Updating the long leading indicators: corporate profits and housing

 

 - by New Deal democrat

This week I’m spending some time updating the non-financial long leading indicators. As I wrote on Monday, I haven’t updated these in a while in large part because the chaos coming out of Washington has blindsided much of the economic data. There’s not a big point in obsessing over what the yield curve of US Treasurys in the bond market might mean for the economy in 2027 when the Commander in Chief barges in and says, “Hey, let’s see what happens when Iran shuts the Strait of Hormuz!”

On Monday I looked at real spending and consumption per capita. Basically, with some noise these have been trending sideways since last summer, and are hovering around 0% gains YoY. Yesterday we saw that gas prices had caused consumers to spend significantly more in the aggregate than they had in the past months, mainly to fill up their gas tanks. Excluding gas, “real” sales were still below last August’s peak.

There are two more nonfinancial long leading indicators, one on the production side and one that is an important interface between production and consumption.

The long leading indicator on the production side is corporate profits deflated by unit labor casts. There have had a long history of turning down one year or more before the onset of recessions. Below I show them both including (dark blue) and excluding (light blue) inventory and capital spending adjustments. I also show proprietors’ income (red), which is almost as leading but has the virtue of being reported at least one month before corporate profits as part of GDP:

As you can see, after virtually stalling during 2024, and then being whipsawed by the front-running of tariffs and the subsequent payback, in the last two quarters of 2025 both measures of deflated corporate profits rose sharply. Proprietors’ income did turn down slightly, and although that bears watching, it is not as important. 

A more up-to-date measures is the weekly update of reported and estimated corporate profits as they will be reported to Wall Street, from Earnings Insight. Here is the most recent update from last week:

Q1 profits have just begun to be reported. Typically companies massage their earnings expectations so that they “beat” them in the report, so I anticipate the current anticipated Q1 level will improve by at least several points. In any event, the weekly updates confirm that Q3 and Q4 saw stout growth in corporate profits but a possible pullback in Q1.

Nevertheless, deflated corporate profits are a long leading positive as of the end of 2025.

The other nonfinancial long leading indicator, which captures an important producer and consumer interface, is housing permits. Below I show total permits (light blue) along with the much less noisy single family permits (dark blue), and also mortgage rates (red), which largely - but not exclusively - drive much of the changes in homebuilding:

In general we can see that for the past two years housing permits have gradually trended downward as mortgage rates oscillated between 6% and 7%.

The relationship is best shown in the YoY% changes of the same data, below (with mortgage rates inverted better to show the relationship):

Mortgage rates have been close to stable for most of the past year with a few positive oscillations (before the March spike secondary to the Treasury market’s reaction to the oil price spike). Building permits on a YoY basis have continued to fade slightly.

As I have written many times in the past year, the downturn in the housing market at this point is frankly recessionary.

To sum up, of the three non-financial long leading indicators I have looked at this week, one - corporate profits - is positive. One - building permits - is negative. And one - real spending per capita - is close to being flat. My suspicion is that if the oil price spike persists for another month or two, real spending per capita is going to turn down. At that point we will see just how much of a burden the AI data center construction driven improvement in corporate profits can carry all by itself.

Housing permits will next be updated on April 29th, and proprietors’ income on April 30 as part of the first estimate of Q1 GDP.

March retail spending: including or excluding gasoline makes all the difference

 

 - by New Deal democrat

Consumer spending is about 70% of the economy, and retail sales is our first wide measure of that spending. This morning’s update for March (still after all these months delayed about a week compared with the schedule before last autumn’s government shutdown) was unsurprisingly dominated by what happened at gas stations. 

Nominally, total retail sales rose 1.7% in March, and February was revised slightly higher to up 0.7%. After taking the monthly 0.9% increase in consumer prices into account, real sales increased 0.6% (blue). Because of the outsized impact of gas prices this month, the below graph also shows real sales ex-gasoline, which *declined* -0.3% (gold):

As is obvious, including vs. excluding gasoline sales makes a big difference. Including such sales, real retail sales were the highest since the end of 2022. Excluding them, however, they remain below their peak from last August. 

Interestingly, the same phenomenon occurred in the 20006-07 period before the Great Recession, where total real retail sales trended slightly higher, but excluding gasoline trended lower:

This can (and I think, should) be read as consumers cutting back on other purchases in order to buy gas for their vehicles. While March is only one month, if this continues several more months it would be sending a significant warning signal.

On a YoY basis, nominal total retail sales were up 4.0%, and in real terms up 0.7%. Excluding gasoline, YoY were up 2.9%, and in real terms *down* -0.4%. Further, if you believe, as I do, that the shutdown shelter kludge removed about 0.2% from consumer inflation during the September-October period, which is still affecting the YoY calculations, then the situation is similarly weaker:

Following up on yesterday’s post, per capita real retail sales have been a very good but not perfect long leading indicator. Since the populaiton estimates have not been updated through March yet, I can’t show you an updated graph, but in the past few months population gains have been just barely above 0, so the population-adjusted changes for March would be almost identical to the graphs above.

Finally, since consumption leads employment, here is the update of YoY total real sales and real sales ex-gasoline (/2 for scale) together with employment (red):

This suggests that on a YoY basis employment is unlikely to deteriorate further over the next several months. Since there were positive numbers last year from February through May, this suggests there will also be gains - if small ones - in the next several months. 

To sum up, March’s spike in gas prices did cause consumers to reallocate spending slightly, but not to cut back retail spending in the aggregate.

Updating the long leading indicators: per capita real retail spending and real spending on goods

 

 - by New Deal democrat

So much of the changes to the economy has been dictated by the whims of the White House that it has not made much sense to throughly update the suite of long leading indicators in many months. After all, why chart their incipient effects when they are consistently being overtaken by new lurches in diktats?

With a few empty days of new economic data this week, I thought I would take a look at a few of them; in particular, those most closely tied to the “real” vs. financial, economy. Today, let’s revisit and update real sales per capita.

Real retail sales per capita have long been an element of my list of long leading indicators, because they typically turn down about a year before the actual onset of recessions. In the past several years I have added the very similar indicator of real consumption expenditiures on goods from the personal income and spending report. Like the less broad retail sales measure, their growth either turns down or at least stalls out many months before the onset of most recessions.

Since the data on both these metrics goes back many decades, I have split the data by historical sections. First I look at it in absolute terms, and then we’ll look at it YoY, which better shows the turndowns.

First, here are real retail sales per capita have (red) and real spending on goods per capita (blue) from 1959-82, 1983-2008, and 2009-present:

While both metrics are somewhat noisy month over month, it is obvious that both measures of consumer spending increase almost continually throughout expansions, but either turn down (real retail sales) or at least stall (real spending on goods) typically on the order of a year before the onset of recessions in the past 60+ years. There have only been two exceptions: 1966 for real retail sales, and 2022-23 for both metrics. 

Why did the indicators fail in 2022-23? Mainly as an artifact of comparison. The stimulus payments to consumers in 2020 and 2021 during the pandemic led to a lot of durable goods purchases in particular, often goods delivered to homes. Simply put, for some time consumer demand for goods, especially durable goods, was largely satiated. Secondarily, the big decline in the price of gas from $5 to $3 a gallon beginning in July 2022 freed up lots of consumer cash to be spent elsewhere, thus avoiding a consumer-centric economic downturn. 

Note that in the past year both metrics have essentially stalled. And insttead of a big decline in gas prices, consumers have been faced over the past six weeks with a big incrrease.

Now let’s look at the same historical series YoY:

Again, note how positive YoY improvements in real consumer retail spending, and spending on goods, have always correlated with continued economic expansions. With the exception of 1966, the only negative comparisons which did not correspond with the start of or oncoming recessions were sporadic months in 1987, 1994, 1996, and the near “double-dip” of 2002-03.

Now let’s look at the post-pandemic YoY record:

Again, we see the poor 2022-23 performance, which was a major false negative resulting in large part from poor comparisons compared to 2021. While the poor performance of real retail sales continued into 2024, it was not confirmed by the broader measure of real spending on goods. Both decelerated sharply in 2025, and both were negative during December. Which means they aren’t signaling an oncoming recession now, but the trend is not good. And the YoY comparisons will be challenging for the next several months: for retail sales, February was already -0.5% below last March, and -0.2% below last April.

Real retail sales will be updated for March tomorrow, and real spending on goods will be updated on the 30th.

Weekly Indicators for April 13 - 17 at Seeking Alpha

 

 - by New Deal democrat

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

The biggest news this week is how sharply oil prices backed off of their recent highs, as speculators figure that all will soon be back to (at least close to) the status quo ante in the Persian Gulf. Secondarily, the Empire State and Philly Manufacturing Indexes continued the theme of a rebound in that sector.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and bring me a penny or two in lunch money for my efforts.

March industrial production mainly continues stagnant trend

 

 - by New Deal democrat

Since I didn’t get to it yesterday, let me say a few words about yesterday’s industrial production report for March this morning.

I used to call this “the King of Coincident Indicators,” but with the shrinking of manufacturing as a share of the US economy, that is no longer the case. Nevertheless, it is an important coincident indicator, with the emphasis on *coincident.* It doesn’t tell us where we are going, but is an important signpost about where we *are.*

And what yesterday’s release showed us, for the about the sixth month in a row, is that the coincident economy is stagnant (but not contracting!), with the big exception of AI-related spending.

In March total industrial production (blue in the graph below) declined -0.5%, although February was revised higher to +0.7%. Manufacturing production (red, right scale) declined -0.2% and was revised lower for the previous several months. Total production is only 0.2% higher than what it was last August, and manufacturing production is lower than it was during the entire July-September period:

Where AI-related spending shows up is in the utilities subindex (gold in the graph below, right scale). If we look at all industrial production less utilities (blue, left scale), then like manufacturing, production has made no headway since last summer, and indeed is slightly lower:

So as I started out above by saying, the message of industrial production was not one of contraction, but one of being stagnant with the exception of AI-related data center construction and support.