Repeat home sales continue to show disinflation; shelter CPI likely to continue to be a non-factor

 

 - by New Deal democrat

For the last number of months, I have been putting front and center 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 March continued that trend.

The seasonally adjusted Case-Shiller National index (blue in the graphs below) actually declined -0.2% for the three month period ending in March, while the FHFA index (red) rose 0.1%:

Just as important if not moreso is that the YoY comparisons of at least one of the two national indexes continued to show further disinflation. The Case Shiller national index increased only 0.7% YoY, tied for the lowest since the Great Recession’s housing bust except for April through June 2023. The FHFA Index again rounded to 1.7%, as it has for the last two months, but actually was slightly lower, becoming the lowest such reading since 2012:

As per usual, since housing prices lead the CPI’s shelter component (purple in the graph below) by roughly 12-18 months, let’s compare the YoY trends (Note: house price indexes /2.5 for scale) going all the way back to 1990:

In 1992, with house price increases generally stable in the roughly 0.5%-1.0% YoY range, shelter inflation increased about 3.0%. But in the past year the trend in house prices has been continued slow disinflation, as it was in 1991. Thus I continue to believe that the repeat sales indexes provide solid evidence that we can expect shelter inflation in the CPI to continue to decelerate throughout this year, with the shelter component ending this year at close to a 2.0% YoY increase.

In April, the shelter component of the CPI had an anomalous monthly jump of 0.6%, the biggest such increase since September 2023, which caused the YoY growth to increase to 3.3%, but I expect the downward drumbeat of disinflation in the housing aspect of consumer prices to resume in the next month or two.

Memorial Day 2026

 

 - by New Deal democrat

Memorial Day originated as the day to remember those thousands who gave their lives to preserve the Union in the Cicil War, by decorating their graves. It is that most somber of national observances, in which we remember all of those who gave their lives to protect government of the People, by the People, and for the People; under the Rule of Law as previously agreed by those people.

From Lincoln’s Gettysburg Address:

“… [O]ur fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal.

“Now we are engaged in a great civil war, testing whether that nation, or any nation so conceived and so dedicated, can long endure…. We have come to dedicate … a final resting place for those who [ ] gave their lives that that nation might live. It is altogether fitting and proper that we should do this.

“But, in a larger sense, we can not dedicate-we can not consecrate-we can not hallow-this ground. The brave men, living and dead, who struggled here, have consecrated it, far above our poor power to add or detract. The world … can never forget what they did here. It is for us the living to be here dedicated to the great task remaining before us-that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion-that we here highly resolve that these dead shall not have died in vain-… that government of the people, by the people, for the people shall not perish from the earth.” 

Here is one such place of commemoration:

Normandy American Cemetery

Weekly Indicators for May 18 - 22 at Seeking Alpha

 

 - by New Deal democrat

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

Interest rates, along with gas prices, continue to be elevated, but consumers are continuing to spend their way right on through the adversity - at least, so far.

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

Preliminary regional Fed reports indicate inflationary pulse continuing in May

 

 - by New Deal democrat

Although manufacturing is far less important to the US economy than it was in the decades after World War II, it is still about 25% of the total weighting; and further, it is more vulnerable to shocks than the services portion of the economy. Which means, for forecasting purposes, it is always a sector that turns down in advance of a general downturn, even if a sharp downturn in manufacturing by itself is generally no longer enough to bring about a recession. Put another way, a downturn in manufacturing is a necessary, but not sufficient, leading indicator for the economy.

At the beginning of this month, the ISM manufacturing index continued its string this year of expansioinary readings. The three month averages of its headline and new orders indexes, which smooth out some volatility, were steady at 52.6 and slightly lower at 54.5, respectively, with any reading above 50 indicating expansion:

But I also noted that the prices paid subindex rose sharply to the highest number since  May of 2022.

Those trends have continued with the first May readings from the New York and Philadelphia Fed regional manufacturing surveys. 

To begin with, the headline numbers were 19.6 for New York (orange in the graphs below), the highest index result since 2022, while the Philadelphia headline number (gold in the graphs below) was slightly negative, at -0.4. To smooth out these very noisy series, I also show the average (blue):

The general trend of expansion in manufacturing since late last year is apparent.

Further, the more leading new orders components of the regional surveys was similar, with New York showing robust expansion, and Philadelphia very minor -1.4 contraction. The average of the two was less positive than in April, but the three month average was the most positive since early 2025:

But if the production portion of the surveys was positive, inflationary problems reared their head in the pricing components.

Prices paid for commodities for production increased for about 50% of all respondents, close to last spring’s highs and aside from the massive 2022 inflation, amongh the highest readings of the Millennium:

And the index o prices received by those same producers also increased to close to 12 month highs, and aside from 2022 among the highest average readings as well:

Since these are May numbers, they suggest further inflationary pass-throughs to consumers. In other words, while the good news is that the economy likely will continue to expand in the next month or two, as I indicated earlier this week, the inflationary pulse that began in March is almost certainly continuing in May.

An exception to the rule? Maybe Housing ISN’T the Business Cycle

 

 - by New Deal democrat

Twenty years ago, Professor Edward Leamer gave an important presentation at the Fed’s Jackson Hole meeting entitled “Housing IS the Business Cycle.” The current environment is putting that hypothesis to a very severe test. Because by all accounts housing has deteriorated  sufficiently that a recession should already have begun months ago. In fact, the current situation would be most congruent with such a recession ending! And yet, here we are. 

Let’s take a more detailed look.

As I often do, let me start with mortgage rates (blue, left scale) compared with single family permits (red, right scale). Typically housing permits and starts follow mortgage rates, and for most of the past several years they had been declining from their post pandemic high of over 7%. In February they made a new 3+ year low of 5.99% before the Iran war oil shock drove rates higher, to 6.67% earlier this week. The decline in rates before March had been sufficient to reverse the trend in single family permits (red, right scale), which began to rise from their bottom early last summer:

In April, housing starts (blue), which are noisier and slightly lag permits (gold), declined -42,000 to 1.465 annualized. Permits rose 79,000 to 1.442 million. But the metric which is the least noisy as well as being most leading, single family permits (red, right scale), declined -23,000 to 872,000 annualized: 

On the one hand, the recent increase in mortgage rates may well be behind the decline in single family permits to their second worst level in three years. But what appears most noteworthy about the above data is that the downward momentum in the numbers has almost completely stalled since last June. Single family permits have varied between 867,000 and 929,000, while total permits have varied between 1.347 million and 1.540 million. 

On a YOY% basis, starts are down -4.6%, while permits are down only -0.2% and single family permits are down -8.5%:

As I noted last month, the YoY downtrend has not been worsening for many months. Typically all three have been down 20% or more at the onset of recessions in the past, although in the 1991 and 2001 recessions, they were only down about -10%; and there have been a number of times, for example 1966, 1987, and 1995, where construction has been down -10% or more YoY without a recession occurring:

Further, negative but relatively minor and stable negative YoY changes have been just as consistent with mid-expansion slowdowns as with recessions, and stable if negative YoY changes have sometimes occurred during recessions a few months before recoveries.

Let’s turn next to the number of housing units under construction. As I have written many times in the past several years, it is the best “real” measure of the economic impact of housing. In March they were rose slightly to 1.275 million annualized, just above their five year lows, and down -25.6% from their peak:

The above graph shows how they have followed single family permits (red), as expected. More often than not in the past by the time a decline in units under construction had declined by this much, a recession had already begun. 

Now let’s update the graph of the typical final shoes to drop before recessions, including houses for sale (gold) and residential construction employment (red, right scale), both normed to 100 as of their respective post-pandemic peaks. Since December, both of these have stabilized at down roughly -5% and -2% respectively, from their peaks:

As I concluded last month, this is a quandary. For nearly the past year, almost all of the indicators in the housing sector have been giving classic signs that a recession should already have been underway. And while a number of coincident indicators, including jobs and real personal income, have been consistent with a shallow recession since then, others - most notably real manufacturing sales and industrial production - have continued to increase.

But instead, as discussed above there are a number of signs that the situation has been bottoming, without a recession having occurred. While the renewed upturn in mortgage rates may, and likely will, cause at least some further downturn in housing permits and starts, at the moment Leamer’s thesis is facing a severe test, to say the least.

Jobless claims continue to be the most positive leading indicator of all

 

 - by New Deal democrat

I’ll get to housing permits and starts later this morning. But first, let me take my regular look at initial and continuing jobless claims. As a reminder, I look at jobless claims because historically they have been a very good short leading indicator for the economy.

And they continue to forecast no imminent recession ahead. For the week, initial claims declined -3,000 to 210,000, still historically in the lowest range going back over 50 years. The four week moving average declined -1,500 to 202,500. Aside from one week each in 2019 and 2014, plus one month in 2022, this is the lowest number since the late 1960s, when the US population was only about half of what it is now. Finally, continuing claims rose 6,000 to 1.782 million, in the lowest range it has been in since 2024:

On the YoY basis more important for forecasting purposes, initial claims were lower by -7.1%, the four week moving average by -11.8%, and continuing claims by -5.7%:

Needless to say, this is a very positive short term indicator for the economy.

And that positive indication extends to the unemployment rate as well, since jobless claims lead that metric by several months:

Initial and continuing claims forecast that the unemployment rate will decline in the next several months to the 4.0% range.

The asterisk with regard to jobless claims is that it likely has been affected by the situation with immigrants, although the exact manner is murky. Most likely even legal hispanic immigrants are reluctant to file claims, where it might attract attention from ICE for a “Kavanaugh stop” or worse. But the fact remains, it is the most positive indicator of all for the economy at present.