Saturday, August 14, 2021

Weekly Indicators for August 9 - 13 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

For the first time, there are some significant if still minor impacts on the economy showing up due to the Delta wave.

As usual, clicking over and reading will bring you up to the virtual moment as to the economy, and help me out a little bit with my lunch money.

Friday, August 13, 2021

Here is my inflation worry


 - by New Deal democrat

I want to follow up on a comment I made yesterday in connection with Wednesday’s consumer price report.

It is certainly true that *inflation* is likely to be transitory. The 5.3% YoY inflation we’ve seen in June and July may certainly pass in the next few months, and reduce to a more somnolent number under 3%.

Hoorah! Inflation was transitory!

But what if the price increases “stick?” In other words, what if the absolute price increases in houses, cars and trucks, and gas don't recede? Then I think we have a problem.

To show you what I mean in one easy (I hope) graph, below are wages and personal income (red shades), house and construction materials prices (blue shades), and new and used vehicle prices (gold shades), all normed to 100 as of one year ago in July 2020:

Wages are up on average 4.7%, and personal income is up 2.3%.
Meanwhile, existing home prices are up 23.4%, new homes up 6%, and construction material prices up 33.1%!
New car prices are up 6.4% and used vehicle prices up 41.7%!

There is simply no way that sales of new homes and new vehicles don’t take a hit if this situation obtains much longer. And here’s the problem: wages not keeping up with prices has historically been a very important “real economy” indicator of an oncoming recession:

Note from the mid-1960s to mid-1990s some of this was ameliorated by the entry of women into the workforce, meaning that household income could increase even if wages didn’t keep up.

So, we don’t simply need for *inflation* to abate. We need the absolute price increases in important consumer assets like houses and vehicles to deflate back to trend.

Thursday, August 12, 2021

Initial claims continue rangebound, while continuing claims continue slow decline


 - by New Deal democrat

Initial jobless claims declined 12,000 this week to 375,000, still 7,000 above their best pandemic levels of 368,000 set on June 26 and July 10. The 4 week average of claims increased by 1,750 to 396,250, 11,750 above its pandemic low of 384,500 set on July 10:

Significant progress in the decline of initial claims remains stalled, as it has for the last 2 months.

The story once again is quite different for continuing claims, which declined 114,000 to another new pandemic low of 2,866,000:

This series, which had also been near a stall, now looks to have begun a slow declining trend on May 29. This may reflect the termination of special pandemic benefits in many States, the impact of $15 minimum wages and signing bonuses being offered, or other items.

From the long term perspective, below is the current level of continuing claims  (blue), together with the 4 week average of initial claims* (red), and the unemployment rate from last week’s jobs report* (gold)(*adjusted for scale)(all current values = zero). The first two are consistent with earlier in the expansions over the past 40 years, while the unemployment rate is consistent with mid-expansion or later:

The decline in continuing claims is good news, provided those whose claims have ended are able to start new jobs, and not just being arbitrarily tossed to the economic wolves.

I continue to believe that whether claims will continue to stall, reverse, or improve from here is under the control of the Delta variant, and whether new vaccinations continue to stall. My best guess is that as to the pandemic August and September will not be good months, as Delta burns through the dry tinder, so I consider it likely that initial claims do not make much more headway.

July consumer inflation: the spike subsides somewhat, but we are close to the limit of “transitory”


 - by New Deal democrat

For the last two months my theme has been that if the spike in inflation only lasted two or three months, it was not a big deal, but if the trend were to continue longer, it would begin to impact consumer spending, and it will get the Fed’s attention.

In that regard, the “good” news is that in July consumer inflation was “only” 0.5%. The bad news is that for the last 5 months alone, consumer prices have risen 3.5%. Further, while inflation was only confined to a few sectors, those sectors were houses andcars - the two most important purchases made by most consumers - and the gas with which to power those cars, the most visible of all prices.

Let’s break it down.

While YoY inflation was 5.3% (blue in the graph below), typically it has not been a concern unless inflation ex-gas (red) has been in excess of 3.0%. Since it is now over 4%, unless it ramps down shortly, as in 2011, this is indeed a concern:

Inflation in shelter (blue in the graph below) has risen sharply m/m for the past 6 months. In the past 4 months, the trend in rent increases (red) have also increased m/m (although they are not up nearly as much as they were before the pandemic):

New car prices have increased sharply each month for the past few months, while in July used car prices may finally have hit a wall:

The building of new houses, and the manufacture of new vehicles are the two most forward looking, learning sectors of the “real” economy. That price pressures are now constraining both is not good for the economy going forward into 2022.

Returning to inflation ex-energy, now over 4% YoY, If this number goes back down below 3% quickly, then consumers can live with that. If not, however, and particularly if wages fail to keep up, then consumers may cut back on other purchases. In fact, wages (more broadly, household income) failing to keep pace with inflation has been one of the tradition “real” harbingers of a recession. Here the news is mixed.

Real hourly wages, I.e., wages deflated by consumer prices, declined slightly in July. Further, while real wages have been more or less flat in the past year, they are down over 1% from their pandemic peak. But on the other hand, they are still up over 1.5% since before the pandemic began:

The big fly in the ointment here is the expiration of many emergency pandemic programs, even as the Delta wave rages.

We really need to see the main drivers of this so-far transitory inflation spike subside: microprocessors for vehicles, and construction materials for houses. The latter will be reported for July as part of the PPI which will be released tomorrow.

The other two important variables are the course of the pandemic, and whether or not emergency measures are renewed if the pandemic does not subside. So far the bond market does not seem concerned, and bank credit as I reported recently has been expanding. If that continues, the economy should continue to do well. But if the pandemic itself, or an inept government response to it cause a crash landing, all bets are off.

Addendum: I note where, inter alia, Paul Krugman lauds this report as demonstrating that inflation has indeed been transitory. I demur. For example, used car prices only increased 0.2% in July. But they are still up 41.7% YoY! Truly transitory inflation in a resource-constrained boom shouldn’t just plateau after a huge price increase, it should ramp right back down, as lumber prices in housing have done, plummeting all the way back down to 2018 prices. It is this ramping back down which was missing in yesterday’s consumer inflation report.

Wednesday, August 11, 2021

Coronavirus dashboard for August 11: evidence that the Delta wave may be peaking in the earliest hit States


 - by New Deal democrat

My framework of analyzing the economy via leading, coincident, and lagging indicators continues to come in handy at looking at the course of the pandemic.

At the beginning of June, I flagged that the number of cases had stopped declining among 5 of the least vaccinated States. By the middle of June, I wrote that Delta was going to be a real challenge for those States. More pointedly, on June 23, I wrote that the Delta wave was beginning in those States, including Missouri, Arkansas, Nevada, Oklahoma, and Utah. Sure enough, as the days went by, more and more States showed increasing cases as Delta took hold. By the end of June, I was warning that the end of July was going to look very different, and by late in July I was warning that the US was on track for 1000 deaths/day by the end of August (as of this morning, deaths are up to 545).

Consistent with the idea that Delta has been burning through the dry tinder, as demonstrated by the sharp peaks and declines in India and the UK, I have been looking for signs of when the peak might come in those early States hit with Delta. And the signs now look like they are showing up.

Here are the 7 day averages in new cases in 4 of the earliest hit States - Missouri, Arkansas, Nevada, and Utah, plus Florida as well. In 3 of the States - Missouri, Nevada, and Utah - new cases look completely flat over the past 7 to 10 days. In the other two, the rate of growth appears to be decelerating:

The ratio of positive to total COVID tests in 4 of those also appears to have peaked (Florida no longer bothers to report):

This is pretty strong evidence that the Delta wave is peaking in those States.

Turning our attention further to the ratio of positive to total tests, here is a graph of the 10 States with the highest ratio, in addition to the 5 already examined:

We have 5 States over 30% - Mississippi, Oklahoma, Iowa, Idaho, and Kansas.

Let’s compare this to the signal case of South Dakota:

South Dakota’s positivity ratio peaked at 60% during its horrific outbreak last autumn. Right now South Dakota is averaging 6 cases per 100,000 per day, the lowest of any State in the nation.

As I have speculated a number of times, South Dakota may have stumbled into herd immunity, or at least close to it, the hard way. The positivity rates in the worst hit States for Delta suggest that some of them at least, may not be far behind. 

Once Delta burns through the dry tinder nationwide, which is looking more and more to happen sometime around Labor Day, just what % of all Americans have actually been infected by COVID becomes determinative in what is likely to happen next.

Tuesday, August 10, 2021

Scenes from the July jobs report


 - by New Deal democrat

[Note: I haven’t put up a Coronavirus dashboard in almost a week. I’ll try to get around to that later today or tomorrow. It isn’t *all* bad news.]

Last Friday’s jobs report for July was probably the most uniformly positive report I have seen since I started writing about them going on 15 years ago. Let’s take a look at a few of the most salient items.

First of all, unemployment (blue in the graph below) at 5.4% and underemployment (red) at 9.2% are about where they were in the middle of each of the last 3 expansions:

Not a boom, but not bad at all either. This is real progress, and a real positive (note graph is normed at the 0 level equal to the current month in both numbers).

On the other hand, when we look at those who aren’t actively looking, so aren’t counted in either the un- or under-employment rates, but say that they want a job now, we see that the number is close to the worst levels since the series started being reported in 1994:

At 6.517 million, that’s about 1 million higher than the number at the midpoint of 2 of the last 3 expansions, and 1.5 million above the 3rd.

If we keep getting very good jobs reports, I expect this number to drop, but gradually, over the next 6 to 12 months.

Turning to the number of jobs added themselves, since the end of last year, we have added 4.318 million jobs:

That’s an average of a little over 600,000 per month.

But we are still 5.7 million below where we were in February 2020. In other words, if the current - excellent! - rate of growth continues, it will still take 9 or 10 months to get back to the pre-pandemic levels.

Finally, here’s a look at the jobs deficit is several sectors:

You can see that the total jobs deficit is mainly one in the service sector, especially leisure and hospitality. Manufacturing and construction, relatively speaking, were never hit as hard, and are closer to making up their losses.

The jobs market was actually in quite good shape in the year before the pandemic, with lots of wage pressure due to nearly “full” employment, with lots of marginal and minority workers getting jobs. While it is by no means booming in the absolute sense now, we have made a lot of progress this year, but with a lot more distance still to go, especially in the services sector.

Monday, August 9, 2021

June JOLTS report: at last, new hires (slightly) outpace record job openings

  - by New Deal democrat

This morning’s JOLTS report for May was the best we have seen since the immediate rebound from the pandemic lockdowns.  There was yet another record level continued all of unfilled job openings, yet another new record low in layoffs and discharges, an enhanced number of people quitting their jobs, and finally - for the first time this year - a huge number of new hires, setting a new m/m record high outside of the immediate lockdown rebound last year.

Here are the month over month percentage changes for each of those metrics:

As noted above, headline job openings (blue), which have been making new all-time records for month, were finally joined by a nearly 700,000 gain in actual hires (gold):

Voluntary quits also rose, and are higher than any other prior month except this past April:

The record number of people voluntarily quitting their jobs (meaning they are not eligible for unemployment benefits) is testimony to the record robustness of the jobs market.

Finally, while total separations (light blue, left scale) are at normal levels, layoffs and discharges (violet, right scale) declined to yet another all time low:

This is a market that is beginning to arrive at a new equilibrium, after having been out of equilibrium for most of this year. Almost nobody is getting laid off, but lots of people are quitting. But the big change is, while there are continued record openings, finally there is hiring outpacing the level of new openings to fill them. 

I want to share two other graphs that I came across recently. The first, from Wolf Richter, shows that continued unemployment claims have declined in the aggregate in States that have cut off pandemic unemployment benefits vs. those that have retained them:

One drawback of this graph is that we can’t tell if the difference is driven by just one or two of the big States, but I think it makes a valid point that is also consistent with this second graph, which I have posted previously but was forwarded to me again last week:

Together, these show that while undoubtedly for some of those people not entering the job market continued pandemic jobless benefits are an issue, for many more the lack of COVID safety in the locale where they live, the unavailability of reasonable-cost child care, or the general low pay for the labor required, are keeping them on the sidelines.

A great deal depends on the course of the Delta wave. If it burns through the dry tinder and recedes over the next 45 days, then we may see openings gradually level off and begin to decline, while hiring continues to increase sharply. If not, well, . . . .

Lending supply and demand both increased in Q2


 - by New Deal democrat

The June JOLTS report will be posted at 10 am eastern time.

While we are waiting for that, here is a link to my update on the Senior Loan Officer Survey, which is a long leading indicator, which was posted at Seeking Alpha.

Easier lending standards, and increased demand for loans, is a strong positive for the economy going out 12 months.

As usual, clicking over and reading will reward me a little bit for my efforts.