March ISM manufacturing shows expansion, but at an inflationary price

 

 - by New Deal democrat

While much of the official government data is still delayed, months after the end of the shutdown, privately sourced data remains fully up to date.

And March data started out with the ISM manufacturing index, which was our second piece of (mainly) good news of the morning.

The headline ISM number (blue in the graph below) rose 0.3 to 52.7 (recall that any number above 50.0 indicates expansion). The more leading new orders subindex (gray) did decline 2.3 from 55.8 to 53.5, but obviously that is also still positive. The three month averages, which smooth out a little volatility, improved to 52.6 and 55.5:

One of the surprises since last autumn has been the rebound in manufacturing despite the tariff situation, even though much of it is likely due to AI data center construction. 

Goods production is only about 25% of the US economy, so normally I weight it against the comparable services numbers, but this month there is really no need, since services have been above 50, indicating expansion, consistently since late last summer.

The bottom line is, this number suggests continuing expansion in the next few months - although I feel compelled to add that I doubt much of the impact of higher fuel costs and associated interruptions from the Iran war debacle has made it through into the index numbers yet.

Several other components of the index are worth noting this month as well.

First, the “less bad” trend in employment continued in March, as it declined very slightly, -0.1, to 48.8. But all three months so far this year have been significantly better than the dismal readings that began last February:

There was one important negative in the report, however - prices paid. These shot up to 78.3, the highest number since June of 2022:

This continues the sharp inflationary pulse that started in February. 

So, while the ISM manufacturing index indicates expansion, it is an inflationary expansion, which is going to put continued upward pressure on interest rates, and tend to keep the Fed on the sidelines in terms of any hope of further rate cuts in the immediate future.

Some good news for a change: real retail sales rebounded in Febuary

 

 - by New Deal democrat

After all these months, we are still feeling the effects of the government shutdown last fall.  Normally construction spending is released on the first day of the month for the second previous month - in today’s case, that would be for February. But half a year after the shutdown began, February and March construction spending are both scheduled to be released on May 7. As I’ve said a number of times already, this is simply not the way a first world country should operate.

But in today’s case, we at least get a consolation prize in the form of retail sales, one of my favorite broad-economy indicators, for February - about three weeks later than normally scheduled. And for a change compared with most recent data, it was good news.

Nominally, retail sales rose 0.6% in February. After taking the monthly 0.3% increase in consumer prices into account, real sales up 0.3%. The below graph also shows the similar but more comprehensive measure of real personal spending on goods (gold, right scale):

Even so, real retail sales remain -0.4% below their peak last August, and indeed below most of their levels from last year. Further, if you believe, as I do, that the shutdown shelter kludge removed about 0.2% from consumer inflation during the September-November period, then the comparison becomes similarly worse. 

February’s good number also means that on a YoY% basis, after a one month flirtation with trending negative, real retail sales have rebounded to +1.3%:

Since consumption leads employment, this is also good news for the latter in the next few months, after deteriorating through most of 2025. Here is the update of YoY real sales and real personal spending on goods (/2 for scale) together with employment (red):

But most likely the deterioration in spending last year has not been fully absorbed by employment yet. This morning ADP reported that private payrolls only grew by 18,000 in March. We’ll find out on Friday if a similarly poor number is true in the official jobs report.

February JOLTS report confirms low hire, low fire, low quit economy

 

 - by New Deal democrat

I normally don’t pay too much attention to the JOLTS report, and I won’t this month, either. It does break down the labor market further than the jobs report, and it does have several slightly leading components, so let’s at least take a brief look.

Below are job openings (blue), hires (red), and quits (gold) through February, all normed to 100 as of the onset of the pandemic:

Job openings seem to get the lion’s share of attention from most commentators, but I treat them as somewhat fictional. In any event, they came in at the 2nd lowest reading since the pandemic, although last month was revised significantly higher. But both actual hires and quits had their absolute lowest reading since the pandemic, and since they unlike openings are “hard” data, that is further confirmation of the poor monthly nonfarm payrolls we’ve been seeing.

Layoffs and discharges, on the other hand, remained near their lowest numbers of the past 12 months, although they did increase in January:

This is further confirmation of the extremely low level of new jobless claims we have seen since November, although as I have pointed out in the past, jobless claims are more leading and less noisy than these monthly layoff numbers.

Finally, the quits rate (blue) tends to lead the YoY gain in hourly nonsupervisory wages (red). First, here’s the long term historical graph:

And here is the post-pandemic close-up:

With quits falling to a new post-pandemic low, this suggests that wage gains will also be somewhat more attenuated in the next few months — not something we want to see while there is an oil shock-induced spike in inflation.

FHFA and Case Shiller repeat sales indexes continue to show further disinflation

 

 - by New Deal democrat

The two national repeat home sales indexes, from the FHFA and Case-Shiller, were reported this morning and both continued to confirm the gradual abatement in shelter inflation.

The Case-Shiller National index (blue in the graphs below) up 0.2% for the three month period ending in January, while the FHFA index (red) rose 0.1%:

But probably more important is that the YoY comparisons continued to show further disinflation, with the FHFA Index up 1.6% YoY, the lowest YoY% increase since spring of 2012, and the Case Shiller national index only up 0.9% YoY, the lowest since the Great Recession’s housing bust except for March through June 2023:

As per usual, since housing prices lead the CPI’s shelter component by roughly 12-18 months, let’s compare the YoY trends (Note: house prices lead indexes /2.5 for scale):

This is solid evidence that we can expect shelter inflation in the CPI to continue to decelerate throughout this year; if anything, the mortgage rate increases associated with the Iran war are only likely to intensify that, with the shelter component ending this year at close to a 2.0% YoY increase.

Oil shocks and real aggregate nonsupervisory payrolls

 

 - by New Deal democrat

As readers know well, one of my favorite “real life” indicators is real aggregate nonsupervisory payrolls, which measures how much in wages average American workers have to spend each month. When it is growing, economic expansions almost always continue; when it declines by any significant amount, recessions almost always ensue shortly.

With gas prices going from $3 to $4 a gallon in March, how is it likely to be impacted? Let’s take a look at a current estimate as well as some history.

Although I’ve done my own K.I.S.S. estimate, the folks at the Cleveland Fed take a much more detailed approach, and publish nowcasts monthly. As of last Friday, they were estimating that March headline CPI would increase 0.8%:

Although Friday is a religious holiday, and markets will be closed, the jobs report for March is scheduled to be released as usual. Although we obviously don’t have the actual figure yet, what we can say is that for the last three years, nominally aggregate payrolls have increased an average of a little under 0.4%; for the year 2025, it slowed to 0.3%:

In other words, if payrolls increased in March by the same percent they have averaged over the past year, real aggregate payrolls are likely to decline about -0.5%. As the below graph, which norms real aggregate payrolls to their peak in January, shows, that would take us back down to just above August and September levels, since February already saw a decline of -0.2%:

Per my previous analysis, that wouldn’t necessarily be enough to flag recession on its own, but it would be in the ballpark of the average such decline until the onset of recessions — and remember that the shelter kludge of CPI during fall’s shutdown suggests that CPI should have been about 0.2% higher, meaning that in *real* real terms average Americans might have a little less to spend than they did last summer.

Is that supported by the historical data? Well, let’s take a look at what has happened to real aggregate nonsupervisory payrolls in past oil shocks. Note that because the official gas price data didn’t begin until late 1991, I’m using spot oil prices for West Texas crude oil (/10 for scale) in the below graphs.

In the 1974 oil embargo, in January oil prices increased 125% from $4 to $10 a barrel (blue). Real payrolls (red) declined -1.1%:

In the second OPEC oil shock of 1979, in August oil prices increased 21.8% from $21.80/barrel to $26.50. Real payrolls declined -0.3%:

OPEC’s pricing power collapsed in 1986, but with Iraq’s invasion of Kuwait in August 1990, oil prices increased 45.8% from $18.60/barrel to $27.20. Real payrolls declined -0.5%:

The final graph below covers 3 separate events. Gas prices bottomed at the end of 1998. In March 1999, oil prices rose 22.1% from $12/gallon to $14.70. Although not shown, gas prices rose 19.3% from $0.90/gallon to $1.08. Real aggregate payrolls declined -0.3%.

When Katrina hit at the end of August 2005, over the two month period till the end of September, oil prices increased 10.7% from $58.70/barrel to $65,00. Gas prices rose from $2.29/gallon to $2.80. Real aggregate payrolls declined -0.3% in August and another -0.8% in September.

Finally, oil prices rose in March 2009 from their Great Recession bottom by 22.5% from $39.20/barrel to $48.00. Gas prices rose 7.2% from $1.91/gallon to $2.44 by the end of April. Real aggregate payrolls declined -0.9%:

This month oil prices started out at about $64.50/barrel. They are likely to end the month at about $100, a 55% increase. Gas prices are likely to be higher by about 35%.  This is about equivalent to the Kuwait invasion oil shock, and second only to the 1974 embargo. In the former, real aggregate payrolls declined -0.5%, and in the latter -1.1%. So the estimation of -0.5% in real aggregate payrolls based on the Cleveland Fed’s nowcast for March headline inflation appears likely, and if anything somewhat conservative.

Weekly Indicators for March 23 - 27 at Seeking Alpha

 

 - by New Deal democrat

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

Unsurprisingly, the main issue is the spreading disruption from the spike in oil prices as well as the bond market’s selloff due to heightened inflation concerns. As I wrote here yesterday, the latest victim is housing, which is being strangled by increased mortgage rates.

As usual, clicking over and reading will bring you up to date on the incipient carnage, and reward me a little bit for gathering and collating the information for you.

“Trump take housing:” how the Iran war is killing the housing sector’s “green shoots”

 

 - by New Deal democrat

“Trump take egg” was a social media meme popularized by MTSW at Bluesky, highlighting prices that T—-p had promised would come down, but increased instead.

The spike in egg prices was due to avian flu, but when it comes to internet memes, nevermind.

Which is by way of introduction to saying that the economic damage done by the Iran war is spreading out.

At the end of February, mortgage rates hit a 3.5 year low at 5.98%. As of yesterday, according to Mortgage News Daily, they made a new 7 month high at 6.62%.

 

I have been writing for nearly a year that the housing market was recessionary, and that the last dominos were falling. But recessions do end and turn into recoveries, and in the last few months there have been signs of “green shoots” in things like mortgage applications that suggested that left to its own devices, any such recession would likely be short. Well, the Iran war is in the process of killing those green shoots.

First, let’s take a look at 10 and 30 year Treasury interest rates (dark and light blue, right scale) vs. mortgage rates (red, left scale) since the Fed first started raising rates 4 years ago:

Note that in the first year, mortgage rates reacted more strongly to the change in the interest rate climate than did long term Treasurys. In the past two years, they gave back that premium, as mortgage rates declined from a high of about 7.80% to the aforementioned 5.98%. Now here is the short term look to emphasize the reversal in the past 4 weeks:

Note that the mortgage rate in the above graph is weekly, and does not include the further increase in the last few days, which would take us all the way back to last August.

And the increase in mortgage rates has already had an effect on new purchase mortgage applications (blue, left scale) in the graphs below) as well as refinancing (gray, right scale). Here’s the longer term look, showing how that after almost completely drying up in 2023-24, mortgage applications generally rose during 2025 and into this year, in response to lower mortgage interest rates:

Now here is the close-up of the past year:

Note that both types of applications fell sharply in the past several weeks - and the two graphs above end as of one week ago.

Refinancing is particularly sensitive to mortgage rates. As the below graph shows, it is virtually a mirror image:

Again, this graph does not include the further increase in mortgage rates this week.

As a result, we can expect both purchase and refinancing mortgage rates to decline further. This is almost certainly going to put an end to the “green shoots” that were beginning to appear in the housing data. And if those higher rates persist, if there is a recession this year, it is only going to be made deeper and longer.