Friday, November 25, 2022

Have new home sales made a bottom?


 - by New Deal democrat

Hopefully you are recovering from your turkey coma today. Here’s a little late commentary on Wednesday’s new home sales report.

New home sales are noisy, and heavily revised, which is why I prefer housing permits, and especially single family housing permits, as a source of information.

But . . . on the other hand, new home sales tend to be the very first housing metric that turns. In fact, during expansions they often peak so early that they are more of a mid-cycle indicator than a long leading indicator. Here’s the comparison of new home sales with single family permits from the 1970s through the Great Recession:

Sometimes the two series peak and trough simultaneously, but not that often (1977, 1985, 1998, 2005) new home sales hit their peak a few months before permits.

Why is that of note? Here is the current expansion:

As per my comment above, new home sales peaked first. But also look at the far right side of the graph. New home sales bottomed in July and are currently at their level from last spring, while permits are still heading south.

Beware revisions, but new home sales may be signaling a bottom for the housing market, which might be correct if long term interest rates are in the process of peaking now, despite the Fed continuing to raise short term rates.

Median new home prices are not seasonally adjusted, so the only good way to look at them is YoY. Remembering as always that sales lead prices, here is the YoY% change in each:

Again, very noisy, but the overall YoY trend in prices is down. The 3 month average gain over the past year has declined from over 22% to under 12%, suggesting that new home prices are on the cusp of turning down in absolute terms.

On a more general note, notice that, having made a recession warning, I am now on the lookout for the indicators that will tell me how long and deep the recession might be, and when it might bottom out. Watching for a peak in long term interest rates is an important part of that process.

Wednesday, November 23, 2022

Jobless claims have a poor week, rising to multi-month highs


 - by New Deal democrat

Initial claims for jobless benefits rose 17,000 this week to 240,000, a 3 month high. The 4 week average also rose by 5,500 to 226,750. Continuing claims one week ago rose 48,000 to 1,551,000, the highest number since March:

While one week like this shouldn’t set off any alarm bells, initial claims has been one of the increasingly few positive short leading indicators. Recently it has been more neutral, but it would only take about another 25,000 increase in the 4 week average to over 250,000 for this to turn fully negative, consistent with the “recession warning” I have written about several times in the past week.

At this point all 3 of my primary indicator systems - the long and short leading indicators tracked by the Conference Board and ECRI (pace Prof. Geoffrey Moore), the high frequency weekly indicators, and the “consumer nowcast” - are all signaling recession ahead.

On the bright side, manufacturers new orders rose 1.0% in October, and “core” capital goods rose 0.7%. This is one of the two components in the Conference Board’s Index of Leading Indicators that is still positive.

Also, new home sales will be released later this morning. I’ll update this post with a line or two later.

Tuesday, November 22, 2022

More on deteriorating tax withholding receipts and jobs reports


 - by New Deal democrat

I have a new post up at Seeking Alpha, in which I lay out all of the short leading indicators, and conclude that the conditions have now been met for a recession to begin at any point in the next 6 months.

There’s one graph I intended to use which didn’t make it through to the final published piece. Here it is:

Typically recessions have only begun when 8 of the 10 components of the Index of Leading Indicators are down compared with their levels 6 months previously. And so, I go through the list . . . .

In the piece, I note that the strong jobs reports have been the biggest reason why no recession has occurred yet. But in the past several weeks I’ve been pounding the table about the implications of the steep deceleration in tax withholding receipts since mid-year. Here’s the YoY% change in total tax withholding receipts since then:

July +7.8%*
Aug +10.2%
Sep +1.2%*
Oct +12.2%
Nov +3.7% (to date)*

*= less than YoY% change in CPI

I’ll get back to this chart further below.

In the meantime, consider that the monthly household report is prepared from a sample of 50,000. The monthly establishment report is prepared from a sample over 100,000+. But tax withholding is a full and complete report of what every taxpayer/employer in the US remits daily to the Department of the Treasury.

As a result, total tax withholding receipts should come fairly close to mirroring aggregate payrolls, especially for non-supervisory workers, in the household jobs report. The one important difference is that even bosses pay withholding taxes, up to $147,000 of salary, on Social Security, and also on Medicare without any income limit. With that in mind, here is a graph of the YoY% change in aggregate payrolls for both non-supervisory workers and all workers for the past year:

Note that beginning in April, the YoY trend starts to decelerate markedly.

Back in August, Investors Business Daily highlighted the below graph of the monthly 10 week YoY% change in tax withholding to date:

Note that, just like aggregate payrolls, with a one month delay it peaked and had declined ever since.

IBD hasn’t updated since, but the values are easy enough to calculate. As of the end of September, the 10 week YoY% change was 4.2%. As of the last daily report last week, the increase was only 3.7%.  

Note that beginning in July in the IBD graph, and the updated information for the 10 week totals, and the monthly totals from July and September in the monthly chart above, *all* of the YoY% increases in tax withholding are less than the rate of inflation.

In other words, since July *even in the aggregate* non-supervisory workers at least are making less, adjusted for inflation, than they were at the same time in 2021.

Further, per my rule of thumb for non-seasonally adjusted YoY data, when the YoY% change declines by more than half, which in the IBD metric it did by September, the data has likely made its absolute peak and started to turn down in absolute terms (i.e., if we could seasonally adjust it).

Over the weekend I took a look at how tax withholding performed in the year leading up to and during the 2001, 2008, and 2020 recessions. In each case, I found that when tax withholding declined on a YoY% basis to a level of 1% or less above CPI, that coincided with a variance of one month with either weak jobs reports of less than 100,000 jobs gains, or even outright job losses, in either the household or establishment aspects of the jobs report.

Now here are the m/m gains/losses in the household and establishment jobs reports for the last 12 months:

What tax withholding data is strongly suggesting is that the actual job losses in the household reports in June and October were signal, not noise, and that there is a strong likelihood that the establishment numbers are going to be revised downward in the future as more complete data is updated.

Monday, November 21, 2022

Coronavirus dashboard for Thanksgiving week 2022


 - by New Deal democrat

As we start Thanksgiving week, let’s take a look at the current state of COVID.

The Alphabet Soup of variants (most of which are direct descendants of BA.5), primarily BQ.1&1.1, has largely displaced their parent, which is down to 24% of all cases:

Typically new waves have peaked when the displaced variant is down to 10% or so of all cases, which should be the case with BA.5 in two or three weeks.

This is noteworthy, because as we will see below, the Alphabet Soup variants have not yet caused any real wave at all.

In the below graphs, I’m going to show the entire 2.5 year history of COVID as to each for comparison purposes.

Here’s BIobot’s waste particles data (dark line) vs. confirmed cases (light line):

Since the end of last year, many people have relied on home tests and not bothered with confirmation, so the “real” number of cases is roughly equal to the peaks of the first 3 waves of the pandemic. This makes sense since each new variant has been more immune-evasive than the previous variants.

Regionally, we do see the likely beginning of a winter wave in the West, and also perhaps in the Midwest (but not the Northeast at all!):

Despite this, hospitalizations are not elevated at all:

And deaths (thick line), when compared with cases (thin line), are near their all-time lows:

This has not gone unnoticed. Dr. Eric Topol, in his substack, calls the BQ.1.x variants the first displacing variants not to cause a new wave, pointing out that:

“in New York State, which has the highest level of BQ.1.1 in the US, there continues to be no sign of hospital admissions increasing. If anything, that rate is decreasing.”

He concludes:

“It would be tempting to interpret the lack of impact of BQ.1.1, relative to its immune evasion properties, as we’re out of the woods. A population-level immunity wall has been built up over 3 years, with all the infections and vaccinations. Further, our T-cell immunity from these exposures, which isn’t assessed with these neutralization antibody assays, is helping us defend against variants. The optimistic viewpoint is that there’s little more that the Omicron family can throw at us which will be much worse than what we’ve already seen. That we’re done, going endemic, that the acute phase of the pandemic with big waves is over.

“Not so fast. As Daniele Focosi reminded us this week, the SARS-CoV-2 mutation rate has increased by 30% in the past year. There still could be room within Omicron, and especially the XBB recombinants, to pose a significant threat. Moreover, there’s the dismal prospect of a whole new family of variants to emerge (e.g. Sigma) that are distinct from the mutation cascade we’ve seen from Omicron for over a year.”

For now, I’m gong to go with the more optimistic scenario. As to XBB, that was responsible for a wave in Singapore, that quickly came and went all in the month of October:

And no new lineage has managed to displace Omicron for the past full year.

In the meantime, I would still mask up in all public indoor spaces, not just for COVID, but to avoid this year’s bad flu outbreak as well.

Saturday, November 19, 2022

Weekly Indicators for November 14 - 18 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

It had to happen sooner or later. Earlier this year, based on the long leading indicators, I went on “Recession Watch.” Now, for the first time in a very long time, I have escalated to “Recession Warning.” I believe there is much more than a 50/50 chance of a recession beginning in the next 6 months.

For all the gory details, click on over and read, which will bring you up to the virtual economic moment. As usual, it will also reward me a little bit for the efforts I made.

Friday, November 18, 2022

Existing home sales decline to recessionary levels; prices have clearly turned down; low inventory still a problem


 - by New Deal democrat

As I wrote earlier this morning, my primary interest in existing home sales at this point is prices. [Note: graphs below for sales and prices does not include October]

For the record, existing home sales fell to a new 2.5 year low (i.e., since the teeth of the pandemic lockdowns) of 4.430 million annualized:

Before the pandemic, the last time the number was this low was in 2012. Further, this is down -19.5% YoY, -26.4% from their recent secondary February high, and -35.3% below their October 2020 expansion high. This is the kind of number I would expect at the cusp of a recession.

More importantly, median prices declined seasonally by -1.5% for the month to $379,100. This is “only” 6.6% higher than one year ago, and is the slowest YoY% increase in over 2 years:

The highest YoY% change in the past 12 months was +17.6% in January.  This is the third month in a row that the rate of change has declined by over 50%, my rule of thumb for when a seasonally-adjusted data set would turn down. 

In short, I think we can safely say that existing home prices, were we able to seasonally adjust, have turned down from a peak during summer.

Inventory is also not seasonally adjusted. This turned down m/m, but YoY is -0.8% lower:

We are nowhere near solving the low inventory problem that we have had since even before the pandemic hit.

Core inflation using house prices rather than imputed rents


 - by New Deal democrat

Later this morning existing home sales will be reported for October, which will mainly be of interest to me only for what happened with prices, and secondarily whether the problem of low inventory which has existed for 3 years is moving in the direction of resolution.

In the meantime, yesterday Jason Furman got some traction, and amplification by Paul Krugman, of the below graph which measures core inflation using new rent indices (e.g., Zillow) rather than owners’ equivalent rent:

The implication is - one embraced by Krugman - that inflation is already not a problem. 

I don’t think this is really the case, because we are still using an imputation of hypothetical rents to measure house prices.

I already posted a graph of what core inflation ex-shelter would look like:

But let’s go one step further and measure what core inflation, *including* shelter looks like, using actual house prices as measured by the FHFA Index rather than owners equivalent rent, thus banishing the entire problem. Here it is:

Most importantly, as of August (the last month for which the house price index has been reported), YoY core inflation including house prices was 8.6%. At its peak 6 months earlier in February, it was 12.4%. If it were to continue to decline at that rate, in October core inflation using actual house prices would be 7.3% - declining fast, but still above the official 6.3% reading of core inflation using imputed rents. It would take until about next April for core inflation using house prices to get to the Fed’s comfort zone of 3% or less.

Thursday, November 17, 2022

Housing permits and starts continue to fall, but housing under construction continues to (slowly) rise


 - by New Deal democrat

The monthly numbers for housing permits, starts, and single family permits all declined this month. Permits (red in the graph below) declined -38,000 annualized to 1.526 million annualized, and starts (blue) declined -62,000 annualized to 1.425 million, both the lowest since summer 2020. Single family permits (gold, right scale), which have the most signal and least noise, declined -31,000 annualized to 831,000, the lowest since May 2020 and before that, the lowest since April 2019:

Perhaps more importantly, here’s a variation on a graph I have run many times over the past 10 years, comparing the YoY change in interest rates, in this case mortgage rates (inverted, *10 for scale) with the YoY% change in total housing permits (red) and single family permits (gold):

These are well within the ranges of declines that have previously been consistent with recessions, with the exception of 1966, although frequently (not shown) the actual recession hasn’t started until there has been a -40% decline.

As I always point out, interest rates lead housing permits roughly by 3 to 6 months. As shown above, for example, this year mortgage rates turned negative (i.e., higher) YoY in April. Housing permits in total and for single family units followed in August. As of now, YoY interest rates have risen almost 4%, an increase only exceeded by 5% and 6% increases in 1980 and 1982 respectively, which coincided with -50% declines in housing permits (not shown). Thus, we should expect housing permits to have declined by about -40% by about January or February, to levels of 1.100-1.150 million and .700-.740 million units annualized, putting a likely recession start date in the 1st quarter of 2023.

BUT, this time it really is slightly different. In the past, housing permitted and not yet started, and housing units under construction, have typically turned down well in advance of the onset of any recession:

But because of a shortage of building materials, there have been record numbers of housing units that have been permitted, but have not yet been started (blue in the graph below), which appears to have peaked in July,  and consequently a big lag in housing under construction (red), which rose slightly again this month, although it has only risen 3.2% in the past 6 months:

Because housing under construction is the actual economic activity, this suggests that  residential housing has continued to contribute ever so slightly to GDP growth. 

This is reinforced by the generally coincident nature of employment in residential construction (gray in the graph below) compared with housing units under construction:

With the sole exception of the 2020 pandemic lockdown recession, construction, which is an even smoother metric than single family permits, has always peaked at least 6 months before the onset of recession, with a median time of 18 months, and as much as 47 months; and has declined at least 6.5%, and as much as 34%, with a median decline of 20% from peak:

In other words, there is a significant element of “it’s different this time,” in that construction has in the past typically followed a decline in permits by 0 to 11 months, with a median of 5.5 months. Further, a recession has typically followed a decline in construction by between 6 and 47 months, with a median time of 18 months; and has declined at least 6.5%, and as much as 34%, with a median decline of 20% from peak.

We are now 10 months out from the peak in permits, and construction has not yet rolled over. Nor has residential construction employment, which has also typically turned down months in advance of any recession. Thus past history would suggest no recession begins until at least 6 months from now, and possibly much later - depending on how quickly construction rolls over and how abruptly it declines.

Jobless claims: evidence the jobs market is cooling slightly from white hot to red hot


 - by New Deal democrat

Initial jobless claims declined -6,000 this week to 222,000. The 4 week average rose 2,000 to 221,000. More interestingly, continuing claims one week ago rose 13,000 to 1,507,000, the highest number in over 7 months:

By historical standards, it is still true that almost nobody is getting laid off (outside of tech). But current numbers are evidence that the job market, while still red hot, is not quite as white hot as earlier this year. In fact, if jobless claims were to stay at current levels, by the end of January they will be negative YoY and up over 20% from their lows, which would turn this indicator - which has been one of the most positive all this year - negative.

Wednesday, November 16, 2022

October industrial production: consistent with a very slow expansion


 - by New Deal democrat

I call industrial production the King of Coincident Indicators, because more often than any other metric it coincides with the peaks and troughs of economic activity as determined by the NBER, the official arbiter of recessions.

Unlike retail sales, the news this morning for October was not so good. While manufacturing production did increase +0.2% to a new post-pandemic high, overall production declined -0.1% for the month. Also, July and August’s production numbers were revised down -0.1% each, and September’s strong number was revised down -0.4% to only +0.1%. As a result, total production has gone nowhere in the three months since July:

This sideways trend in total production is frequently observed before recessions, but it also coincides with slowdowns during expansions (see, e.g., 2018-19), so is not particularly dispositive of anything. Unfortunately FRED does not have a tool for creating 3 month moving averages (the one big shortfall of that site imo), but I can approximate showing you this via a graph of the quarter over quarter change for the past 60 years ending with the July-September quarter:

Note, for example, the negative q/q reads during the 1966 and 2016 slowdowns. 

This is a report consistent with a very slowly expanding economy, but one that is not yet in recession.

October retail sales: consumers: “We’re not dead yet!”


 - by New Deal democrat

Retail sales, my favorite consumer indicator, was reported this morning for October. And it was a good number, up +1.3% nominally, and up +0.5% after adjusting for inflation:

On the bright side, this was the highest absolute number since April. On the down side, retail sales have still gone essentially nowhere for the last 18 months. 

As a result, YoY retail sales are only up +0.5%. Since real retail sales YoY have an excellent historical record of coinciding with imminent recession, here they are historically from 1997 through 2019, compared with real aggregate payrolls for non-supervisory employees, another excellent coincident indicator (gold), and also real personal spending YoY (red):

The latter historically has lagged somewhat, but is included because there is an excellent case that this year consumers have shifted from spending on goods, which are more reflected in retail sales, to spending on services, which are better picked up in the personal income series. Here’s the close-up of all three for the past year:

Real retail sales did go negative for several months in the spring, coinciding with the negative Q1 and Q2 real GDP reports, but have since turned slightly positive. As I noted the other day, real aggregate payrolls remain positive - although certainly not strong; and real personal consumption expenditures are still pretty robust.

Short conclusion: no recession yet.

Because real retail sales have also historically been an excellent short term indicator for payrolls, here is that comparison for the past year, together with real personal spending as well:

Although this month’s retail sales report was very good, it nevertheless continues to imply further weakening jobs reports in the months going forward.

So, a good report, but one that does not change the underlying decelerating trends.

Tuesday, November 15, 2022

October producer prices: more evidence that supply chain pressures have eased


 - by New Deal democrat

Let me start this discussion of October’s producer price index by pointing to the NY Fed’s “Global Supply Chain Pressure Index” for the past 5 years through October:

Before Trump’s tariff’s in 2018, most often this index was slightly below zero. It zoomed higher when the pandemic, and with the exception of a few months, stayed there until spring of this year. It has generally declined since the beginning of this year, and especially since May. It is now showing only a little more than “normal” pressure.

With supply chain issues abating, so has pressure on producer prices. In October, prices for final demand, and “core” demand minus food and energy, both increased 0.2%:

On a YoY basis, final demand PPI decelerated to 8.0% (compared with a March high of 11.7%), while “core” prices decelerated to an 8.1% gain:

Perhaps more importantly, for the last 4 months final demand PPI has increased by precisely 0.0. With supply chain pressures eased, if this deceleration continues, by sometime next spring producer prices will be within their pre-pandemic “normal” range of inflation.

Of special note, producer prices for construction materials declined -1.3% in October (blue, left scale below); on a YoY basis they have decelerated to only a 2.9% gain (red, right scale):

This is in marked contrast to the rising 7.9% YoY gain in “owner’s equivalent rent” in the CPI. Here’s a comparison of the last two years of CPI and PPI:

If producer and consumer prices continue to trend as they have since the middle of this year, then by the middle of next year they will both be back into a “normal” range.  The question remains, how much damage will the Fed insist on doing before we get there?

Monday, November 14, 2022

Some foreboding signs and portents from consumption and employment data


 - by New Deal democrat

I have a special post up at Seeking Alpha, looking at some very troubling signs from several of the high frequency indicators I track weekly as to consumption and employment.

Click over and read the whole article, but here is a little taste: the below is what the YoY% change in the 20-day total of payroll tax withholding has been in has been as of the first week of each month this year:

  • Jan +9.3%
  • Feb +11.6%
  • Mar +13.4%
  • Apr +12.6%
  • May +3.6%
  • June +20.7%
  • July +7.8%
  • Aug -3.4%
  • Sept +1.7%
  • Oct +3.6%
The first half of this year was, in the aggregate, terrific. And then things slowed down precipitously. Considering inflation has been over 5% YoY all year long, this chart certainly appears to indicate that, in real terms, there has been no YoY increase at all in payroll tax collections since late summer. That’s not good.

Saturday, November 12, 2022

Weekly Indicators for November 7 - 11 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Although a few indicators are holding up, in the past month there has been almost continual deterioration in several employment and consumption metrics. These are particularly important for whether the consumer is pulling back, typically a signal that a recession is close to imminent.

As usual, clicking over and reading should bring you up to the virtual moment as to the state of the economy, and reward me a little bit for my efforts.

Friday, November 11, 2022

Real average hourly wages and real aggregate payrolls for October


 - by New Deal democrat

With yesterday’s report on October consumer prices, we can up two of my favorite measures of how the working/middle class is doing - real average non-supervisory wages, and real aggregate payrolls.

Real average wages for non-supervisory workers declined -0.1% for the month. They are -5% below their pandemic lockdown peak (which, recall, was affected by more lower wage workers being furloughed) and -2.6% lower than they were in September of last year:

Real aggregate payrolls measure how much wealth the middle/working class is earning as a whole. In the past 60 years, when that has outright declined on a YoY basis, it has always - with no exceptions - coincided, give a month or two, with the onset of recessions:

The news here was good. Really, really tepid, but still good.

Real aggregate payrolls were unchanged for the month, and remained +1.1% higher YoY:

In the past few months, both inflation and nominal payroll growth have decelerated. To signal an imminent recession, nominal payroll growth is going to have to decelerate significantly more than inflation. That it hasn’t done that much in the past several months is at least muted good news.

Thursday, November 10, 2022

October CPI report: total inflation increasing at 3.5% annual rate, core inflation minus shelter increasing at 2.8% annual rate in the past 4 months


 - by New Deal democrat

For a full year now I’ve been hammering the fact that the official CPI measure of housing inflation, “owners’ equivalent rent,” seriously lags actual house prices as measured by the most popular housing indexes. I said then, and I have reiterated almost every month since, that because of this serious lag, OER was going to rise probably to 7.5% YoY or more, and drag core CPI along with it. That remained evident in this morning’s October CPI report.

Here are the headlines:
Total CPI +0.4% +7.8% YoY (-0.4% YoY decrease from last month, and down -1.2% from June’s high of +9.0%)
“Core” CPI +0.3% +6.3% YoY (-0.4% decrease from last month’s 40 year high)

The below graph shows the monthly change in total (blue) and core (red) inflation since  January 2021:

It’s clear that there has been a significant deceleration in the past 4 months.

Owners’ equivalent rent rose +0.6% for the month, making a new +6.9% all time high YoY (exactly as I started forecasting a full year ago) compared with the FHFA purchase only house price index (black, /2 for scale):

Here’s what core inflation excluding OER looks like m/m (it was unchanged!):

And YoY (up 5.9%):

In other words, in the last 4 months, since gas prices peaked, total inflation has increased at a rate of  3.6% YoY. Core inflation minus OER has increased at only a 2.8% annual rate.

Here are some other highlights of the report.

Energy prices increased 1.8% for the month:

Used vehicles: -2.4% +2.0% YoY (down from +41.2% in February
New vehicles: +0.5% +8.4% YoY (down from +13.2% in April)

The YoY sharp deceleration in used car prices doesn’t mean they’re cheap: they’re still almost 50% more expensive than they were when the pandemic lockdowns ended. But they are about -5% down from their January peak. New vehicles are still very problematic:

In sum, high inflation at this point is primarily a function of housing. And while actual house prices have turned down slightly in the past several months, and are sharply decelerating YoY (but still up 12% vs. their 20% YoY high), the fictitious and lagging measure of housing - owners equivalent rent - that is used by the Census Bureau continues to misrepresent the true picture.

To repeat how I closed this report last month, in hiking rates, the Fed is chasing a phantom menace.

Jobless claims: still holding steady


 - by New Deal democrat

Initial jobless claims rose slightly, by 7,000, from one week ago to 225,000. The 4 week average declined -250 to 218,750. Continuing claims also rose slightly, by 6,000, to 1,493,000:

This is right in the middle of where claims have been for the last 6 months. If anything, there might be a slight rising trend in the last month.

The jobs market remains very tight. Aside from Zuckerberg’s and Musk’s employees in social media, almost nobody is getting laid off.