Saturday, February 12, 2022

Weekly Indicators for February 7 - 11 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha. 

Last year my task was easy, because the issue was whether to describe the economic Boom as “red hot” or “white hot.” With interest rates having risen between 1/2% or 1%, depending on which type being measured, and inflation having eaten up wage increases, the task this year is more challenging.

But the end of a Boom does not mean the onset of a recession. The DOOOMers are already out and baying; as usual they will be wrong.

To see where we are at now, and where we are headed over the near term, click on over and read. It will inform you and invest me with a couple of $$$.

Friday, February 11, 2022

Real wages continued to stall in January, portending a consumer slowdown, but don’t reverse


 - by New Deal democrat

Let me follow up on yesterday’s post about the January CPI by talking about “real” wages.

Since both average real hourly wages and consumer inflation increased in January by 0.6%, real hourly wages for non-supervisory workers were flat month over month:

Real wages have been essentially flat since June 2020, with the exception of last winter and September. That isn’t good, but it isn’t recessionary either.

Now let’s turn to real aggregate payrolls, which are an overall measure of consumer health. These declined by -0.3% for the month. But, due to the annual revisions in the household survey from which they are derived, December 2021 was their new all-time high:

For the past 50+ years, only when aggregate real wages have retreated from peak for 3 to 9 months, has recession typically followed:

So, a blip, but not bad news.

The conclusion I have written for the previous 2 months continues to be true now, with only slight modifications: while real wage growth has halted, depending on which measure we use, it has not gone into reverse. This is consistent with taking a near term recession off the table for now. On the other hand, we certainly are at a point where a deceleration beginning with the consumer sector of the economy is more likely than not.

Thursday, February 10, 2022

Jump in January consumer prices seals the deal on Fed interest rate hikes


 - by New Deal democrat

Consumer prices increased 0.6% in January, the third time in four months that it has come in over 0.5%. Energy increased 0.9%, which isn’t a horrible monthly rate, but YoY energy prices for consumers are up 27%, just below their YoY peaks in 1974, 1979, 2005, and 2008 - not coincidentally 3 out of 4 of which coincided with deep recessions: 

YoY inflation is now 7.5%, the highest rate since 1982. My favorite measure, CPI ex energy, is also up 5.6% YoY, and tied for the worst since the 1981-82 recession as well:

My rationale for tracking CPI ex-energy is that, unless energy costs filter through into the broader economy, there is no cause for alarm. But if the wider economy shows a sharp increase, then there is likely to be aggressive action by the Fed to bring the rate of inflation down, and that means slowing the economy, or even putting it into reverse.

Inflation in new and used vehicle prices rose 0.9% in January, and 23.3% YoY, an all-time high (compared with gas prices, red):

As I have forecast for months, house price increases (blue, /2 for scale) have continued to feed through into rents and “owners equivalent rent”(red), which constitutes 1/3rd of the entire inflation index, and in turn has also continued to increase, and is now up 4.1% YoY:

What happened in the case of both prior cases where owners equivalent rent surged after house prices did - 2000 and 2006 - the Fed stepped in and raised rates aggressively, in both cases resulting in recessions, which in turn caused the rate of overall inflation to decline:

This report all but seals the deal on the Fed raising interest rates in March. It increases the odds of a more aggressive .50% increase rather than a baby-steps .25% increase. I hasten to point out that, so long as the yield curve does not invert, the Fed can still achieve its desired result of a decline in inflation, without causing a recession - and the current spread between the 10 year and 2 year bond is consistent with an economy 2 or 3 years before a recession hits:

Unfortunately, hindsight being 20/20, the Fed allowed itself to fall behind the curve. When house prices increased over 10% YoY consistently in early 2021, it should have realized that this was going to filter through into the broader measure this year, and begun laying the groundwork for tightening then, and probably begun to tighten slowly by the end of last summer.  Now it is probably too late. But the Fed, like me, probably assumed that the US population would be fully or nearly fully vaccinated by last autumn, bringing the pandemic to an effective end, thus bringing labor and supply shortages to an end as well. 
I’ll discuss the effect of this report on wages tomorrow.

Jobless claims bounce along near their bottom


 - by New Deal democrat

New jobless claims declined 16,000 to 223,000 last week. This is still 35,000 higher than the low of 188,000 set on December 4; but on the other hand is remains among the lowest weekly figures for the past 50 years. The 4 week average declined 2,000 to 253,250, which is 53,500 above its 199,750 low set on December 25:

Continuing claims were unchanged at 1,621,000, 66,000 above their low of 1,555,000 set on January 1:

I suspect we have set the lows for this economic cycle. On the other hand, I don’t see any particular reason for jobless claims to rise out of their recent range below 250,000 anytime soon, pandemic permitting.

Programming note: I’ll report on the January consumer inflation number later this morning.

Wednesday, February 9, 2022

Gas prices sound a consumer warning


 - by New Deal democrat

I got a note yesterday from a fellow forecaster pointing out that crude oil prices have once again made new 7 year highs. This is something I also highlighted in my “Weekly Indicators” column on Saturday. As I write this on Wednesday morning, West Texas Intermediate Crude trades at slightly under $90/barrel, yet another new 7+ year high. 

How much trouble does this portend for the economy? Potentially, a lot.

Prof. James Hamilton (of Econbrowser) pointed out over a decade ago that big increases in gas prices had preceded 10 of the 11 recessions in the US since the end of World War 2. Although I can’t find the article right now, my recollection is that Hamilton’s model is calibrated to gas prices to spiking to a new all-time high. Obviously, at about $3.40/gallon right now, we’re nowhere near 2008’s $4.25/gallon, when average hourly wages were 33% lower than they are now.

But it strikes me that the model shouldn’t *require* new all-time highs. Suppose prices had been $2/gallon for 20 years, and then rose to $3/gallon suddenly? That obviously would be nowhere near a new all-time high, but many consumers would long ago have come to accept $2 as the “normal” price, and probably would react almost as strongly as if prices had made a new high.

So I went back and calculated current gas prices now, and in the half-year coinciding with past recessions vs. the 5 year previous average of prices. Before I show you how that came out, let’s look at a historical graph.

Gas prices have been published only since 1978. In order to include the oil shocks of 1974 and 1979, we need to use oil prices, the records of which go back to World War 2 and before. Here’s what the semiannual prices of each look like:

When we compare gas prices in the 6 months just before past recessions vs. their 5 year previous average, here’s what we get:

1990: $1.33 vs. $1.01, up 32%
2000: $1.48 vs. $1.13, up 31%
2008: $3.45 vs. $2.21, up 52%

We don’t have 5 full years of gas prices before 1980, but using the data from its beginning in January 1878, we get:

1980: $1.27 vs. $0.74, up 71%

Since we can see from oil prices that gas prices were on par or even lower than 1978 during the 3 previous years, the shock in 1980 would be higher than 71% (from personal recollection, gas prices doubled or more after the 1979 oil shock started, which is also what they did in 1974).

Now let’s look at the current comparison:

2021: $3.25 vs. $2.53, up 28%
January 2022 vs. previous 5 years: $3.32 vs. $2.58, up 28%

The current increase of 28% compared with the previous 5 years is very close to the 30%+ that coincided with the onset of previous recessions. It’s important to point out in that regard that the 1990 recession just barely coincided with a new all-time high, since at $1.33, they were only $.04 higher than 1980’s $1.27.

Generally, the way we would expect gas prices to trigger a consumer recession is by consumer’s cutting back on non-gas purchases, perhaps even to a greater amount than the added $$ spent on gas. The below two graphs show that two ways.

First, here are retail sales ex-gasoline adjusted for the overall consumer price index (note this series only begins in 1994):

Non-gas purchases turned flat in the year just before both the 2001 and 2008 recessions. They didn’t do that for the sui generis pandemic recession.

Next, here is the YoY% change comparison between non-gas (blue) and gas (red, /2 for scale) purchases:

Before both the 2001 and 2008 recessions, YoY non-gas purchases, adjusted for inflation, were down, while gas purchases YoY were still higher.

At the moment, both are still significantly higher YoY. But that is going to change drastically starting in March, with the comparisons against last spring’s stimulus-fueled spending.

Just one indicator, and none of my indicator arrays are forecasting recession this spring. But they are forecasting a slowdown by summer, so at very least if gas prices remain at these *relatively* high levels, or increase further, I expect significant consumer distress to show up.

Tuesday, February 8, 2022

Coronavirus Dashboard for February 8: Omicron declines sharply; did Delta provide protection against the worst outcomes?


 - by New Deal democrat

As I mentioned yesterday, I haven’t posted a Coronavirus dashboard in awhile, and with Omicron in rapid retreat, it’s time for an update.

To begin with, deaths are presently peaking at roughly 2450 a day, while nationwide cases are down almost 2/3’s:

There are over a dozen States where numbers are now down close to, at, or even below their pre-Omicron outbreak levels. In particular, the Northeast region and Puerto Rico down over 85%. NY, NJ, CT, DC, DE, and MD  are at the same level as they were last April, well below their winter 2020-21 peaks, and as of yesterday were still declining with no signs of stopping. *If* the current rate of decline of 50% per week is maintained, they will be at last June’s lows in about 4 weeks:

One thing that is somewhat surprising is that the relative rates of cases from Omicron does not correlate that strongly with previous vaccination rates. To cut to the chase, a previous bad Delta outbreak may have provided some protection against Omicron.

Here are the last 8 weeks (basically the time since Omicron hit) for the 10 most vaccinated (with 2 or more doses) jurisdictions, compared with the nationwide level (in red):

Note that many of them had substantially worse Omicron outbreaks than the average.

And here are the 10 least vaccinated jurisdictions:

Many of these had *lower* numbers than the national average.

It appears that the heavily vaccinated jurisdictions, being urban travel hubs, were exposed to Omicron first, and are further along in their declines, while the least vaccinated jurisdictions tend to be more rural, were hit later, and are declining less so far (and Tennessee is still increasing!). This pattern is more evident when we compare the jurisdictions with the lowest current rates of infection:

With those having the highest current rates of infection:

Again, urban areas were hit earlier, and have declined from peak more sharply than more rural areas.

The pattern is similar when we turn to deaths. For the US as a whole, total deaths in the past 8 weeks average 31.3 per 100,000.

Here’s the death rates for the 10 most vaccinated jurisdictions (including PR, but not DC):

PR (80% vaxxed) (20.9 deaths per 100,000)*
VT 80% 19.4*
RI 79% 37.5
ME 78% 31.0
MA 77% 39.5**
CT 77% 33.3
HI 76% 11.9*
NY 75% 39.0
NJ 73% 38.2 
MD 73% 40.8**

And here is the same for the 10 least vaccinated jurisdictions:

AL 49% 22.6
WY 50% 30.8
MS 50% 31.0
LA 52% 22.1 
AR 53% 32.6
TN 53% 47.8**
GA 53% 24.3
IN 53% 54.9**
ND 54% 24.7
MO 55% 35.1

*among 10 best rates
** among 10 worst rates

Other States included in the 10 best rates of deaths are:
CA 14.7 
UT 16.7
WA 18.5 
OR 19.7
MT 19.7 
FL 19.8
NC 20.3

Other States included in the 10 worst rates of deaths are:

MI 59.7
PA 54.1
NM 50.7
AZ 49.3
WV 42.6
OH 41.4

While some highly vaccinated States - CA, OR, WA - have among the best records, others - PA - do not. And while some of the least vaccinated States - WV, MI - have terrible records, several others - FL, MT, UT - have among the best records.

To sum up, Omicron seems to have hit highly urbanized areas first and hardest, and more rural areas later on. In the urban areas, cases are declining sharply, while in rural areas deaths are still at or nearer their peaks. Vaccination status seems to be only weakly correlated with Omicron outcomes. This probably doesn’t have anything to do with any shortcomings in the vaccines, but rather the effect of recent bad Delta outbreaks (concentrated in the poorly vaccinated States) providing some protection against the worst outcomes from Omicron.

Monday, February 7, 2022

Programming note: not playing hooky!


 - by New Deal democrat

The economic calendar is *really* sparse this week: initial jobless claims and CPI on Thursday are the only releases of note.

But I am not playing hooky! I haven’t posted a Coronavirus Dashboard in awhile, and with cases coming down, usually sharply, almost everywhere, I thought it was worth a look to see where Omicron hit hardest and where it was not so hard, in particular depending on vaccination status.

So far, the results are not necessarily what you would expect. I’m still working to complete the update, which is pretty extensive, and which should be posted tomorrow morning.

See you then!