Saturday, February 26, 2022

Weekly Indicators for February 21 - 25 at Seeking Alpha


 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

The invasion of Ukraine by Russia has added some elevated risk to a few of the numbers, but there is nothing that indicates any economic crisis.

In general, there are accumulating signs that last year’s Boom is over; but on the other hand, no accumulating signs that a recession is anywhere near. In short, a normal, uneven expansion for now and the near future.

As usual, clicking over and reading will bring you up to the virtual moment, and bring me enough to buy a bottle of wine or two.

Friday, February 25, 2022

Consumers still spend, but real income declines, leaving them increasingly vulnerable to price shocks


 - by New Deal democrat

Nominal personal income was unchanged in January, while spending rose 2.1%. In real terms after inflation, personal income declined -0.5%, and personal consumption expenditures rose 1.5%, completely reversing December’s decline, and adding about 0.2%. I have stopped comparing them with their pre-pandemic levels (they are both well above that). Rather, the more important comparison now is with their level after last winter’s round of stimulus. Accordingly, the below graph is normed to 100 as of May 2021: 

Since then spending is up 2.2%, while income has declined -1.4%.

Comparing real personal consumption expenditures with real retail sales for January (essentially, both sides of the consumption coin) reveals both rebounded almost exactly from their respective December declines:

Many people front-loaded their Christmas spending into October, so the decline in November and December was not too concerning. On the other hand, the continued decline in income since last spring is somewhat. In that regard, the personal saving rate was 6.4% in January. The below graph shows that past 10 years, from which I’ve subtracted 6.4%, so that it shows at exactly the 0 level:

The saving rate is now below any point since the end of 2013. This means that consumers are more vulnerable to a price “shock” than at any time in the last 8 years (house, car, and gas prices, anyone?). One of my recession models - the “consumer nowcast” - is based on such a shock that is unable to be made up from increased real income, or an increased source of wealth to be cashed in. If income has faltered, and if stocks are - perhaps - faltering, that leaves housing wealth, which is still increasing sharply but is itself increasingly vulnerable as well, as I laid out earlier this week.

Thursday, February 24, 2022

New home sales increasing trend continues - for now; expect a major pullback in coming months


 - by New Deal democrat

With mortgage rates having risen sharply (as of this morning Mortgage News Daily has the 30 year rate up to 4.19%, the highest in nearly three years), we are at an important moment for the housing market. In that context, let’s look at this morning’s new home sales report for January.

There are two important things to know about new home sales: (1) it is the most leading of all housing reports, leading even permits, so much so that it is more of a mid-cycle indicator rather than a long leading indicator, and (2) the data is very noisy, and heavily revised (December was revised up 3.5% this morning), so much so that it is less useful than single family permits in particular.  

So first, here  is new home sales (blue) vs. single family permits (red) for the past 3.5 years:

It’s easy to see that the trend in sales led permits - but also that sales are much more noisy. 

Here is the longer term view of same:

Sales are consistent with the move upward in permits in the past several months.

Having said that, as I always say, interest rates lead sales. Here is the YoY% change in mortgage interest rates (gold, inverted, so that an increase in rates shows as a decrease) vs. the YoY% change (/10 for scale) in new home sales for the past 10 years:

Again, it is easy to see that interest rates lead sales by 3-6 months. Note that sales were generally more buoyant that interest rates in the past decade, due to the demographic tailwind of the big Millennial generation, a tailwind that is now abating. Mortgage rates as of last week (i.e., before the further surge this week) were already slightly over 1% higher than one year before.

Here is the longer term view. In this graph I add 1% to the YoY change in mortgage rates, so that only changes in mortgage rates of higher than 1% show as a negative:

*Every* time mortgage rates were higher by more than 1% YoY, new home sales declined YoY at least briefly. But they only correlated with an oncoming recession about 50% of the time. So the increase in interest rates to date does not reliably signal a recession next year.

Next, sales lead prices. The below graph compares the YoY% changes in sales with that of prices (green):

The YoY change in sales peaked from summer 2020 through spring 2021; prices followed from spring through autumn 2021. Price increases are now decelerating (just as we saw the other day with the Case Shiller and FHFA house price indexes).

Finally, in the case of new houses, prices lead inventories. The below graph compares sales with new homes for sale (brown):

The inventory of new single family houses for sale rose to 406,000 in January, the highest number since summer 2008, and before the housing bubble previously exceeded only during the 1970s.

In keeping with my mantra, we should expect the continued rise in mortgage rates to lead to a renewed decline in new home sales and construction, continued deceleration with price increases (and an increasing change of outright price *decreases*), and a continued increase in the inventory of new houses for sale. Depending on what other long leading indicators do, this *could* mean a recession in 2023, but not necessarily so at this point.

New 50+ year low in continuing jobless claims

  - by New Deal democrat

[Programming note: I will post about new home sales later this morning.]

Initial claims (blue) declined 17,000 to 232,000 (vs. the pandemic low of 188,000 on December 4). The 4 week average (red) declined 7,250 to 236,250 (vs. the pandemic low of 199,750 on December 25). Continuing claims (gold, right scale) declined 112,000 to 1,476,000 (not just a new pandemic low, but the lowest number in over 50 years!):

As anticipated, as the Omicron tsunami rolls back out, the recent increase in initial claims has abated, although I still suspect we have seen the lows in initial claims for this expansion. Still, it is consistent with a deceleration in monthly gains in nonfarm payrolls compared with last year.

The decline in continuing claims to a 50 year+ low means that the record tightness in the jobs market isn’t going away anytime fast. There will be continuing upward pressure on wages. 

Wednesday, February 23, 2022

Coronavirus dashboard for February 23: the Omicron wave has receded by almost 90%; what about deaths?


 - by New Deal democrat

No economic data today, so let’s update the situation with COVID-19. My usual source of graphs, 91-Divoc, is down today, so less elaborate, cluttered graphs from the NYT site to follow.

The Omicron wave peaked in the US on January 14, at a 7 day average of 806,928. As of yesterday, the average was 86,553, an 89% decline! But before you get too excited, while that is the lowest number since mid-November (minus the days after Thanksgiving when there was very limited reporting), it remains higher than at any point during 2020 before November of that year, and between March and August of 2021. In order to get down to their July 2021 lows, cases would have to continue to decline at their same rate since peak for another 4 to 5 weeks:

Deaths during the Omicron wave peaked on February 1, (only) 18 days after cases, at a 7 day average of 2,670. As of yesterday, they were down 27% at 1,939, conquerable to where they were on January 14, 18 days before the peak:

This is a slower rate of decline than cases, which 21 days after their peak were already down 60%!. Cases were already down 27% from peak only 13 days later. 

On the one hand, if deaths were to decline in line with cases, we would expect deaths to be down to about 300 within a month. On the other hand, if deaths continue to decline as they have since their peak, then within a month they will be about 1200. That’s a big difference!

Let’s turn to a State which had an early and huge Omicron wave, New York, for further clues.

Cases in NY peaked on January 9 at 74,186. They are now, 44 days later, at 2,975, or a decline of 96%! 

This is the lowest number of new cases since August 4, although for perspective NY had its lowest number of cases on June 25 at 314.

Deaths peaked in NY on January 22, only 13 days after cases, at 206. They are now, 31 days after the peak, at 58:

This is a 72% decline. By contrast, 31 days after the peak in cases NY was down 91%. Cases had declined by 72% on January 27, only 18 days after their peak.

Note that the NY comparison, -72% in deaths vs. -91% in cases the same length of time after peak, is much closer than the US comparison, -27% vs. -89%.  Also, NY cases peaked 5 days before the US as a whole, and deaths in NY peaked 10 days before the US as a whole.

In other words, the peaking process in deaths for the US as a whole was much more extended than for NY. Put another way, deaths in the US have shown a more extended peaking process in the US compared with cases. This is more in line with earlier waves of the virus, where deaths peaked 3 to 4 weeks after cases.

There is evidence of the same pattern in other countries. Deaths in the UK had a similar long peak compared with cases, before falling in lockstep, now down about 50%.  Portugal is also showing a similar long peak in deaths, but since cases only peaked 3 weeks ago, more cannot be said. The same is the case with Israel. In Canada deaths look slightly elongated as well, but are now down over 50%, following the pattern in cases (no graphs, because of the aforesaid glitch with 91-Divoc today).

If we figure that the wave in deaths is more extended on both the upside and downside, than we can expect the decline in deaths to accelerate now that we are 3 weeks past peak, more in line with the NY decline, making for a roughly 70% decline from peak within a month. That amounts to about 800 deaths per day, still lower than at any time during 2020, and lower than any time during 2021 except for May through early August.

Tuesday, February 22, 2022

House price increases still strong, but clear deceleration from peak


 - by New Deal democrat

The Case Shiller and FHFA house price indexes were reporting this morning, covering the period through December.

As you all know well, my mantra is that interest rates lead sales, and sales in turn lead prices. Here’s this month’s update.

The monthly increase in the Case Shiller national index (violet) was 0.92%, and the YoY% increase was 18.3%. This is the 4th month of price deceleration from August’s high of 20.0%. Meanwhile, the FHFA purchase only Index (red) increased 1.2% for the month, and was up 17.6% YoY, a declined from 19.3% in July:

The below graph compares the FHFA index (red, *2 for scale) with several measures of home sales, including single family and total permits, as well as housing starts, all YoY:

YoY housing sales have been decelerating since last April, and are barely positive at all. In fact, single family permits are slightly negative.

We have almost certainly seen the peak in YoY price appreciation in housing. I expect prices to come very close to flatlining by later in this year sometime, and may even turn negative, i.e., we may see outright price declines as increased mortgage rates really take a bite.

Monday, February 21, 2022

You’re reading the right blog, Presidents‘ Day edition


 - by New Deal democrat

No economic data today due to the Presidents’ Day holiday, so here is something else I ran across over the weekend.

Former Federal Reserve Economist Joseph Gagnon critiqued a Paul Krugman column about the cause of inflation. He notes that the causes of this inflation are both supply and demand sided:

To which Paul Krugman replied:

Yours truly bought into supply chain problems as creating some inflation almost immediately. By last summer I was also citing personal income and spending, and retail sales as adding a demand pull element to the inflation. I officially left “team transitory” last August. Two months ago I noted the reverse-“musical chairs” element of wage inflation that was likely to continue.

It’s nice to see two such prominent economists figure it out only a few months later.