March existing home sales demonstrate a new equilibrium in the housing market

 

 - by New Deal democrat

Sometimes there just isn’t much drama in economic numbers, and that was certainly the case for this month’s edition of existing home sales.

As a mild refresher, even though they constitute about 90% of all housing sales, existing sales are not nearly so important as new home sales, since the latter involve much more economic activity in the building process, plus more landscaping and furnishings. As a further refresher, for the past several years existing home sales have been narrowly rangebound.

And they remained rangebound in March. Although the declined -3.6% for the month, at 3.98 million annualized, they remained well within their 3 year range of 3.85 million to 4.35 million. The negative here is that this range is also well below their pre-COVID range, shown in this 10 year graph:

Meanwhile, similar to the sideways trend in prices in both the FHFA and Case Shiller repeat sales indexes, on a YoY basis prices were only up 1.4%:

And although I won’t bother with the graph today, recall also that the median price of new single family houses has been trending slightly *downward* for the past several years.

With both sales and prices more or less in stasis, it is no surprise that inventory only crept upward at a very slow pace, up only 3% YoY. Here is the 10 year graph showing that while inventory has mainly recovered from its post-COVID lows, it is still only about 80% of what it was in the several years before 2020:

In short, the housing market seems to have reached a post-COVID equilibrium, with the big unfortunate aspect that the US needs much more housing to be built in order for it to be as affordable as it was before (actually, several decades before) COVID.

The Big Picture overview of the economy: the oil shock may be the proverbial straw that breaks the camel’s back

 

 - by New Deal democrat

Today I want to step back from the daily data and give you my Big Picture overview of the economy, particularly because Friday’s inflation report has materially changed an important component.

To begin with, as I have been saying off and on for months, the economy has been essentially flat, and may have tipped into a “mini-recession” during the government shutdown last autumn. Here are important components of real income (light and dark blue) and real spending (red and orange) for the past two years (note: all graphs below are normed to 100 as of last August with the exception of YoY graphs):

All of these were essentially flat for the last 5 months of 2025, and all are as of their most current reading below last August’s.

In addition to real income less government transfers (blue), nonfarm payrolls (red) and industrial production less utilities (purple) are also close to flat since last August. Indeed, payrolls have been flat for almost a full year:

In fact, the only two metrics that the NBER uses to declare recessions which are materially higher than last August are real manufacturing and trade sales (gold) and total industrial production including utilities (blue):

In the above graph I also show capital goods new orders (red), which have been rising sharply more or less consistently since late 2024. Both capital goods orders and utility production are likely closely tied to the construction of AI data centers, which are broken out specifically in the graph below from Wolf Street:

Downstream of that construction boom has (until the Iran war) been a boom in the stock market (blue, left scale) and strong personal spending on services (red, right scale):

At least until the Iran war this spending has more than overcome the lackluster growth in jobs, income, other manufacturing production, and spending on goods. 

But as indicated above, Friday’s inflation report has darkened the picture. Let me show that in a number of YoY graphs.

First, here are average nonsupervisory hourly earnings (blue) vs. inflation (red). The first two graphs below show the pre-pandemic historical view:

Except for the 1980s and 1990s, the onset of recessions was associated with a sharp increase in inflation that surpassed wage growth. In the 1980s and 1990s, as wages were depressed by the tsunami of Boomers and women entering the workforce (which meant that two-earner household income nevertheless increased) a relative sharp further increase in inflation vs. wages typically was a feature of the onset of recessions.

The post-pandemic record shows a similar surge in inflation in 2022, but government stimulus checks and the rapid disinflation of late 2022 kept the economy from falling into recession. March’s spike in inflation has brought us within 0.1% of real wages turning down YoY again - with no government stimulus nor, at this point, any likely prospect of rapid disinflation:

Finally, here is aggregate nonsupervisory payrolls (dark blue) vs. inflation (red). As above, the first two graphs show the pre-pandemic historical view:

In absolute terms, as I have indicated many times, real aggregate nonsupervisory payrolls have always peaked several months before the onset of recessions. On a YoY basis, in 5 of the last 7 recessions, YoY inflation has topped YoY aggregate payrolls several months into the recession, while on 2 occasions the corssover happened before the onset of the recession.

Now here is the post-pandemic view:

Even in 2022, aggregate payrolls increased more than inflation, with the closest approach being a 1.1% difference in December 2022. As of last Friday, a new low of 0.8% was made. The crossover point could easily happen within the next several months.

To put the capstone on this analysis, the surge in consumer inflation could be the proverbial straw that finally breaks the camel’s back, taking an economy that was just barely expanding and putting it into contraction.

Weekly Indicators for April 6 - 10 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators post is up at Seeking Alpha.

While inflation and interest rates took a whack at some of the data, most of the financial-related series (like the yield curve in the bond market and credit conditions) remain very positive. And consumer spending, likely by the uppermost income groups, actually posted one of its very best YoY comparisons in the last 3+ years!

As usual, clicking over and reading should bring you up to the virtual minute as to the state of the economy, and reward me a little bit for my efforts.

As expected, March consumer inflation packed a (possibly recessionary) wallop

 - by New Deal democrat

As anticipated, the March CPI packed a wallop, up 0.9% for the month and causing the YoY% gain to increase to 3.3%, while core CPI was a tame 0.2% with a YoY% gain of 2.6%. Because of the impact of that big number, I am departing from my usual format to focus on energy and shelter, but also the impact on real wages and incomes.

But first, and as I’ve written in the past few months, here is an IMPORTANT CAUTIONARY NOTE: Because the October-November kludge in shelter prices of a mere 0.1% increase for two months is still present in the YoY calculations, and will be until this coming November, this is probably continuing to lower those comparisons by roughly -0.2%. In other words, take out that kludge and YoY headline CPI would probably be 3.5%, and core at 2.8%.

First, as per my usual practice for the past several years, let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which because of the big impact of oil, surged to 3.4% YoY:

Before I go further, let’s note some good news: the very large shelter component of CPI has continued to undergo disinflation. Actual rent was only up 0.1% for the month, the lowest monthly increase since the end of 2020, and up 2.6% YoY, the lowest number since June 2021. Similarly, Owners Equivalent Rent increased only 0.2%, and was up 3.1% YoY. These are also the lowest numbers since late 2020 (except for last September) and late 2021, respectively (Note this is also substantially true even if we apply the counter to the government shutdown kludge):

Further, as I have been writing since way back in 2021 is that the YoY% changes in the repeat home sales indexes lead shelter CPI by about 12-18 months. It did that on the way up, and it has been doing that on the way down. YoY home price increases continue near or at multi-year lows, the FHFA at 1.6%, and Case Shiller’s national index at 0.9%. And shelter inflation has followed, as shown in the graph below:

Shelter inflation has declined to *below* its pre-pandemic YoY range. Needless to say, because of the leading/lagging relationship of house prices to shelter inflation, we can expect even *further* deceleration in the shelter component of inflation during this year.

Let me put this succinctly: if nobody had started a war with Iran, this morning’s report would have been very good news, with the biggest problem child of the past 5 years, shelter, going into hibernation.

But, alas, that is not our world. Here is an update of a graph I put up several weeks ago, showing my K.I.S.S. estimate based on the increase in gas prices (blue), vs. the actual CPI number (red):

Because gas prices started out so low as a share of consumer spending, the increase was not nearly as bad as it could have been; but also, as I pointed out in that analysis several weeks ago, it is common for the effects of an oil shock to show up in the subsequent month (in this case, April) as well. 

But now let’s turn to the effect of this oil shock on household finances.

In last week’s jobs report, average hourly wages for nonsupervisory workers increased 0.2%. Now that we know what March inflation was, that means that real wages declined -0.7% in March:

This puts them at their lowest level since last April, and they are now only up 0.1% YoY. As the long term view shows, with the exception of the 1980s and early 1990s, when the massive entry of Boomers and women into the labor force acted to depress wage gains, this often is a harbinger of near term recession:

And the bad news doesn’t stop there. Remember that one of my big forecasting tools is real aggregate nonsupervisory payrolls, showing the amount of $$$ in total that average households have to spend. In March, nominally aggregate nonsupervisory payrolls rose 0.3%. With the inflation adjustment, real aggregate nonsupervisory payrolls declined -0.6%, and are -0.7% below their January peak:

This puts us back to just above where we were last September. Further, as I wrote in the past several weeks, a -0.7% decline from peak in this metric is about the median decline at the onset of past recessions.

Finally, on a YoY% basis, real aggregate nonsupervisory payrolls are only up 0.8%, the lowest since the pandemic:

Historically, outside of the 2002 near-“double-dip”, such a low YoY gain has only a few times outside of recessions, particularly in the case of 1979-80, where it occurred just a few months before, and also several isolated one month downturns (note: graph below adds 0.7% to value so that a 0.8% increase shows at the 0 line):

As suspected before the official numbers, needless to say this was a very poor report. The good news of disinflating shelter costs has been squandered, at least for March. Further, this is a very real loss in average consumers’ finances. By at least one important measure, it is at very least near-recessionary if not outright recessionary. The only silver lining is that this is just one month. If we get lucky and there is not another big increase in April, and further the situation in the Middle East is allowed to settle down sufficiently so that gas prices actually declined somewhat in the next several months, we might escape without more seriously negative consequences.

Very low jobless claims continue

 

 - by New Deal democrat

Jobless claims, along with stock market prices and upscale consumer spending (and recently, manufacturing orders) are one of the few important metrics holding up the economy. And the short summary of this morning’s data is: the new regime of very low claims continued.

Initial claims did rise 16,000 to a still very low 219,000, and the four week moving average increased 1,500 to 209,500. With the typical one week delay, continuing claims fell sharply to 1.794 million, the lowest number in two years:

On the YoY% basis more important for forecasting purposes, initial claims were down -1.8%, the four week moving average down -6.1%, and continuing claims down -3.1%:

This is very positive - in fact, jobless claims are probably the single most positive data point in the entire economy right now. If you have a job, there is simply very little chance you are getting laid off.

Finally, let’s take an updated view of how that played into the unemployment rate in last week’s jobs report for March. As anticipated, the unemployment rate declined, by -0.1%:

Jobless claims are forecasting further declines in the unemployment rate in the next several months.

Recessionary signals in February personal income and spending, but some bright spots as well

 

 - 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 February, so it is still several weeks later than usual. Keep in mind that this represents activity before the Iran war and its oil price shock. 

In February, nominally personal spending rose 0.5%, but personal income declined even nominally, by -0.1%. Since the PCE deflator increased 0.4%, real spending was only higher by 0.1%, while real income declined, after rounding, by -0.4%. Here is what they look like since the pandemic:

Note that real personal income has been flattening for almost a year, and February’s number was the lowest since last June.

Further, on a YoY% basis, both real income and spending have been decelerating since late 2024, income by more than spending:

Once we exclude government transfers — one of the important coincident metrics used by the NBER to date recessions, real personal income also declined -0.4% to the lowest level since last July:

On a YoY basis, this was up 0.5%. With only three exceptions —  2013 (which was an artifact of a change in Social Security withholding), 2022, and one month in 1995 — such a low rate has only happened during recessions:

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, with the war with Iran that is not going to happen now. But despite the 0.4% increase in PCE prices for the month, the YoY% change remained at 2.8%:

Whether this suggests that the slowly increasing YoY trend over the pat 12 months will continue, or is flattening, is not at all clear.

Another important component of the data is spending on goods, and in particular durable goods, which is a leading indicator. 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. These have been flashing red warning signals. 

In February, there was something of a rebound. Real spending on services rose only 0.1%, but real spending on goods rose 0.2%, and on durable goods rose 09%. But neither of the latter two measures fully reversed their January declines. The below graph shows the post-pandemic record, normed to 100 as of January of last year:

The trend in goods spending was flat all last year. To smooth out some of the noise, I have been tracking the three month average. That average was almost completely flat in the period from July through December, peaking in November, and as of February is at a seven month low.

The updating of the PCE deflator also allows for an update to another important coincident indicator used by the NBER to consider whether the economy is in recession or not; namely, real manufacturing and trade sales, which is delayed by one additional month. These increased 0.4% in January to a new all-time high:

This is of a piece with the recent rebound in manufacturing data we have seen in things like durable and capital goods orders as well as manufacturing production. 

Finally, the personal saving rate - i.e., the portion of income left over after spending, declined in February back to 4.0% from its 4.5% reading in January:

Paradoxically, this is relatively good news, because a sharp retrenching by consumers is also something that typically happens just before the start of a recession. It looked like one might have been beginning in January, so February’s reversal means that consumers were a little more confident.

When we put all this together, we get a mixed picture. Real income has been stalling out, and declined in February, both before and after taking government transfer payments into account. So have real spending on goods and in particular durable goods. All of these are recessionary or near-recessionary. But consumers did not retrench, and the rebound in manufacturing sales continued in January.

But to reiterate, all of this predated the oil price spike in March. We will find out just how much that impacted consumers with tomorrow’s CPI report.