Saturday, February 19, 2022

Weekly Indicators for February 14 - 18 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

As the Omicron tsunami recedes, what is still present is high commodity prices (not least of which is gasoline), and mortgage rates at levels that have not been seen in close to 3 years.

The overall picture is of an economy that is very slowly decelerating, or worsening, depending on whether you feel optimistic or pessimistic as you read this.

As usual, clicking over and reading will bring you up to the virtual moment, and bring me a little pocket change for my efforts.

Friday, February 18, 2022

A housing warning: affordability, at long last, is approaching its housing bubble nadir


 - by New Deal democrat

If current price and mortgage trends hold, we are about 6 to 12 months away from matching the very worst housing affordability at the peak of the housing bubble.

Let’s start with a comparison of existing home sales (blue, reported today for January), new home sales (gray), and mortgage rates for the past 16 months: 

Note that the NAR doesn’t permit FRED to show sales more than 12 months previously - but here is the graph I ran 6 months ago:

The bottom line is that both existing and new home sales declined - with the typical delay of 3 to 6 months - in response to moderately higher interest rates early last year. When interest rates declined again during autumn, new and existing home sales responded - again, with a delay - by heading higher.

Now here is what mortgage rates look like up through this week:

Mortgage rates have jumped by about 0.75% since January 1, only 7 weeks ago.

The saving grace in the housing market for the past several years has been that, while the down payment cost of a home was the highest ever in comparison with household earnings, mortgage rates were so low that the monthly carrying costs were nevertheless relatively modest. The NAR publishes a “Housing Affordability Index” taking that into account. Here is the long term view:

And here is the latest graph through December:

Thus this does *not* include the jump in mortgage rates in January and this month so far. And bear in mind that since the house price component of the index is not seasonally adjusted, and January is typically the nadir for house prices, we can expect this index to deteriorate substantially in the next several months.

In fact, by my calculations, this most recent jump in mortgage rates makes monthly mortgage costs the highest since about 2007, and only about 15-20% lower in real terms than at their worst at the peak of the housing bubble in 2005. And if house prices continue to appreciate during the next 6-9 months the way they have for the past 24 months, we will match that peak.

Prices follow sales, and after the last few buyers lock in sales before mortgage rates go higher, I fully expect sales to decline substantially, and prices to follow suit once they hit their breaking point later this year.

Thursday, February 17, 2022

Housing permits jump; the last hurrah before mortgage rates bite?


 - by New Deal democrat

This morning’s report on January housing permits and starts highlighted the unique divergence between the two. As I have often pointed out, permits are the more leading and less noisy of the two reports, so I usually highlight them, especially single family permits.

But in the past year there has been a marked divergence in trend between the two data sets, as permits soared then sank, while starts have been much more steady. The explanation for the divergence is the huge number of housing units for which permits have been taken out, but on which construction has not started. In January that was 280,000 on a seasonally adjusted basis (red), the highest such number since non-seasonally adjusted records (blue) began in 1974:

There are simply a huge number of units that *could* be started, but haven’t, probably because of a shortage of some necessary materials (I’ve heard, e.g., that windows are particularly in short supply).

With that in mind, below are total housing permits (blue), total starts (gray), and single family permits (red, right scale):

As you can see, there was a surge in permits one year ago, which then declined sharply. Total permits have risen again, to 1.899 million annualized, the highest number since September 2005. Single family permits also rose to 1.205 million, a one year high, but below January 2021’s high of 1.268 million.  

Starts, on the other hand, declined to 1.638 million. I deal with that by averaging the last 3 months, which makes the number much less volatile. That average, 1.683 million, is the highest number since September 2006. A close-up of the three series since 2019 is below, better to show that actual starts have varied around 1.600 million in the past 12 months:

Since starts are the actual, hard economic activity, this indicates that housing is still a positive for the economy looking out ahead 12 months.

A big surge in housing permits in the face of rising mortgage rates, at least initially, is not really a surprise. The same thing happened several times in the past decade, notably in early 2014 and 2016, as potential buyers rush to close before rates climb even higher. Housing (blue and gray below, /10 for scale) does follow mortgage rates (red), but with a 3 to 6 month lag as shown in the graph of the YoY% change in each for the past 10 years, which I have run many times in the past:

After this surge, which may persist another month or so, I fully expect housing starts and permits to decline, and substantially, in accord with the big increase in mortgage rates to over 4%, about 1.3% above their 2021 lows.

Jobless claims essentially steady; we have probably seen the low for this expansion


 - by New Deal democrat

[Programming note: I will post about housing permits and starts later this morning.]

Since the crisis in jobless claims is long past, I will keep this note brief.

Initial claims (blue) rose 23,000 to 248,000 (vs. the pandemic low of 188,000 on December 4). The 4 week average (red) declined 10,500 to 243,250 (vs. the pandemic low of 199,750 on December 25). Continuing claims (gold, right scale) declined 26,000 to 1,593,000 (vs. the pandemic low of 1,555,000 on January 1):

It is possible there is some unresolved seasonality due to the pandemic that affected the November and December numbers. It is also likely that the Omicron wave has led to some increased layoffs - which should pass as the wave continues to recede sharply to pre-Omicron levels.

Still, I suspect we have seen the lows in initial claims for this expansion. The increase isn’t enough to be of concern, but on the other hand this is consistent with job growth decelerating this month and the next several months.

Wednesday, February 16, 2022

Retail sales and industrial production both positive for January; but expect an employment slowdown in the coming months


 - by New Deal democrat

Over the past few months, one of my repeated refrains has been that a sharp deceleration beginning with the consumer sector of the economy is more likely than not. In December, that showed up in spades in retail sales, although that was clearly influenced by people front-loading Christmas purchases into October and November.

This month it completely reversed. Retail sales, one of my favorite “real” economic indicators, rose sharply in January, up +3.8% for the month before inflation. After inflation, “real” retail sales were still up +3.1% for the month, although they are still down -2.2% from last April’s peak: 

On a YoY basis, real sales are up 5.4%. This is the lowest comparison since last February, but still a very good number over the long term:

Note that these comparisons almost certainly will turn negative in March. Probably more important is that, as shown in the first graph above, they have been esssentially flat since last April. That’s not recessionary, but it’s not good either.

In short, this report remains consistent with a slowdown in the consumer sector of the economy.

Next, let’s turn to employment, because real retail sales are also a good short leading indicator for jobs.

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 pandemic hit:

The two had been right in line during the latter half of 2021. With real retail sales slowing down considerably in the last two months - and with the expectation that they will go negative for at least a couple of months in March and April - I expect the string of monthly jobs reports averaging 500,000 or more will shortly end, although maybe not for several more months. Whether we get a negative print at some point in spring or early summer will depend on whether sales, measured from last April, continue to go sideways, improve, or deteriorate.

Finally, real retail sales per capita is one of my long leading indicators. Here’s what it looks like for the past 30 years:

With a -3.0% decline since April, this remains a negative signal, and reinforces the long leading forecast of a stall or near-stall in the economy by about the end of this year.


Let’s also take a look at this morning’s report on January industrial production. This was also positive, as total production increased 1.4%. However, the big increases were in utilities and secondarily in mining. Manufacturing production only increased 0.2%. Here are the index values for the past 5 years:

Both are significantly higher than they were just before the pandemic, but slightly below their 2018 peaks. The YoY% comparison shows a slight deceleration trend:

Industrial production is the pre-eminent coincident indicator, telling us that at present the economy is performing fairly well.

Tuesday, February 15, 2022

Coronavirus dashboard for February 15: the most optimistic I have been in months


 - by New Deal democrat

The current trend in both cases and deaths in the US has me the most hopeful I have been in over 6 months. Here’s why.

Nationwide, cases have declined to 150,000, only 30,000 above their level just before The Omicron wave started, and about 10,000 less than their Delta peak:

The Omicron wave has been almost completely symmetrical. Cases started to rise exponentially roughly on December 15. They peaked about 4.5 weeks later. Now, about 4.5 weeks after that, if the current trend continues the US will be below its level of December 15 within a week from now. Meanwhile, deaths have declined slightly to 2300 from their peak of roughly 2500 a week and a half ago. Further, in a comparative sense only, Omicron has been mild-er than previous waves, with more than 3x the number of infections at the US’s previous peak one year ago, but 25% fewer deaths, and only about 20% higher than their Delta peak. Still, as the graph shows, the US currently is at a level far above its summertime 2020 and 2021 levels.

As usual, there is a big divergence among the States in the course of the current wave. The worst States are still reporting over 100 cases per 100,000 population daily. the best, plus Puerto Rico, are between 12 to 25 cases per 100,000:

More granularity, here’s a list, plus relevant exemplar graphs, of where the 50 States plus DC and Puerto Rico fit in.

(1) State with less than a 50% decline: ID

(9) States with greater than 50% declines, but still above their Delta peak: AZ, CA, KY, MT, NM, NC, OR, VA, WA

(22) States below their Delta peak, but not below their level pre-Omicron: AL. AK, AR, CO, FL, GA, HI, KS, LA, MN, MS, MO, NV, ND, OK, PR, SC, TN, TX, UT, WV, WY

(16) States below their level pre-Omicron: CT, DE, DC, IL, IN, IA, MD, MS, NE, NH, NJ, NY, RI, SD, VT, WI 

(3) States below both their pre-Omicron and pre- Delta onset levels: MI, OH, PA

(1) sui generis: ME, which never really had an Omicron wave, but was caught in the middle of its Delta wave when Omicron hit:

Finally, let’s take another look at cases and deaths per capita in the US focused on the last 8 weeks:

Cases have been declining at roughly 40% per week. *If* they continue to decline at that rate, the US is going to be completely below its pre-Omicron level within a week, and back to its summertime 2020 and 2021 levels within 3 weeks.

Further, the CDC’s latest report shows that Omicron has all but eliminated Delta, which was responsible for 0.0% of cases (!) in their latest weekly report. In other words, there is every reason to believe that deaths, which have lagged cases by about 3 weeks or so since the onset of Omicron, are going to fall all the way to about 500 per day by March 10.

This is about the best, most hopeful data trend I have seen since the Delta wave started last July. Half a year ago, I thought that once Delta had burned through all the dry tinder, and once vaccinations increased enough, by this spring we might be returning to something at least close to normal. It may very well be that Omicron wound up doing the deed instead. If so, I certainly expect more variants and more waves; but it could very well be that future waves are going to be significantly smaller than either Delta or Omicron, especially in terms of deaths.

A note on producer prices and (possibly) cooling inflation


 - by New Deal democrat

[Programming note: I will hopefully have an updated Coronavirus dashboard up later today.]

One point I make from time to time is that, with seasonally adjusted data, YoY comparisons can miss, or at least lag, turning points. We *may* have such a situation developing with producer prices as evidenced by this morning’s report.

On a YoY basis, producer prices for finished goods (red in the graph below) are up 12.5%, while commodity prices are up 19.3%. Consumer inflation, released last week, is up 7.5%:

Commodity and producer price inflation is off slightly from its level of 13.5% in November.

When we look at the month over month increases, we see that there has been a decided cooling in the price increases in the past several months compared with last spring, summer, and early autumn:

*If* this continues, then YoY inflation is going to decelerate sharply in the next few months, back towards more “normal” levels. And since commodity prices tend to lead producer prices, which frequently (but not always!) lead consumer prices - which unlike commodity and producer prices were still rising on a YoY basis in January - then we could see a return to more normal consumer inflation later in the year.

Which means the Fed shouldn’t overreact and slam on the brakes this spring.

Monday, February 14, 2022

The return of the “Oil Choke Collar”!

 - by New Deal democrat

For the first five years after the end of the Great Recession, one of the staples of my analysis was the concept of the “oil choke collar.” By that I meant that typically recessions had occurred after there was a sudden and sharp upward spike in the cost of gas, inflicting such pain that consumers cut back drastically on other spending - causing a prompt economic downturn. But what if, instead, gas prices rose more gradually to the pain threshold? Then we could expect consumers to react less drastically, cutting back marginally on other purchases. The economy would slow, gas prices would retreat, the pain would go away, and consumers would resume their prior purchases. And repeat. 

In other words, gas prices would act as a “choke collar” on the economy, biting and relaxing as consumer purchases waxed and waned. There would be no recession, but no great growth either.

And then, in 2014, gas prices fell precipitously from $3.75 to just over $2 a gallon. That put an end to the oil choke collar!

Is it coming back? Last week I wrote that gas prices had increased almost 30% above their average level of the past 5 years, And so I anticipated some consumer distress.

I mentioned the idea in my “Weekly Indicators” column, which caused several long-time readers to pipe up and ask about the status of the “oil choke collar.”

So let’s take a look.

The “oil choke collar” does not depend upon the absolute price of gas, but rather it’s relationship to spending. There are at least 3 ways of comparison: (1) to average wages, (2) to disposable income, and (3) to GDP. The first two are measures of the hit gas purchases make to consumers’ wallets, and the third measures against the entire economy. Below I’ll look at each in turn. Note that weekly gas prices weren’t compiled until after 1990, so for the period before that I use Texas crude spot prices only.

1. Vs. wages



The OPEC oil shocks of the 1970’s, the Kuwait invasion shock of 1990, and the 2006-08 shocks stand out. In addition to the 2010-14 period, the 1975-79 period also stands out as a period of a “choke collar,” with consistent elevated prices that mainly went sideways, operating as a depressant on the economy without causing recessions.

Measured in terms of gas prices (not oil prices), we are about 10% below the price where the “choke collar” would take effect.

2. Vs. Disposable personal income

This is an even better comparison than just against hourly wages, since it measures the hit to discretionary spending.



Note that I’ve normed both graphs to 100 as of July 2012, a typical month of the “oil choke collar” period. We see that any sudden sharp move substantially above 100 has been consistent with a recession, while periods oscillating about 100 are eras of subpar growth. The current value is just over 65% for gas prices, meaning they would have to rise to about $4.25 a gallon for the “choke collar” to engage.

3. Vs. GDP

Oil analyst Steven Kopits in the past has written that every time Oil prices rise to a level of 4% or more of GDP, a recession has followed. The below graphs norm that to 100 as displayed.



Once again we see that every time this metric shoots suddenly past 100, a recession has occurred. The two times it has oscillated around that point - in the later 1970s and 2010-14 - there has been no recession, but growth has suffered.

The metric for gas prices currently measures at roughly 70. Again, gas prices of roughly $4.25 a gallon would engage the “choke collar,” equivalent to about oil prices at $125/barrel.

As I write this, oil prices are about $93/barrel, and gas prices are about $3.50/gallon. As I wrote last week, because this is a big jump compared with the last 5 years, I expect there to be some consumer distress. But we aren’t at the point of engaging the “oil choke collar” yet.