Monday, August 8, 2022

Previewing July CPI: good news and bad news about gas, housing, and vehicle prices


 - by New Deal democrat

While July’s consumer inflation is likely to be less intense than in recent months, I don’t see it coming back down to more “normal” levels. The good news is gas; the bad news is vehicles and housing.

To begin with, gas prices have fallen about 25% from their peak at the end of June to this past weekend. To get to their “real” price, I divide by average hourly wages of nonsupervisory workers. Here’s what that looks like, with the peak of June 2008 set at 100:

In June of this year, gas prices divided by average hourly nonsupervisory wages were 79.8% of their peak. By the end of July, that had fallen to 73.5%. This is more typical of the 2005-07 period, and also the 2010-14 period of the “oil choke collar,” where gas prices backed off every time they hit a threshold that threatened to cause a consumer recession. It looks like that has happened again.

Turning to the CPI, in usual times, the price of gas is the biggest component of CPI volatility. And that is likely to be the case with this Wednesday’s report as well. My rule of thumb is to take the change in the price of gas, and divide it by about 16, and add .15% for normal background “core” inflation, to figure the most likely monthly inflation reading.  Here’s what that looked in the 10 years before the pandemic:

Now here is the past 2+ years since the onset of the pandemic:

If this were “normal” times, gas would drag July consumer prices down by roughly 0.5%. Add in the background “core” inflation, and I’d expect a reading of -0.3% or -0.4%.

But these aren’t normal times, and the biggest culprit is housing inflation. A number of times in the past year I’ve run YoY% comparisons of the FHFA and Case Shiller house price indexes vs. Owners’ Equivalent Rent, the official CPI measure. Below I’ve instead used month over month changes to show how house prices have gradually fed into owners’ equivalent rent in the past two years:

Additionally, let me re-up this graph from Bill McBride, showing that measures of apartment lease inflation have a similar issue:

Since rents are typically increased only once a year for each tenant, it takes a full year for rent increases to filter through to the total metric.

For July, owners’ equivalent rent is likely to clock it at about +0.7%, and since it is almost 1/3rd of the entire CPI index, this is going to dwarf the impact of lower gas prices.

Finally, because of microchip production issues out of China, vehicle prices have also been a significant component of inflation, as shown in the YoY graph below:

But unfortunately in the past few months there’s been no sign of further deceleration in the monthly readings:

This suggests that increases in vehicle prices are likely to persist.

So, while I expect July inflation to back off from its most recent 1%+ monthly increase, an increase in the 0.5%-0.9% ballpark seems likely.

Saturday, August 6, 2022

Weekly Indicators for August 1 - 5 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Several important metrics have reversed course in the past month. Interest rates, especially mortgage rates, have declined (in the case of mortgages, by 1 full % from their peak. As many have pointed out, gas prices have fallen by about $1/gallon from their peak as well. That is putting more money into consumers’ pockets for other things. And stock prices have also reversed, nearing a 3 month high.

While that doesn’t negative the message of the long or short leading indicators in the past, it certainly can change their forecasting meaning going forward. In other words, even if we have a recession - which looks nearly certain by now - it *might* be short and shallow.

As usual, clicking over and reading will bring you fully up to date, and reward me with a penny or two for my efforts.

Friday, August 5, 2022

July jobs report: in which an absolute positive blowout make me happily wrong; all pandemic job losses now recovered


 -  by New Deal democrat

As I wrote earlier this week, the short leading indicators for both jobs (real retail sales) and the unemployment rate (initial jobless claims) have each signaled that we should expect weaker monthly employment reports, with both fewer new jobs and a higher unemployment rate. I have been noting this ever since February, when consumption growth started to flag, It already had shown up by last month, as the 3 month average in new jobs decelerated from over 500,000 to 383,000.

Secondarily, as of last month we were only 550,000 jobs shy of the pre-pandemic level. Would we finally get there?

The complete opposite happened in July, as job gains surged and the unemployment rate declined further. Together with the upward revisions to the last two months, as of now there are 22,000 MORE jobs than there were just before the pandemic. Further, the skew of those jobs is away from lower paying sectors towards higher paying ones. Here’s my in depth synopsis:

  • 528,000 jobs added. Private sector jobs increased 471,000. Government jobs increase by 57,000. 
  • The alternate, and more volatile measure in the household report indicated a  gain of 179,000 jobs. The above household number factors into the unemployment and underemployment rates below.
  • U3 unemployment rate declined 0.1% to 3.5%, equal to the January 2020 low.
  • U6 underemployment rate was unchanged at 6.7%, tied for its all-time low.
  • Those not in the labor force at all, but who want a job now, rose 254,000 to 5.910 million, compared with 4.996 million in February 2020.
  • Those on temporary layoff declined -36,000 to 791,000.
  • Permanent job losers declined -107,000 to 1,166,000.
  • May was revised upward by 2,000, and June was also revised upward by 26,000, for a net increase of 28,000 jobs compared with previous reports.
Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and will help us gauge whether the strong rebound from the pandemic will continue.  These were completely positive:
  • the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.1 hour to 41.1 hours.
  • Manufacturing jobs increased 30,000, and is at a level higher than it was before the pandemic.
  • Construction jobs increased 32,000. All of the jobs lost during the pandemic  have also been made up in this sector. 
  • Residential construction jobs, which are even more leading, rose by 2,900.
  • Temporary jobs rose by 9,800. Since the beginning of the pandemic, over 250,000 such jobs have been gained.
  • the number of people unemployed for 5 weeks or less declined by -182,000 to 2,080,000, which is also below its pre-pandemic level.

Wages of non-managerial workers
  • Average Hourly Earnings for Production and Nonsupervisory Personnel: rose $0.11 to $27.75, which is a 6.2% YoY gain, a further decline of -0.2% from last month and its 6.7% peak at the beginning of this year.

Aggregate hours and wages:
  • the index of aggregate hours worked for non-managerial workers rose by 0.3%, which is above its level just before the pandemic.
  •  the index of aggregate payrolls for non-managerial workers rose by 0.8%, which is below the average inflation gain of 0.9% in the past 3 months.

Other significant data:
  • Leisure and hospitality jobs, which were the most hard-hit during the pandemic, rose 96000, but are still -7.1% below their pre-pandemic peak.
  • Within the leisure and hospitality sector, food and drink establishments added 74,100 jobs, but are still about 635,000, or -5.1% below their pre-pandemic peak.
  • Professional and business employment increased by 89,000, which is about 1,000,000 above its pre-pandemic peak.
  • Full time jobs declined -71,000 in the household report.
  • Part time jobs increased 384,000 in the household report.
  • The number of job holders who were part time for economic reasons increased 308,000 to 3,924,000, above last month’s 20 year low.
  • The Labor Force Participation Rate declined another -0.1% to 62.1%, vs. 63.4% in February 2020.


This report was an unexpected blowout, plain and simple. All of the pandemic job losses have been made up. We are near or at all-time lows in both the unemployment and underemployment rates. *All* of the leading indicators in the report were positive, meaning we should not expect the jobs sector to roll over anytime in the immediate future. Temporary layoffs declined. The only area still lagging is in the lower-paying leisure and hospitality sector, while there are almost 1,000,000 *more* higher paying jobs in the professional and business sector.

There were a few warts. Average hourly earnings once again did not keep up with inflation, a significant negative. The decline in unemployment was helped by a *lower* labor force participation rate. The number of full time jobs actually declined.

The strength of the jobs market has been the best reason why the US is not currently in a recession. This report added to that argument.

On the other hand, I want to caution that some of the great news in this report may be due to comparisons with the distortions of the last two summers, particularly with regard to temporary and education jobs. In other words, we might give this back come September. Leading indicators are still leading, and unless consumers use their new gas savings to spend on other stuff, I still expect job gains to flag in coming months. But for this month, I was very happily wrong.

Thursday, August 4, 2022

Jobless claims continue their relentless climb


 - by New Deal democrat

Initial jobless claims rose 6,000 to 260,000 last week. More importantly, the 4 week average, which has been rising relentlessly, rose another 6,000 as well to 254,750, an 8 month high.  Continuing claims also rose 48,000 to 1,417,000, the highest since April:

Initial claims have usually risen by 15% or more over its low, and turned higher YoY before a recession has begun.  There is a clear uptrend in all the numbers, with the 4 week average of initial claims over 50% higher than its low. Claims remain on track to turn higher YoY in November, which would signal an imminent recession.

To reiterate what I’ve said several times in the past two weeks, I anticipate (more likely than not) a slight upturn in the unemployment rate in tomorrow’s jobs report.

Wednesday, August 3, 2022

Coronavirus dashboard for August 3: is this what endemicity looks like?


 - by New Deal democrat

Confirmed cases nationwide (dotted line below) declined to 121,700, still within their recent 120-130,000 range. Deaths (solid line) are also steady at 431, within their recent 400-450 range as well:

Hospitalizations have plateaued in the past 10 days reported in the 45-47,000 range, and as of July 30 were 46,100. A commenter at Seeking Alpha who works in a hospital wrote to me that the big increase in the past several months has been people showing up with unrelated issues testing positive for COVID, I.e., “patients with COVID:”

Biobot has not updated since one week ago, showing as of then a 10% drop in COVID virus in wastewater, consistent with a “real” case count of about 360,000.

The CDC updated its variant tracker yesterday, showing BA.4&5 making up 97% of all cases. They also included a new subvariant, BA.4.6, in their analysis, indicating it constituted 4% of all cases, or 1/3rd of the BA.4 total:

It is primarily a factor in the northern Great Plains, where it makes up 9% of all cases.

But it has not been particularly growing in the past month, nor does it seem to be replacing BA.5. Similarly, while a few cases of BA.2.75 are showing up in most States, they are not showing up in the CDC data at all. I have not seen any medical commentary on either subvariant in the past week. 

Regionally there has been a small decline of confirmed cases in the West, while the other three regions are steady:

In fact, the only noteworthy changes in any State are that NY and NJ both show small declines:

Unless a new variant shows up imminently, I suspect we are entering a period of decline in cases and deaths.