this low during the years immediately preceding the Great Recession, and during 2022:

In 2022, the economy was saved by the hurricane strength tailwind of deflating producer prices, which enabled a continued Boom in consumer spending. Needless to say that is unlikely to happen now. To the contrary, as indicated above, PCE prices increased 0.4% for the month, are were up 2.9% YoY, the highest rate of YoY increase since March 2024:

An accelerating PCE deflator is not something that is going to encourage the Fed to cut interest rates further.

And the leading portions of consumer spending are also flashing red warning signals. Historically, the pattern has been that real spending on goods (red in the graph below) turns down in advance of recessions, and in particular spending on durable goods (orange), which tends to turn down first. Real spending on services (blue) has tended to rise even during all but the most prolonged or deep recessions. The below graph shows the post-pandemic record, normed to 100 as of one year ago:

In December, services spending rose 0.3%, but real spending on goods declined -0.5%, and on durable goods -0.9%. For all of 2025, services spending did indeed increase, up 2.6%, but real spending on goods declined -0.1%, on real spending on durable goods declined -2.9%. And it wasn’t just one poor month. The trend in goods spending has been flat all year. To smooth out some of the noise, I have been tracking the three month average. That average peaked in October, and made a six month low in December.

In summary, real personal income, as well as real personal spending on goods, have flatlined in recent months, and are now slightly negative. Savings are being used to power additional spending, making consumers particularly vulnerable to any adverse shock. Any further deterioration would be clearly recessionary — and a downturn in the stock market, which has delivered so much “wealth effect” spending, could be just such a blow.

AI data center and electricity supply production as drivers of industrial production and capital goods spending

 

 - by New Deal democrat

There is more and more accumulating evidence that manufacturing, at least in the aggregate, is something close to Booming. That message was apparent in yesterday’s durable goods orders report for December. While the headline number (blue in the graph below) declined -1.4%, the three month average for this very volatile series made a new post-pandemic high. The much less noisy capital goods new orders number (red, right scale) increased 0.6% to a new all time high. The three month average for that metric made a new all time high as well:

These numbers have been rising for the past 18 months, and even accelerating, as the YoY% gains have also been increasing:

The same dynamic was apparent in yesterday’s industrial production release, in which headline production rose 0.7% for the month, and the manufacturing component 0.6%. The latter made a 3+ year high, and the former a post-pandemic high. But as I pointed out, the real driver was electric utility production. The below graph drives this home by norming all three to 100 as of just before the pandemic. Headline production is up 1.3% since then, but manufacturing production, despite the increases of the past 18 months, is still down -0.4%. Utility production, however, is up 13.9%!:

As I indicated then, I suspect this is almost all driven by AI data center and attendant power plant construction. Below I again show headline industrial production (blue) compared with employment in manufacturing (red), and in non-residential construction (gold), again all normed to 100 as of just before the pandemic:

Employment in manufacturing has been declining for several years, and is now -1.2% below its pre-pandemic levels. But employment in construction ex-residential housing is up 9.4%, and as of the latest report was still rising!

We know that some non-residential construction employment was increasing due to the Inflation Reduction Act, which led to a surge in construction of manufacturing plants, but that peaked in the middle of 2024 and has been declining since:

While this isn’t definitive, and I haven’t yet found a way to do a more granular analysis, it all points to the big increase in both electric utility production and non-residential construction employment being concentrated on the building of AI data centers and the gargantuan energy demands to power them. On this (I submit) rather slender reed is the current growth of the economy reliant.

Presidents’ Day week jobless claims pose a quandary

 

 - by New Deal democrat

Later this morning I’ll discuss yesterday’s positive durable goods orders release, and in that context I’ll also have more to say about the likely reason why industrial production also improved so much. Tomorrow we’ll get personal income and spending, and new home sales, both from December, as well as the first pass at Q4 GDP — all of which are one month late - even now three months after the end of the government shutdown!

In the meantime let’s take our usual weekly look at jobless claims. I do this because they are a good short leading indicator, particularly of the labor market.

Initial claims declined sharply last week, down -23,000 to 206,000, the best reading since mid-January. The four week moving average declined -1,000 to 219,000. And with the typical one week delay, continuing claims rose 17,000 to 1.869 million:

As per my usual practice recently, the above graph includes the last three years to show that there has been a pattern of unresolved seasonality whereby claims rise in the first six months of the year, and then decline in the last six months. 

Now let’s look at the YoY% changes which are more important for forecasting pursposes:

Initial claims were down -8.0%, but the four week moving average was still higher by 0.6%. Continuing claims were also higher by 0.4%.

So was the big decline this week a return to the positive comparisons YoY that we saw beginning last July? Or was it simply a function of Presidents’ Day being one week earlier this year than last year? Notably, in 2023 and 2024 there was a big spike downward in claims during the equivalent week in February, and while there was no such spike last year, there was a big upward spike the following week.

All of which means we’ll have to wait one more week to see if this week’s initial claims number was an outlier or not. Another week of lower claims YoY suggests that the trend since last July of comparatively very low claims has not abated, while a spike upward would suggest that unresolved post-pandemic seasonality has resumed being the bigger driver of the trends.

In either event, for forecasting purposes the numbers remain either mildly or strongly positive.

Industrial production surged in January, further evidence of an AI data center led rebound

 

 - by New Deal democrat

Industrial production is much less central to the US economic picture than it was before the “China shock,” but it remains an important if diminished economic indicator, particularly since the month it has peaked in the past has typically been the month the NBER has chosen as the economic cycle peak.

In January, headline industrial production (blue in the graph below) rose 0.7%, establishing another new post-pandemic high (although it remains below its 2018 all-time high).  Manufacturing production (red) increased 0.6%, and was the highest since October 2022: 

Recently the issue of utility production, which has been supercharged both by the needs of crypto mining and AI data center construction, has become important to the overall numbers. This increased another 2.1% in January to another all-time record:

This was a 0.7% increase YoY. 

There has been all kinds of evidence from the regional Fed reports, and to a lesser extent the ISM manufacturing index, that production has been rebouding since the fall. This morning’s report was powerful further evidence of that rebound. A big caveat, particularly with the impact of tariffs, is how much of this broader rebound, like utility production, is contingent on the AI data center Boom continuing.

Housing short term indicators say “recession;” longer term indicators suggest “recovery” is close

 

 - by New Deal democrat

When I updated this information in September, I wrote that “a puzzling relationship this year has been that the housing data has been classically recessionary for a number of months, and yet the economy has not rolled over.” I concluded that update by noting that while the report was “very much recessionary, [ ] in some YoY comparisons, I would expect further damage before the actual onset of one. But that could easily occur within the next four to six months.” 

Indeed, some of that did happen in the October report released last month. On the other hand, I noted that the fact that permits did rebound for two months and units under construction did not decline further argues for the possibility of a bottom in the housing market and the proverbial “green shoots.”

So the short term outlook and the longer term outlook may have begun to diverge.

Let me start by reiterating the basics: mortgage rates lead sales, which in turn lead prices, which in turn lead inventory. Sales, in the form of permits and starts, are long leading indicators. Inventory, in the form of units under construction, is a shorter leading indicator. Further, as has become increasingly important in the last year, employment in residential construction, and the inventory of houses for sale, are the last to turn down before a recession. Here’s the historical pre-pandemic look at that last relationship:

Per my opening remarks above, the housing market has been in recessionary territory for many months. So let me take the data out of my usual order, and focus on the short leading indicators first, before discussing the longer leading ones.

To wit, housing units under construction declined -1.5% to 1.277 million annualized, the lowest number since 2021, and -25.5% below their late 2022 peak:

There have been only two times in the past 50 years when such a decline did not yet give rise to a recession: in 2007, when the decline was just -0.1% lower, at -25.6%, and 1991, when the decline was 28.2%. As is apparent from this, just a further -2.8% decline from here would give us an all-time decline without a recession.

Now let’s look at the post-pandemic record of residential construction employment and new housing inventory for sale in comparison with units under construction:

Both of the above “final shoes to drop” have in fact dropped. With the recent revisions, employment in residential construction peaked in March 2024, although it is only down -1.5% from there. New housing for sale peaked in March and May of last year, and is currently down -3.2%. Historically this decline in inventory under these circumstances meant a recession was already underway, although the decline in employment in the past had typically been on the order of -5% to -10% before a recession began.

But if the above discussion suggests that housing remains recessionary - in fact, by most measures a recession should already be underway, the more leading indicators suggest that if it does not happen in the next few months, it is not likely to happen at all.

First of all, although I won’t bother with a graph, mortgage rates have fluctuated in a range between just over 6% to 7.6% in the past 3+ years. In the past several months, interest rates have been near the bottom of their range, and permits have responded.

In more detail, in December total permits (red in the graph below) increased 60,000 to 1.448 million, . Single family permits, which convey the clearer signal, increased 18,000 to 876,000. Meanwhile the much noisier and slightly lagging housing starts rose 60,000 to 1.448 million units, over 100,000 higher than their recent October low:

Even with these gains, permits and starts remain in territory below their peaks sufficient to be consistent with a recession. On the other hand, all three measures are down less than -10% YoY, where in the past it has taken a more severe decline of greater than -10% to be consistent with with a recession:

Further, in the past once permits and starts have bottomed, it is a signal that a recovery from a recession will begin within the next 6 - 8 months.

Similarly, the YoY% decline in housing units under construction, which I discussed further above, has also improved significantly from its worst levels of 2025. In the past, this has almost always meant that a recession has already ended:

The only episode which is consistent with the present was the late 1980s, where YoY declilnes stabilized for several years before the 1991 recession began.

In short, most of the housing metrics are telling us that we should already be in recession, while the more leading ones are telling us that if one does not happen in the next few months, it is unlikely to happen at all.

I continue to believe that the decisive factor which has prevented the economy from rolling over so far (unless the government shutdown last autumn proves to have been the precipitant) is the AI Boom, which has led to stock market gains, and a “wealth effect” increase in spending by the uppermost income consumers.