September CPI shows widespread movement *away* from Fed target, post-pandemic low in real nonsupervisory payroll growth

 

 - by New Deal democrat

After two benign months due to a temporary decline in energy prices this summer, the higher trend in inflation returned. And that continued in September, as prices (blue) rose 0.6%, and on a YoY% basis accelerated 0.3% to 3.7%. Core CPI excluding food and energy (red) also rose 0.3% for the second month in a row, rising from its post-pandemic YoY% low of 2.4% to 2.6%. Excluding shelter (gold), CPI rose 0.5%, but also increased 3.5% YoY:

Needless to say, the big culprit was energy prices, which rose 5.2% in September alone, and were up 20.4% YoY:

And the bad news extended to shelter, which is 1/3rd of the entire index. It reversed its recent deceleration, rising 0.4% for the month, and 3.2% YoY (blue).  Of it’s two components, Owner’s equivalent rent rose 0.3% monthly and increased to 3.3% YoY, while actual rent of primary residence also rose 0.2% and was up 2.8% YoY:

There was other bad news as well. Electricity prices rose another 0.2%, and are higher by 20.4% YoY. Utility services did decline -0.3% for the month, but remained higher by 5.0% YoY. And computer hardware prices rose 1.4% for the month, and were higher by 9.7% YoY:

Motor vehicle maintenance and repair also continued to be a problem child, up 0.7% for the month and 5.8% YoY:

If there was a silver lining, it was that motor vehicle prices continued to be somnolent. New vehicle prices (red) rose 0.2% for the month, and were only higher 0.6% YoY, and while used vehicle prices (gold) rose 0.7% for the month, they remained lower YoY by -1.5%. The average for all motor vehicles (blue) was higher 0.5% monthly, but was unchanged YoY:

Finally, let’s update real nonsupervisory hourly wages (orange), which declined and real aggregate nonsupervisory payrolls (red), both of which declined -0.4% for the month. Both remain about -0.9% and -0.5% below their February and January peaks respectively:

Real wages are also down -0.4% YoY, but payrolls remain positive, up 0.5% YoY:

Recall that real aggregate nonsupervisory wages are an excellent short leading indicators for recession. Further, when they turn negative YoY, they have been a good coincident marker for a recession. The current situation remains almost sui generis. It is very rare for this metric to stay below peak for more than half a year without a recession occurring shortly thereafter. In fact, only three times in the past 60 years, for *1* month apiece in 1968, 1996, and 2011, have decelerating real aggregate nonsupervisory payrolls been higher this little YoY without a recession ensuing shortly thereafter:

In conclusion, this was a poor report for obvious reasons. Not only are oil and gas prices driving up the headline number, but the recent quietude in shelter prices appeared to reverse a little higher, and the AI-data center driven increases in electricity, water, and computers are still firmly in place. While my forte is forecasting rather than Fed-watching, it is difficult to see the Fed being comfortable with this widespread boomerang away from its 2% target.

The subpar equilibrium in existing home sales continues - for now

 

 - by New Deal democrat

To repeat my housing sector mantra for the umpteenth time, mortgage rates lead sales, which in turn lead prices, which finally lead inventory. 

And for the last three years, the market for existing homes has been rangebound, first in sales, then in prices, and finally this year in inventory as well, in what I have described several times as a “suboptimal equilibrium,” because the housing market as a whole continues to be unaffordable compared with any time outside of the housing bubble before the pandemic.

That continued in September, in which existing home sales rose a seasonally adjusted +1.5% monthly to 3.99 million annualized from a slightly downwardly revised August. Which continues to be well within its range of between 3.85 - 4.30 annualized for the past three+ years:

With rangebound sales, prices on a YoY basis have been relatively calm as well. These are not seasonally adjusted, so we look at them YoY. On that basis, since February of 2025 there has been no YoY comparison higher than 3.0%. in September the YoY comparison was +1.3%, as the median price of an existing home was $417,500, vs. $412,300 one year ago. Prices did  decline -10,200 vs. August on a non-seasonally adjusted basis, as they typically do after midyear:

As noted above, this year the most lagging metric, inventory, has also fallen in line - at least until this month, as the YoY% change in existing home inventories increased to 4.6%, the highest comparison since March. By contrast, last month it was down less than 1%. For context, as recently as last December it was up 7.9% YoY:

Unfortunately the above graph does not show the metric very well, but for the last year on a YoY basis inventory has consistently been about -500,000 less than it was a decade ago. Until this inventory shortage is taken care of, the housing market will continue to be tight, and largely unaffordable for new buyers.

To bring this discussion full circle, here is what mortgage rates (gray, right scale) look like in comparison with sales (blue, left scale):

As I wrote at the outset, mortgage rates lead sales, and with the recent increase in mortgage rates to the 7.50%-7.60% range, I fully expect both existing and new home sales, as well as housing permits and starts, to react to the downside over the next several months. So this recent subpar equilibrium may shortly be broken - unfortunately, to the downside.

 

A proposal for Project 2029: Medicare Advantage for All

 

 - by New Deal democrat

On this Indigenous Peoples/Columbus Day holiday, there is no new economic news, so let me roll out something I have been thinking about for quite a while; namely, how to migrate from out current patchwork health care insurance system to a better, universal system.

Such a migration is very popular. Just last week, the Kaiser Family Foundation reported that 66% of all Americans, including 72% of all self-identified Independents, favor some sort of national health care plan:

 

The question has always been, how to get there from here, given the many stakeholders with strong financial incentives under the current hodgepodge.

While many observers have issues with Medicare Advantage plans, they are very - and increasingly - popular among Medicare recipients. But they do have several advantages, including that a person enrolled knows up front how much is being paid for by the plan (rather than the uncertain “80%” coverage of regular Medicare). And over the long run, both types of plans seem to cost a similar amount, with the difference being that Medicare Advantage plans are better for relatively younger, healthier seniors, and regular Medicare better for seniors who have costly medical conditions.

(ADDENDUM: I also wanted to mention that other countries with very efficient and successful universal public health insurance programs, like France and Germany, rely upon private insurers to provide coverage).

Another advantage that “Medicare Advantage for All” would have over “Medicare for All” is that the potent medical insurance lobby would very much be in favor of its passage, removing one very big roadblock to it. And it could easily be employed promptly, since medical insurers already have plenty of experience handling and paying medical claims.

But one big question is, how would it be paid for? Especially if some sort of taxpayers’ revolt from an increased tax burden might be feared.

First of all, there should be no further concern about deficit spending for such a plan. If the GOP can blow a huge hole in the budget and run up $Trillions of debt for a tax giveaway to Billionaires, there is no point in arguing for fiscal prudence on the other side. On top of which, as I’ll lay out below “Medicare Advantage for All” ought to be able to pay for itself.

Here’s how my proposal would work.

1. Everybody not covered by existing Medicare, CHIPs benefits, or Veterans’ benefits, would qualify.

2. The plan would be funded by a FICA withholding tax. Similarly to income tax withholding, at the beginning of each year, every person employed would fill out a form listing the number of persons in their household. Full exemptions would be granted for every household member covered by any other type of medical insurance (including employer-sponsored medical coverage at least equivalent to either an Obamacare silver plan or a Medicare Advantage plan. FICA taxes for the program would be withheld from the person filing the form, as well as any dependent not so covered. In this way, most importantly anyone already covered by an employer’s plan would face no new taxes.

3. Employers with more than 50 employees and $5 million in gross sales would be required to pay their 50% share of the FICA withholding tax starting with the next fiscal quarter more than 60 days after the passage of the act.

4. Employees and smaller employers would not be required to pay their share of the FICA withholding tax until the first fiscal quarter more than one year after the passage of the act.

5. Which means, as per my opening comment, most of the initial year’s outlays for the program would be put right on the general national debt. After that, the FICA taxes would be designed to fund the annual costs of the program, just as FICA taxes have done for, e.g., Social Security and Medicare in the past.

6. Benefits under the act would begin to be paid the first fiscal quarter more than one year after passage of the act as well.

7. The year’s delay in employees’ having to pay the tax would give them a chance to bargain with their employer, formally or informally, about their pay; and if their employer refused to raise their pay to cover their share of the FICA withholding tax, it would give them a chance to find employment elsewhere at a higher rate of pay.

8. Any employer with over 100 employees or over $10 million in gross sales refusing to increase employee wages or salaries to cover their share new FICA taxes would be hit with an income tax surcharge of an equal amount.

9. Just like Medicare Advantage plans, people newly enrolled in the plan would have to compare various plans on offer. If they failed to choose one during the coverage window (the same window of time as with existing Medicare), they would be enrolled in a randomly chosen plan available in their area. Over several years, even lazy consumers who wound up with poorer plans would likely migrate to better plans recommended by relatives and/or friends.

10. The year’s delay in the beginning of payments of benefits would also allow insurers to develop their Medicare Advantage plans for the new influx of younger people (who on average would be in much better health than current Medicare enrollees).

11. Since the program would be funded just like Social Security and existing Medicare, it should withstand any creative Court challenges (with the big caveat that nothing is beyond the majority of the current SCOTUS, but SCOTUS expansion should happen first before anything else anyway).

12. Over time, it’s likely that employers would find it easier and less expensive just to pay their employees’ FICA taxes to join the new Medicare Advantage plans rather than continue with the burdensome paperwork of their own private plans.

13. In addition to being funded by new FICA withholding taxes, the one year hole in the budget would be covered by rescinding the last 3 GOP tax giveaways to the wealthy in 3 stages. For individual taxpayers who earned over $500,000 and corporate taxpayers with gross sales or earnings over $10 million, the 2025 Big Bad Bust-out Bill’s tax cuts would be rescinded immediately. The similar but relatively smaller 2018 tax cuts would be rescinded in two years. And the 2012 extension of the 2002 Bush tax cuts would be rescinded in four years. Further, the rescission would be made retroactive for four years based on income declared then (note there is no “ex post facto” issue as to taxes, which can be made retroactive); and the taxpayers would be given years from the inception of each rescission to pay back the relevant taxes.

The end result would be that every American would be covered by medical insurance at least equal to either Medicare or an Obamacare silver program. Insurers, who suddenly would have a substantially larger pool of relatively healthy new customers, would also be happy. And to the extent necessary (which I doubt it would be), “Medicare Advantage for All” could be a stepping stone, via a subsequent public option if so passed, to “Medicare for All.”

Weekly Indicators for October 5 - 9 at Seeking Alpha

 

 - by New Deal democrat

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

The paradigm that has been supreme for the last few months continues. On the one hand, there are soaring AI related stock prices fueling consumer spending. On the other hand, there are also sharply higher interest rates and gas prices. So far, AI has been ‘winning.’

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me a little bit for obtaining and organizing it all for you.

The US economy right now: AI vs. everything else

 

 - by New Deal democrat

Let’s wrap up this week of limited economic data by looking at perhaps the most prevalent theme about the state of the US economy right now: that it consists of basically 2 components, (1) AI and (2) everything else. This is a round up of a bunch of graphs I have seen in the past few weeks that have all circulated around this same point.

First of all, construction spending. While unfortunately FRED doesn’t separate out data center spending, some other writers have. Here’s a good graph from Steve Rattner showing how, when we take out AI data center construction spending, the entire remainder of construction spending has been declining since the middle of 2024:

Here’s a fuller breakdown from Prof. Jason Furman:

And Prof. Furman also points out that total CapEx investment is more concentrated now than at any point in the last 50 years:

This is showing up in stock market valuations:

The valuations of AI related companies are Booming. Everything else is moribund.

This is apparent in the advance-decline line. If share prices in more companies in, e.g., the S&P 500, increase on any given day vs. decline, the A-D line is positive. If the declining number of stocks outnumber advancing ones, the A-D line is negative:

Here is a longer term historical view of a similar, basically self-explanatory, metric:

The last time the number of outperforming stocks was this narrow was during the dotcom bubble at the end of the 1990’s.

Meanwhile borrowing costs are rising for lower rated corporate debt:

Here is a similar FRED graph that, in addition to Treasurys (purple), includes high rated AAA corporate debt (blue), lower rated but still investment grade BBB corporate debt (orange), vs. risky high yield CCC or lower corporate debt (red), all normed to “0” as of the lows in the bond market last October:

In general, the lower rated the debt, the more it blows out to the upside in the yield investors demand to buy that debt. This includes before and during recessions, but also during and after other scares, such as the Silicon Valley Bank collapse in March 2023.

Basically the US economy has put all its eggs in one basket, called AI. Earlier this week Paul Krugman wrote on his substack that "Massive spending on data centers is crowding out investment in everything else in the economy,” adding that "this isn't a hypothetical risk." And as I have written in the past several months, while the *software* aspect of AI may not be a bubble, i.e., the end result of AI may be a boon to human productivity, the *hardware* aspect, i.e., 10 or 20 different companies all making massive construction investments in plant and equipment, where only 1 or 2 companies are likely to survive as winners (much as in the 1990s all of the internet search companies withered except for the big winner, Google), almost certainly *is* a bubble.