Tuesday, October 26, 2021

New home sales confirm upturn in housing, while FHFA and Case Shiller suggest increase in house prices is slowing


 - by New Deal democrat

This morning we got three reports on housing sales and prices. Let’s start with the sales data.

New home sales, while very noisy and heavily revised, tend to lead all of the other housing indicators, even permits. 

This morning’s m/m increase in new home sales (blue in the graph below) was good news. It was the second increase in a row, and at 800,000 was the highest since March. This suggests that single family permits (red, right scale) - which have continued to decline, but only slightly in the past several months - are likely to turn up shortly:

The number of houses for sale (which lags the number sold) was unchanged at 379,000, tied with last month for the highest level since October 2008 (gold in the graph below):

Increasing sales and increasing prices bring out increasing inventory, as home builders jump at the chance for increased profits.

Now let’s turn to house prices.

As shown below, both the FHFA and CaseShiller indexes have risen almost an identical 250% since January 1991, when the FHFA index began:

During that time, usually the FHFA index has decelerated, and made a peak or trough a month or two before the Case Shiller index (note for example, 1994, 2006, 2009, 2010, and 2013). 

With that in mind, here is the same data zoomed in on the last 4 years (again, note that the FHFA index turned slightly ahead of the Case Shiller index in 2018 and 2020):

The Case Shiller index shows no signs of decelerating, although at least it has stoppped *accelerating* on a YoY basis. But price gains in the FHFA index have decelerated at least slightly, from over 19% one month ago to 18.2%, the least YoY gain in the last 4 months. The 1.0% monthly gain is the smallest since June 2020. I’ve also added new home prices YoY (gold) from this morning’s new home sales report:

Last week I noted that median existing house prices as reported by Realtor.com had decelerated from a 23% YoY gain to 13%, likely indicating the peak in actual prices had either just happened or was imminent. Neither the FHFA nor Case Shiller indexes are confirming that, nor certainly have new home prices, but the *slowdown* in price increases indicates they are not too far behind.

Meanwhile sales, which lead prices, are likely to increase in response to recently lower mortgage rates, although the surge in prices will put a damper on just how much.

Monday, October 25, 2021

Q3 GDP will show economic contraction? 150+ years of short term interest rate history says no


 - by New Deal democrat

No economic news today, but let me show you one important reason I am not concerned about the supply chain or inflation issues at this point, despite some DOOOMMsaying about a likely punk GDP reading for Q3 that will be reported on Thursday.

There is no one foolproof indicator that always has indicated recession in advance. For example, as I have noted many times, the yield curve never inverted between 1932 and 1957, even though there were a number of recessions during that time.

But if inflation were such a bugaboo, why hasn’t the Fed raised rates? In the modern era, the Fed raising rates has always been a reason that the economy has slowed down. But let’s go further back. Because even before the Fed undertook a systematic raising/lowering interest rate regime, in fact even before there even *was* a Fed, there were commercial paper rates.

And short term commercial paper rates (basically short term commercial loans) almost always increased substantially before the economy tipped over into contraction - and indeed the increase in those rates was probably a factor in why the economy did so.

Here are short term commercial paper rates going all the way back to before the Civil War:

Note they always increased before every 19th or early 20th century recession.

Here are the same rates from the Great Depression through 1971:

The only cases where they did not rise appreciably were in 1938 and 1945. The former was a recession caused by a sudden contraction in fiscal spending. I’ll come back to the latter in a bit.

Here are the last 50 years:

Once again, we have appreciable increases, mirroring the increases in Fed short term rates, before every recession.

In summary, we have over 150 years of history telling us that, even if the central bank does not raise rates, commercial lenders will if they think they need to protect themselves, and that tightening of credit provision helps bring about a recession.

And there is *no* such tightening going on now.

Finally, let me come back to 1945, the one possible example that might be similar to our own situation. That was a recession brought about by the end of World War 2, and the sudden synchronous stoppage of war production in factories all over the US. It took time to convert back to civilian production!

So let’s overlay the quarter over quarter change in industrial production over commercial paper rates for that era:

In both 1938 and 1945 industrial production suddenly contracted by over 10% in one quarter alone.

Now here is the quarter over quarter change in industrial production over the past 5 years, including Q3 this year that just ended:

Industrial production *rose* 1.1% in Q3 compared with Q2.

There simply is no indication that either inflation or supply chain issues have caused an actual contraction in economic activity.

Sunday, October 24, 2021

My Big Picture


 - by New Deal democrat

It’s a Sunday, and it’s been a while since I put up some generalized thoughts on where we are, so let’s update. I’ll go in order of my optimism on the economy, COVID, and the political situation.

The economy

I am pretty happy about the place the economy is in right now, and for the near term future. Yes, we have inflation and supply chain issues, but we always have issues. And Q3 GDP will probably come in pretty punk on Thursday, but I’m just not concerned. Average hourly wages for non-managerial personnel are up 5.5% from one year ago. While inflation is going to pass, those wage gains are likely to prove “sticky.” For the first time since the late 1990s, labor is in a position of strength, and able to capture more of a share in the increase in economic activity. 

Here’s more:
 - Even after adjusting for inflation, retail spending - although down from spring’s stimulus-fueled pace - is up 12.3% since just before the pandemic hit, and up 8.1% in the past 12 months. 
 - Real disposable personal income is up 3.4% since just before the pandemic, and slightly higher than 12 months ago. 
 - Personal savings are up 22.9% since just before the pandemic, although down from 12 months ago.

Basically, households spent most but not nearly all of their stimulus payments, and also maintained some of their savings from being cooped up at home due to COVID. And they’re being paid more at work.

Producers are struggling to keep up with all of that new demand - that’s a big part of the supply chain issue - but forward looking data like factory new orders continue to show that production should continue to expand.

And the background financial conditions continue to show low interest rates, an open spigot for money supply, and also an open spigot for credit being granted.

Maybe sometime next year, the economy will hit a wall. But even one year out, very few indicators are showing signs of trouble. Color me optimistic.


Here I am also at bottom optimistic, but much more cautiously. One thing I got wrong this year is that I expected vaccinations to continue at a 2 to 3 million per day pace, once they got available, and reluctant people saw that they really did protect the vaccinated. I did not realize the ferocity and power of the disingenuous political opposition that was originally orchestrated by Trump, but then escaped beyond even his control.

That is going to continue, but it is likely to be overcome by factors on the other side.

For example, even though lots of people over 65 are GOPers, the latest data from the CDC shows that 85% of seniors are fully vaccinated, and over 95% have had at least one shot. In other words, they may be telling pollsters that they’re against vaccines, but they quietly went out and got their shots anyway (because they know how vulnerable they are, and they don’t want to die).

More broadly, almost 70% of all adults are fully vaccinated, and almost 80% have had one shot.

Right now 66% of the *entire* population has had at least one shot, and 57% are fully vaccinated. The percentage of people vaccinated may only be rising by about 0.1% a day, but it has, relentlessly, continued to rise. With the likely approval of vaccines for children ages 5 to 11 (who are about 8.5% of the population), we are going to see a further increase.

Even at 0.1% increase a day, by the end of this year (in two months), it’s likely that about 63% of the US population will be fully vaccinated, and 72% will have had one shot. By March of next year, those numbers will probably be at least 70% and 77%, respectively.

Add to that the fact that, on average, prior infection in the past 1.5 years is the equivalent of a single dose of vaccine, and that it is likely that a little over 2x the number of people have been infected as opposed to cases “confirmed” by tests, currently close to 14%, and probably about 30% of those not vaccinated have some resistance now, and that will probably be over 35% by spring.

In short, by the end of winter, between vaccinations and prior infections, there’s probably only going to be about 15% of the entire population that does not have some resistance. A coronavirus looking to infect its next victim is going to have a 3/4 chance of encountering someone virtually immune, and another 10% chance of encountering someone with some resistance. Not terribly good prospects for wide continuing spread. 

Furthermore, I anticipate more and more vaccine mandates from the federal, State, and local governments, as well as by employers. School mandates are going to be enormously helpful where enacted. I think it is only a matter of time before we get interstate public transport mandates. Finally, entire “Blue” regions like the Northeast may finally impose quarantines with teeth on travelers from places like Florida and Texas. Too bad for them; they should get vaccinated.

My base case right now is that we do get a winter wave, but it peaks at only about 1/2 to 2/3’s of the cases and deaths of the summer Delta wave. The next wave after that will be about 1/2 to 2/3’s of that wave, and so on. That’s what COVID turning endemic is likely to look like. By the end of next year, I anticipate it really will be “just like the flu” in terms of both infections and deaths.
The US political system

Finally, we get to the issue where I am pessimistic - but really, it is just watching what I figured out shortly after Election Day last year coming to fruition.

The President does not decree legislation. It must be passed by the Congress. And Congress has been completely non-functional ever since 2011, except on those things that are allowed to pass with a bare majority of the Senate (tax cuts and judges). This is a blueprint for continued GOP control. Everything they want they can pass with a bare majority, in a chamber weighted towards rural States to begin with. Everything Democrats want requires 60 votes, and they will never get them. A 50/50 Senate means that even 1 dissenter completely destroys any Democratic agenda item.

And here we are. Maybe some scaled down version of Biden’s economic program finally gets enacted. But the scaled down version isn’t going to be nearly enough.

And the situation with regard to voting rights in particular, and democratic integrity in general, is much more dire. 

It’s pretty clear that the filibuster in the Senate is not going to be lifted for voting rights legislation, nor for legislation (that is *clearly* within Congress’s power, as to Congressional elections) dealing with gerrymandering. And Merrick Garland (who, presumably, is following Biden’s wishes) appears to be “looking forward, not back,” thus ensuring that there are no consequences even for an attempted violent overthrow of the 2020 Presidential election, and further ensuring that much more organized attempts will follow, probably successfully.

Meanwhile the Supreme Court is revving up to repeal the entire 20th Century, both as to civil rights and economic regulation. 

About the only silver lining I see there is that, whether Roe v. Wade technically survives or not, it is really clear that abortions are going to be permitted to be outlawed by the States (and I don’t even put it past the Court to declare that the fetus is a “person” and that abortions *must* be prohibited). That will be the first time in the entire history of the US that a personal right that people thought they had - for the last 50 years - is taken away. 

And one thing we know from behavioral economics specifically, and behavioral psychology generally, is that people react *much* more strongly to things that are taken away from them than things that they didn’t have to begin with. I expect a complete firestorm of rage when this happens, and it may very well lead to 2022 midterm election results that defy the usual trend, with a Blue avalanche giving Biden and the Democrats a much better chance to enact a real agenda, up to and including voting rights and Supreme Court reform.

But in the longer term, the Rule of Law in the US is going to end shortly, I suspect. Some day long after that, a new Constitution not encumbered with creaky 18th Century kludges will finally come into existence, long after I am gone.

Saturday, October 23, 2021

Weekly Indicators for October 18 - 22 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Yesterday I wrote about how house prices appear to be at their peak for this cycle. And in the weekly high frequency data, there is more evidence that a number of other commodity and transportation measures - but not oil! - are also either at or already on their way down from their respective peaks.

This can be treated as good news - hooray, the supply chain bottlenecks are beginning to ease! - or bad news - OMG, users and buyers are refusing to pay these prices, a recession is coming! The rest of the indicators so far decisiveless bet to one side of that bet.

As usual, clicking over and reading should be educational for you, and slightly remunerative for me.

Friday, October 22, 2021

Median prices for existing homes is probably at peak; expect inventory to continue to increase


 - by New Deal democrat

Existing home sales were reported yesterday for September, up 7% month over month on a seasonally adjusted basis. While they are about 90% of the market, they are much less important for the economic cycle than are new home sales, which will be reported next week.

I suspect new home sales will increase, since interest rates stabilized at very low rates earlier this year, and the increase in existing home sales is some confirmatory evidence. Realtor.com doesn’t all FRED to produce data more than 12 months old, so here is the last 12 months for both new and existing home sales, normed to 100 as of September 2020:

Both declined, but new home sales much more deeply.

Realtor.com does provide FRED with both new and total (“active”) listing counts for the past 5+ years. Here’s what that looks like (note, new listings are on right scale):

Note that new listings declined precipitously in late 2019 even before the pandemic - and the pandemic certainly hasn’t helped.

Since neither series is seasonally adjusted, comparing them YoY is more useful:

While new listings rebounded this year, they were slightly lower YoY in September. More importantly, they are down almost 10% since September 2019, which was just before the big decline started, while total listings are down over 20% since then.

In the “the cure for high prices is, high prices” department, YoY median price gains have continued their deceleration. Here’s what the last 4 months have been:
Jun +23%
Jul +20%
Aug +15%
Sep +13%

At this rate, prices will roll over YoY sometime this winter. While these are not seasonally adjusted either, my rule of thumb is that a deceleration of 50% typically marks the top for any such statistic. We are virtually there already as of September, causing me to believe that we are at the peak. This follows my rubric that sales peak first, followed by prices. We can expect inventories - the YoY% decline in which has already decelerated by over 50% - to continue to increase.

Thursday, October 21, 2021

Jobless claims show renewed downward trend; still some slack in continued claims


 - by New Deal democrat

Jobless claims declined 6,000 this week to 290,000, yet another pandemic low. The 4 week average also declined 15,250 to 319,750, also another pandemic low:

With the exception of the last few years of the last expansion, this level of weekly initial claims would be very low for any point in the last 50 years, and the 4 week average would be average for late in an expansion:

Continuing claims declined 124,000 to 2,481,000, also a new pandemic low:

This level would also be normal for the middle of the last few expansions:

Except for the last 2.5 years of the last expansion, continuing claims never dropped meaningfully below 2,000,000 at any point since the 1974 oil embargo.

Finally, here is the YoY% change of continuing claims:

Based on the YoY change, it appears that the complete nationwide phase-out of all emergency pandemic benefits last month may be a cause for the decline in continued claims since then. 

With this week’s confirming data, it appears that we have begun a renewed downward trend. Layoffs are at levels typically seen after very sustained expansions. But there is still some slack in workers who have not yet found new jobs, as evidenced in continuing claims. I suspect we will continue to see that number decrease.

The one big surprise is that all of this is happening while we still have about 80,000 new cases, and over 1600 deaths, of COVID daily.

Wednesday, October 20, 2021

Coronavirus dashboard for October 20: as the Delta downtrend slows, is any State closing in on “herd immunity”?


 - by New Deal democrat

It’s been a moment since my last dashboard. That’s primarily because the Columbus Day weekend resulted in anomalies for the past 9 days, that have finally mainly but not  completely resolved.

Here’s a look at the past 6 months for both cases and deaths per 100,000:

As of today, cases are finally down more than 50% from the Delta peak, at just over 80,000. But as you can see, they are still well above their 11,300 minimum in late June. Deaths are still just under 1700, an elevated number that is the highest since early March.

Here’s a close-up of the past 8 weeks:

I am showing you so you can see that the lack of reporting on Columbus Day, to also in some States the day after as well, caused an anomalous decline those two days, followed by a spike, and then an anomalous bigger decline today as last Tuesday’s spike left the average. You can also see that many States don’t bother to report on the weekends anymore causes a flattening of those two days’ readings compared with trend. The next few days will reveal if there remains a true downward trend or not.

Here is what the four Census regions of the country look like over the past 12 months:

Note that the winter wave began at the beginning of October last year. There has been no such increase so far this month. If cases either trend downward or even sideways for another couple of weeks, we will be lower this year than last year heading into winter. Whether vaccinations + the Delta wave mute any winter wave (when people head indoors for social gatherings) this year is the big question over the next few months.

I have also been curious as to which States have been the closest to or furthest away from either “herd immunity” or “endemic Covid.” While I haven’t looked at all of them, I have compared the most extreme cases. 

Those States with the most vaccinations tend to have had a low to moderate number of total infections (yes, that included NY and NJ). The two jurisdictions (omitting PR and various island territories) with the most vaccinations are DC and VT:

DC has 62% fully vaccinated, plus 10% partially so. VT has 71% fully plus 8% partially vaccinated. Only 9% of the population of DC has had a confirmed infection, and 6% of Vermont (both excellent number for the US). 

If we figure that the total number of actual cases is 2.2x the confirmed count, that gives us a 20% infection rate for DC, and a 13% infection rate for VT. If we randomly assign those among fully, partially, and un-vaccinated people, that gives us the following:

DC: 64% immune,* plus 14% with some resistance, for a total of 78%, with 22% sitting ducks.
VT: 73% immune,* plus 10% with some resistance, for a total of 83%, with 17% sitting ducks.
*=obviously not totally so

At the other extreme, the two States with the highest number of confirmed cases are TN and ND, both with 18.5% confirmed infection rates (suggesting that 41% of their populations have actually been infected. TN has 47% fully, plus 7% partially vaccinated.  ND has 45% fully, plus another 7% partially vaccinated:

That gives us:

TN: 50% immune, plus 24% with some resistance, for a total of 74%, with 26% sitting ducks.
ND: 48% immune, plus 25% with some resistance, for a total of 73%, with 27% sitting ducks.

While there aren’t any States that have managed both low vaccination and low infection rates, there is one (small!) State which has both a very high vaccination rate and a very high previous infection rate: Rhode Island.

RI has 70% fully, and another 7% partially vaccinated. It also has a 16.5% confirmed infection rate, the 8th highest rate in the entire country, for a “real” number of 36%:

That gives us 73% immune, plus 12% with some resistance, for a total of 85%, with only 15% still sitting ducks (2% better than VT, 7% better than DC, and over 10% better than either TN or ND.

Once 5-11 year olds are able to be vaccinated, that (hopefully) should add about another 8% to the totals of fully vaccinated. That would put both RI and VT over 90% either immune or with some resistance. That’s a point by which we should expect to see what an endemic COVID, if not “herd immunity” looks like.

Tuesday, October 19, 2021

New housing construction for September shows a big decline on the surface, but underneath shows stabilization


 - by New Deal democrat

This morning’s report on September housing permits and starts looks very negative on the surface, but on closer examination shows continuing stabilization in new home construction, following the general stabilization of mortgage rates this year.

Housing starts (violet in the graphs below) decreased -1.6% m/m, and total permits (blue) decreased a whopping 7.7%(!), but only after a downwardly revised 5.6% increase in August. The less volatile single family permits (red) decreased -0.9%. As a result, the overall trend for all three metrics for the past several months is a slight decrease:

For the past several months I have noted that the YoY comparisons were going to become much more challenging, given the boom in construction late last year. Indeed this has been the case, with total permits unchanged, single family permits down -7.1%, but housing starts *up* 7.4%:

The YoY increase in starts is noteworthy because it highlights an unusual event which has taken place over the past year; namely, a record number of permits were issued for houses that were not promptly started. 

Take another look at the first graph above, and note the sharp divergence between the violet line (starts) and the other two last winter. Single family permits increased 30% in the 2nd half of last year, and total permits over 20%, but actual starts only increased a little over 10%. The below graph shows the % by which permits have exceeded starts, averaged by quarter. Before this quarter, the *least* % by which permits exceed starts in the previous year was 6.8%, so I have subtracted that to norm it at zero. Simply put, the below graph indicates that this yearlong divergenace between early 2020 and early 2021 was the biggest of the past decade:

This year single family permits have declined almost -18% and total permits over -15%, but the three month average of starts has declined only -2.1% from 1599/month to 1566/month.

In other words, the actual on-the-ground economic activity in housing construction hasn’t declined much at all, most likely because housing materials at reasonable prices constrained the actual building of houses authorized by permits. This suggests much less of a real economic downdraft than would otherwise be the case.

And the evidence from mortgage rates is that housing should be (and is) stabilizing. Here is the raw mortgage interest rate number (gold), left scale vs. the absolute number of single family permits (right scale):

In the past 5 months rates have stabilized between the 2.75%-3.05%, and housing can be expected to resume a moderate increasing trend in response. This is also shown when we compare the YoY% changes in mortgage rates (inverted) and single family housing permits over the past 10+ years:

Mortgage rates have only increased 0.24% YoY, so for all intents and purposes have been flat YoY for the past 3 months. In sum, this continues to suggest that the economy, which tends to follow housing with a 1 year+ lag, after a period of cooling early next year, will also stabilize later on.

Monday, October 18, 2021

September industrial production turns down, but no major cause for concern


 - by New Deal democrat

Industrial production is the King of Coincident Indicators. This morning’s report for September was negative, and August was revised downward, taking total production back below pre-pandemic levels.

Total production decreased -1.3% in September, and the manufacturing component decreased -0.8%. The August reading for each was revised downward by -0.3%.  Nothing particularly special about that; in fact the manufacturing component was a little weak compared with most recent months. Additionally, the July numbers were revised slightly (not significantly) higher and lower for each, respectively. As a result, manufacturing is now only 0.4% above February 2020, and total production is down -1.3% compared with just before the pandemic:

Needless to say, this is very much at odds with the continuing very positive ISM manufacturing index readings which we have gotten every month this year. The Fed regional manufacturing indexes as well as the Chicago PMI also remain positive, so I am not terribly concerned about one poor month (which needless to say may also be revised!).
This morning’s report is probably going to prompt some scary downward revisions to forecasts of Q3 GDP, which will be released one week from Thursday. But when we look at quarter-over-quarter numbers, industrial production is still up 1.1% from Q2 of this year. In the below graph, I’ve subtracted that number so that it norms to zero, to compare that increase with the past 30+ years:

As you can see, while it isn’t the strongest reading, it is higher than most quarters during the 3 expansions since 1989, and is nowhere near recessionary. So, while we’re almost certainly going to see a sharp *deceleration* from the blockbuster last several quarters in q/q GDP next week, in absolute terms I do not see any particular cause for concern.

Saturday, October 16, 2021

Weekly Indicators for October 11 - 15 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

There are a couple of signs that the inflationary surge may be at or just past its peak, mainly in that the costs for ship transportation, which have been soaring for months, have stopped doing so and in one case have reversed. Meanwhile on the production side, some commodity costs are still increasing sharply.

As usual, clicking over and reading will bring you up to the virtual moment as to the economic picture. It will also reward me a little bit for my efforts.

Friday, October 15, 2021

Another strong month for real retail sales growth; to cope, employers are going to have to sweeten the pot to add employees


 - by New Deal democrat

Real retail sales, perhaps my favorite monthly economic indicator since they tell us so much about average consumer behavior, and are also a good short leading indicator for jobs, were reported this morning for September, and they were positive.

Nominally retail sales increased +0.7%, after a +0.2% upward revision to +0.9% for August.  After taking into account +0.4% inflation, real retail sales increased +0.3%. Although real retail sales are down -3.2% from their April peak, they are +12.3% higher than they were just before the pandemic hit:

They are also 8.1% higher YoY, and 3.8% higher just since January, as will be discussed further below.

Last month I wrote that ”while the recent decline from April is consistent with a slowing economy ahead, if sales stabilize here I don’t see this as a harbinger of an actual downturn.” That still looks correct. To show why, let me overlay industrial production (gold, right scale) with real retail sales in the graph below:

Industrial production is only 0.3% higher than it was in February 2020 just before the pandemic. In other words, manufacturers have not ramped up production equivalent to the increase in sales at all. The only time the economy gets in real trouble is when production has substantially outpaced sales (as at the end of the 1990s and mid-2000s, not coincidentally shortly before recessions began). Production and imports are still trying to catch up to this very strong increase in consumer sales, which is why we have such huge bottlenecks at all of our ports and rail and truck shipping as well. As noted above, real retail sales are over 8% higher YoY. How extreme is that? Well, here’s a graph that subtracts 8% YoY growth from retail sales from 1948 through 2019:

With the exception of 2 months during the 1990s, real retail sales haven’t been this strong YoY since 1984. The modern global supply chain simply can’t cope with that huge an increase to new all-time levels.

Now let’s turn to employment. As I have written many times over the past 10+ years, real retail sales YoY/2 has a good record of leading jobs YoY with a lead time of about 3 to 6 months. That’s because demand for goods and services leads for the need to hire employees to fill that demand.  The exceptions have been right after the 2001 and 2008 recessions, when it took jobs longer to catch up, as shown in the graph below, which takes us up to February 2020:

Now here is the same graph since just before the onset of the pandemic. Note the scale is much larger, given the huge changes wrought by the early lockdowns, and of course the comparative spikes from the data one year later:

As with the recoveries immediately after the two prior recessions, up until the past several months YoY job creation has been well below YoY real retail sales growth. But for the last 3 months, jobs have caught up to forecast trend.

Although the most recent jobs report was, relatively speaking, disappointing, this still  argues that we can expect jobs reports in the next few months to average out about even with those from one year ago, which averaged about 500,000 per month. Before I go, let me supply one more graph from my former co-blogger Invictus:

Job switchers have seen explosive growth in their wages in the past few months. To cope with labor’s new-found great strength, employers are going to have to engage in lots of wage and life-style sweeteners to maintain the 500,000/month jobs growth they need.

Thursday, October 14, 2021

Jobless claims: a renewed downward trend?


 - by New Deal democrat

Jobless claims declined 36,000 this week to 293,000, another pandemic low. The 4 week average also declined 10,500 to 334,500, also another pandemic low:

With the exception of the last few years of the last expansion, this level of weekly initial claims would be very low for any point in the last 50 years, and the 4 week average would be average for an expansion:

Continuing claims declined 134,000 to 2,593,000, also a new pandemic low:

This level would also be normal for the middle of the last few expansions:

Finally, here is the YoY% change of continuing claims:

Based on the YoY change, it appears that the ending of all of the emergency pandemic assistance programs by some States in June had very little effect, but the complete nationwide phase-out last month may be a cause for the decline in continued claims in the last few weeks. 

Whether this week is just a bit of a downside outlier, or the actual beginning of a renewed downward trend in claims remains to be seen. But it certainly adds to the evidence that employees have little fear of layoffs at present.

Wednesday, October 13, 2021

Continuing accelerated consumer inflation points to sharp slowdown, but no recession imminent


 - by New Deal democrat

Inflation, along with the expiration of the emergency pandemic payments, is one of the two big threats to this expansion. This morning’s report on consumer inflation for September, at 0.4%, was certainly elevated compared with its typical pre-pandemic reading of 0.2%/month, but on the other hand was the third month in a row of sharp deceleration from springtime, during which inflation averaged 0.8%/month. 

Typically inflation has not been a concern unless inflation ex-gas (red) has been in excess of 3.0%. YoY it is now 4.1%, as it has been for 2 of the 3 prior months. Meanwhile YoY total inflation (blue) is 5.4%, slightly higher than the last 3 months: 

Just as importantly, one of the traditional “real” harbingers of a recession has been wages (more broadly, household income) failing to keep pace with inflation: 

Since April, on a YoY basis wages had failed to keep pace with inflation. In September, they eked out a 0.1% gain.

In Absolute terms real wages have been more or less flat for over a year:

This does not necessarily portend a recession, but it is certainly consistent with a sharp slowdown.

Taking a somewhat more granular look at inflation, housing (shelter) is over 1/3 of the entire index, and reflects households’ biggest monthly expense. The bad news is that on a monthly basis both inflation in shelter (blue in the graph below) and rent increases (red), which had been within their normal ranges in August, are now both running hot (particularly with the expiration of the eviction moratorium):

This has caused the YoY indexes to also turn up:

This will bleed over into the general shelter inflation index, which has already been telegraphed for many months by price increases as measured by the FHFA and Case-Shiller Indexes.

Turning to motor vehicles, new car prices (red) continued to increase at an elevated pace in September, while used car prices (blue) hit a wall in July and have decreased for two month is a row since then:

On a YoY basis, used car prices, which had been up over 40%, are now up “only” 24%, while new car prices are now up nearly 10%:

Finally, although I won’t bother with a graph, there have been renewed gas price pressures in the past several weeks, with prices up about $.10/gallon in that time.

What is the conclusion from all of this? 

First of all, price pressures in these very important sectors of the consumer economy - housing, vehicles, and gas - are constraints going forward into 2022. As I wrote in connection with last month’s report, heightened inflation has gone on long enough now that I expect some damage to show up in consumer spending. It hasn’t yet, probably because in the aggregate personal savings is up over 20% since just before the pandemic began. That’s quite a cushion! Additionally, “real” wage earnings have generally kept pace with inflation, as opposed to declining, so that suggests that consumers can maintain at least a steady level of “real” spending - and it is spending that drives production and jobs.

Secondly, there has been a real deceleration in inflation between the second quarter, during which consumer prices increased at an 8.4% annualized pace (red, monthly right scale vs. YoY, blue, left scale), and the third quarter, during which they increased at a 6.6% annualized pace:

 I expect inflation in both wages and consumer prices to decelerate further from here, with a very important caveat that inflation in rents is a wild card. 

To me this adds up to a sharp slowdown in the economy, but not enough evidence at this point - certainly not in the long or short leading indicators - to suggest a recession in the immediate future.