Weekly Indictors for March 16 - 20 at Seeking Alpha

 

 - by New Deal democrat

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

Unsurprisingly, the big news this week is how the damage from the oil shock caused by the idiotic Iran war is spreading into more sectors of the economy. There was also a very unusual development in the bond market.

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 gathering and organizing it all for you.

Prepare for a major shock in March and April CPI

 

 - by New Deal democrat

Prepare for the CPI to increase over 1.5%, and perhaps even 2.5%, just by the end of April. That’s the mesage conveyed by the huge spike in gas prices so far this month due to the war with Iran.

Let me start with the blockbuster graph. This is the monthly % change in gas prices at the pump since the onset of the data, measured weekly by the E.I.A:

Just through March 16, gas prices had risen from $2.94/gallon at the end of February to $3.72, an increase of 26.7%, the largest such monthly increase on record. Only two other months approached 20%: May 2009 at 18.9%, and March 2002 at 20.3%. And in both of those cases prices were rebounding from very low levels near the end of recessions. And remember, we still have over a week to go in March, and daily prices as I type this are already at $3.92/gallon according to GasBuddy.

My past rule of thumb has been that to correlate gas prices with CPI, divide them by 14, and add 0.15% for underlying inflation elsewhere. It’s definitely not perfect, but it is usually in the ballpark. For purposes of this post, however, I am being more conservative, dividing the change in gas prices (blue in the graphs below) by 16 and only adding 0.10% to arrive at the CPI forecast (red). Here’s what that looks like, first from 1998 through 2012:

And here is 2013 to the present:

You are reading that correctly. Even with a conservative measurement, a CPI increase of 1.8% is forecast. If you examine the graphs carefully, it is easy to see that the increase most often doesn’t show up in just one month. More often the increase is only 1/3 to 1/2 the forecast number in previous cases when there have been big increases in gas prices in a month. But more often than not, when we include the subsequent month as well as the month of the gas price increase itself, the outcome is very close to the monthly forecast. For example, after plummeting in 2015, in January 2016 the forecast due to the jump in the price of gas was 1.1%. The CPI in January and February of that year increased 0.7%. And more recently, in March and May 2022, the model forecast CPI increases of 1.2% and 0.8% respectively. In March of that year the CPI increased 1.1%, in April 0.3%, in May 0.9%, and in June 1.3%, for a total of 3.7%, due to a 48.6% peak increase in gas prices during that period. Jut through the 16th of this month, the increase in the price of gas was over half of that. At today’s average gas prices, that would be a 32.6% increase. 

In other words, based on past history and using conservative assumptions, the model forecasts a 1.8% increase in CPI between March and April. Using normal assumptions it would forecast a 2.1% increase in these two months. And if I were to plug in today’s $3.92/gallon average vs. $3.72, the model would forecast a 2.5% increase in consumer prices by the end of April. 

Three days ago I wrote about how real aggregate nonsupervisory payrolls were continuing to increase through February, negativing an imminent recession. I used the graph below to show the decomposition of that metric:

Real aggregate nonsupervisory payrolls have held up because wage increases of about 3.8% YoY have consistently been above the inflation rate of 2.5%-3.0%. But just the 1.8% increase in CPI forecast using conservative methods would mean a 4.0% YoY inflation rate. A 2.5% increase in inflation by the end of April would mean a YoY% increase of 4.7%, swamping wage increases. 

In the past, with one outlier (1979), real aggregate nonsupervisory payrolls have declined by between -0.3% and -1.4% from their peak until the onset of recessions, with a median of -0.8%. If we get a 2.5% increase in consumer inflation by April, that will likely more than meet that threshold.

A detailed look at interpreting expansionary and pre-recession layoff and unemployment signals

 

 - by New Deal democrat

This week, in addition to my usual look at jobless claims, especially in view of my post earlier this week breaking down the components of aggregate nonsupervisory payrolls,  I want to compare them with several other indicators of increased joblessness in terms of their expansion and pre-recession dynamics. 

First, let’s look at this week’s update. It is simply very hard for me to conceive of any recession being imminent as long as people aren’t getting laid off. The historical look at the 4 week moving average of claims shows that they have *always* trended higher before a recession begins, with the very least warning being 2.5 months in 1981:

Further, the monthly average of initial claims has almost always been higher by 10% or more YoY before the onset of recessions, with the exception of the oil shock of 1974 and the 2008 Great Recession:

Which means that this week’s data is a strong negative of any imminent recession, regardless of the copious amounts of other soft data. As I pointed out yesterday, it has been one of the three pillars holding up this expansion.

Initial claims declined -8,000 to 205,000, one of the lowest numbers in the past 50 years. The four week moving average declined -750 to 210,750. With the typical one week lag, continuing claims rose 10,000 to 1.857 million:

As usual, it is the YoY% change which is more important for forecasting purposes. So measured, initial claims were down -9.1%, the four week average down -7.9%, and continuing claims down -1.3%:

These are simply very positive numbers, totally inconsistent with any imminent recession.

Let’s do our typical look at how these compare with the unemployment rate. To back up a bit, here is the historical look at the 4 week average of claims compared with the unemployment rate, measured YoY:

Simply put, going back 60 years, initial claims have always started rising before the unemployment rate and always peaked before the unemployment rate, with the closest point being only 2 weeks during the 1980 recession.

Now here is the post-pandemic look:

Since last July, initial claims have been forecasting that the YoY comparisons in the unemployment rate would improve. Here is the same data in absolute terms:

Although the unemployment rate ticked up 0.1% last month, both initial and continuing claims still indicate downside pressure on that rate.

 Now let me expand this discussion to three other metrics of employment softness: layoffs and discharges from JOLTS, the number of newly unemployed by less than 5 weeks, and aggregate hours of nonsupervisory workers, both of which are from the monthly payrolls report. I included this last metric because, as I pointed out several days ago, it typically is the first component of aggregate payrolls to decline, with average wages holding up usually into the onset of recessions.

First, here is the historical look at each, broken down into two time periods because layoffs and discharges were not reported until 2001:

Now here is the post-pandemic view:

The short term unemployment less than 5 weeks metric is very noisy, so to extrude signal, can only be looked at on a 3 month moving average basis. Comparing the metrics, one 3 occasions short term unemployment turned up first; but on 3 other occasions initial claims turned up first. One time they turned up simultaneously. Meanwhile, the (inverted) number of hours worked always turned up last, frequently not until the onset of the recession.

Now let’s look at the same data YoY, first historically:

And now the post-pandemic view:

On a YoY% change basis, initial claims *always* turned up first, with the exception of 2001 when they turned up simultaneously with the three month average of short term unemployment.

So the first lesson is that initial claims are a much less noisy metric than short term unemployment, and are the more leading of the two.

Secondly, notice that while (inverted) aggregate nonsupervisory hours have always turned up last, they are the least noisy of any of the four metrics, and they have also turned up well before the onset of recessions.

In other words, when we compare all four metrics, the best thing to do is to look at initial claims, especially YoY, and then look for confirmation by aggregate nonsupervisory hours. Only when both signal is there the most reliable indication of a recession being close at hand. 

And at present neither are signaling. This pillar of the post-pandemic expansion remains firmly intact.

The impact of the Iran war oil price spike on stagflation

 

 - by New Deal democrat

Even before the Iran war started almost three weeks ago, the US economy was in something of a stagflationary scenario. Let’s take a look at how the war, and in particular the closure of the Strait of Hormuz, has impacted that, starting with the direct effects and then following the ripples out to the wider economy.

Most directly of course, the price of a barrel of oil has shot up from about $63 to about $95:

This is the highest price since August of 2022.

Unsurprisingly, this almost immediately caused a similar spike in gas prices. Normally I make use of the weekly information from the E.I.A., which shows the national average for a gallon of gas as of Monday at $3.72. But events have been moving so fast that the daily average from GasBuddy is more accurate, which as of the time I am typing this is $3.86/gallon:

This is also a three year high.

Although I won’t bother with a graph, keep in mind that as a share of disposable income this remains very low historically. This is not the equivalent of the 1974, 1979, 2008, or even 2022 oil price spikes.

The inflationary impact of these prices has shown up in both US Treasury rates and mortgage rates:

A closer look at daily mortgage rates shows they rose from 5.99% to 6.28% as of Monday:

This will likely put a damper on the “green shoots” slight rebound in the housing market I have been talking about for the past few months.

And according to Truflation, which attempts to measure consumer prices daily, using prices on the internet and other sources, YoY consumer prices have jumped from a low of about 0.68% in early February to 1.52% as of yesterday:

The broad economy has been kept afloat by AI data center-related spending, which shows up in three high frequency weekly data series. The first is consumer retail spending published by Redbook:

On a YoY basis, not only has consumer spending been holding up throughout the past year, but the comparisons have been increasing YoY. In fact, the last time the YoY% increase came in at under 5% was last July. As of this week’s report, it was up 6.4% YoY.

Secondly, new jobless claims have also been hovering near their 50 year lows:

Although they have trended slightly higher since the beginning of this year, that has been their pattern, even after seasonal adjustments, for the last three years. They remain lower YoY, which is an absolutely positive sign.

But the third metric, stock market gains, have been faltering:

The above graph is normed to 100 as of Election Day 2024. Both big selloffs since then have been due to actions by one man, first the tariff-related 20% selloff last spring, and now a modest 3% selloff (so far) from the Iran war.

The S&P 500 did make a new 3 month low last week, which takes it into neutral territory by my method. Note that it is also only higher by less than 2% from 6 months ago as well.

Finally, this morning we got updates from the Before Times (i.e., January and February) on two significant data points that are affected by tariffs and one of which is also impacted by oil prices.

The producer price index came in “hot” for February, with final wholesale demand prices increasing 0.7% for the month, and 3.4% YoY. Raw commodity prices rose 2.1% for the month, and 3.2% YoY. The increasing trend is apparent in commodities, and to a lesser extent - at least for the past 8 months - in final demand. The below graph also shows the CPI (red), which historically followed, but since the advent of “just in time” inventory methods has largely been coincident or only slightly lagging PPI:

Again, this does not take into account the big increase in oil and gas prices so far this month. It suggests at very least that we should not expect any disinflation in consumer prices with the likely exception of shelter.

Secondly, the final version of durable and capital goods orders for January showed the former unchanged and the latter up a small 0.1%. Their positive trajectory since mid-2024 remains intact, with the former up 10.3% YoY and the latter up 4.4% - but, again, remember this is through January:

To sum up the state of the economy based on the above, before the Iran war the main part of the economy was either on the cusp of, or actually in a mild recession with the tipping point being the government shutdown last autumn. This was counterbalanced by the AI building Boom, which spilled over into stock prices and wealth-effect related consumer spending by the affluent.

The war, and in particular, the resulting oil prices shock is unlikely to have any big effect on AI data center construction, certainly not directly. Hence (most likely) the mild reaction by the stock market so far. But the inflation is very much showing up at the gas pump, and considering producer prices already jumped in February, CPI for March and April are likely to point to intensifying stagflation as well. A renewed slump in housing would certainly not help. Which means that the lower part of the “K” shaped economy may finally outweigh the upper part.

Real aggregate nonsupervisory payrolls have continued to increase, negativing recession. Here’s why

 

 - by New Deal democrat

There’s no major economic news today, so let me take this opportunity in view of last week’s update to the CPI, to update one of my favorite labor market indicators: real aggregate nonsupervisory payrolls.

As a brief refresher, over the past 60 years this has been a very good and reliable “real” economic indicator. Basically, so long as average American households’ income is rising in real terms, they can sustain and expand their consumption, which largely drives the economic expansion. When it declines, usually households have to pull in their horns, triggering Keynes’ “paradox of saving.” What is good for the individual household causes an aggregate decline in consumption, followed by an economic contraction.

Let’s start with the absolute value of this indicator through February:

Although there were several stalls or near-stalls last year, the general trend was increasing. The gap is due to the omission of CPI reports for the period of the government shutdown. Although there was an assist from the way the Census Bureau kludged shelter costs during the shutdown, evne if they had not done so, the subsequent months would still show an increase.

So the bottom line is that, before the Iran war this indicator did not suggest a recession was imminent.

But let me break down the components of this index to show why that is. Real aggregate nonsupervisory payrolls is calculated by taking average hourly nonsupervisory wages (blue in the graphs below) x the number of hours worked (green teal), and then normalizing by dividing by the CPI (red). Below I show each of them on a YoY% change basis.

First, here is the period from the inception of the data series in 1964 through 1986:

And here is the subsequent period up until the pandemic:

There was a consistent pattern of each of the three measures during this entire 50+ year period. The inflation rate increased in roughly the year prior to the onset of each recession. Almost simultaneously, the number of hours worked started decelerating precipitously in the months before the onset of the recessions, frequently turning negative shortly after the recession began. Meanwhile average hourly wages remained steady or even increased a little on a YoY basis going into the recessions. It was only after the onset of recessions that wage increases were trimmed back.

So, what we are looking for is an uptick in inflation, and a downtrend in hours worked. With that in mind, here is the post-pandemic record:

Hours worked did gradually decelerate through 2023 and 2024, even turning negative for several months in 2025 before rebounding slightly. if you go back to the pre-pandemic graphs, a 1% YoY increase in hours worked was pretty pathetic. But there was no precipitous decline post-pandemic. Meanwhile, assisted by the disinflation in shelter costs as measured by the CPI, YoY inflation was also gradually decreasing. Note that *this* measure was affected by the shelter kludge after the government shutdown; without it there would have been no further deceleration in the CPI thereafter.

Finally, we see that while wage growth has also been gradually decelerating, it remains higher than the YoY inflation rate. If you go back and look at the pre-pandemic cycles, inflation (red) almost always exceeded wage growth (blue) YoY in the months before the beginning of recessions, although there were several exceptions, notably 2000-01, but also several occasions when inflation grew more than wages for several years late in expansions. This was due to the general deceleration of wage growth as the huge Boomer generation, and women, entered the labor force, which together held down wage growth even as two-income *household* income increased.

Of course, it could be that “this time it’s different,” like 2000-01, although I would still expect to see aggregate hours decline YoY. Additionally, it could be that the Iran war will finally cause a spike in consumer inflation that will result in it being higher than YoY wage growth.

But the bottom line is, through February the consumer economy has surprisingly been aided by an increase in real aggregate nonsupervisory payrolls. And very low new weekly jobless claims suggest that has not changed. At least not yet.