Saturday, July 16, 2022

Weekly Indicators for July 11 - 15 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

We are at the point where I suspect that after the Q2 quarterly economic reports come out, and the Fed’s next meeting/rate hike, literally *all* of the long leading indicators will be negative.

But, wait! There is a ray of sunshine still. Oil prices went back down under $100/barrel yesterday, equivalent to where they were when gas was $4.10/gallon. Take away the Ukraine-related oil shock, and not only might consumers start spending more on other things again, but inflation might decline sufficiently to cause the Fed to ease up a little. Maybe.

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

Friday, July 15, 2022

June industrial production: second sharp monthly decline in manufacturng


 - by New Deal democrat

Industrial production declined -0.2% in June, and May was revised downward to unchanged. Even worse, manufacturing production declined -0.5% in June, and May was revised downward to -0.5% as well:

This corresponds to the sharp deterioration in the regional Fed new orders indexes, and the ISM manufacturing new orders index we have seen during that same time.

On a YoY basis, total production is up 4.2%, while manufacturing is up 3.6%. Compared with the last 40 years, and particularly the last 20, this remains pretty good growth:

The sharp deceleration in the past two months is not good, and two recessions - 1990 and 2007 - have started from these levels, but it has usually taken an even sharper downturn to coincide with the onset of a recession.

Real retail sales decline again slightly


 - by New Deal democrat

Nominal retail sales for the month of June rose 1.0%, and May was revised up by 0.2% from -0.3% to -0.1%. But since inflation was 1.3% in June and 1.0% in May, this makes the combined downturn in real retail sales -1.4% for the two months:

YoY real retail sales is down -0.5%. In the past 75 years, a decline in real retail sales YoY has frequently - but not always - indicated a recession. Here’s what the past 30 years look like:

To repeat what I said one month ago, not good news. 

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 (note: sales averaged quarterly to cut down on noise):

II have been writing for months that I have expected the blowout job numbers of about 500,000 per month to slow down to a range of about 100,000-300,000 per month by early autumn. The last 3 months have averaged 383,000, so the slowdown has begun, but there is almost certainly more to go.

Thursday, July 14, 2022

Jobless claims continue to trend higher, but no recession signal yet


 - by New Deal democrat

Initial jobless claims rose 9,000 to 244,000 last week, a 7.5 month high. The 4 week average rose 3,250 to 235,750, a 7 month high.  But the news wasn’t all negative, as continuing claims declined 41,000 to 1,331,000, which is only 25,000 above their 50 year low set on May 21:

Two weeks ago I noted that, reviewing the entire 50+ year history of initial claims, “there are almost always one or two periods a year where the four week moving average of jobless claims rises between 5% and 10%. About once every other year for the past 50+ years, it rises over 10%. Typically (not always!) it has risen by 15% or more over its low before a recession has begun. And a longer term moving average of initial claims YoY has, with one exception, turned higher before a recession has begun.”

Both initial and, this week aside, continuing claims have been continuing to drift higher, and since that uptrend has lasted for more than 3 months, they are no longer a positive indicator. Indeed, initial claims are almost 50% higher than their low for the cycle, meaning they fulfill the first of the two above criteria to signal a recession is near. Further, if the present trend continues about 3 more months, initial claims will be higher than 1 year previous, which would fulfill the second criteria as well.

But we’re not there yet, so initial claims aren’t negative, signaling recession.

Wednesday, July 13, 2022

June CPI report: bad, bad, bad, bad, bad


 - by New Deal democrat

In case for some reason you haven’t already heard, the inflation news for June was uniformly bad.

Here is some of the carnage. For the month of June only:
  •   overall inflation was up 1.3%, the highest monthly increase since 2005
  •   energy inflation was up 7.5%
  •   inflation less energy was up 0.7%
  •   inflation in used cars and trucks was up 1.6%
  •   inflation in rents was up 0.8%, the highest since 1986
  •   owners’ equivalent rent, the CPI euphemism for house prices, was up 0.7%

Again, those were for the month of June *alone.* There was no respite anywhere.

YoY, overall inflation was up 9.0%, the highest since 1981:

YoY energy prices were up 41.5%, the highest since 1980:

YoY prices less energy were up 6.6%, which is below the March peak of 6.8%, but still above any year previous since 1982:

The relatively bright spot is that YoY prices in used cars and trucks were “only” up 7.1%, compared with their June 2021 peak of +45.3%:

YoY rents increased 5.8%, the highest since 1986, and owner’s equivalent rent (red)(for houses) increased 5.5%, the highest since 1990. As I have been saying for 9 months, house prices (black) lead OER by 12-18 months, meaning we were likely to see the highest YoY% increases in OER ever. And we are well on our way:

I am sure everyone is expecting another 0.5% hike, if not a 0.75% hike, at the next Fed meeting.

Finally, this absolutely clobbered real wages in June. Average hourly earnings for nonsupervisory employees increased 0.5% in June, but with a 1.3% increase in consumer prices, real average hourly wages decreased 0.8% for the month. Real wages are down 2.9% from April 2021, and down 3.6% from December 2020:

It is going to take more than the recent 8% decline in gas prices to reverse this negative dynamic. Thus simply must be putting a real crimp in consumer spending, which raises the stakes for Friday’s retail sales report for June.

Tuesday, July 12, 2022

Coronavirus dashboard for July 11: BA.4&5 now over 80% of cases without creating a new wave, as COVID heads toward endemicity


 - by New Deal democrat

The CDC’s variant proportions data for this past week is out, and it shows that combined BA.4&5 made up slightly over 80% of all infections. BA.5 was at 65%, and BA.4 at 16%. BA.2.12.1 now only makes up 17% of all cases:

Regional disparities among the variants have all but disappeared with the slight exception of the Mid-Atlantic, where BA.4&5 make up a slightly lower percentage of cases, and BA.2.12.1 still makes up a slightly higher percentage:

The 12 week view of confirmed infections and deaths shows that the two new variants have almost completely supplanted both the original BA.2 variant as well as BA.2.12.1, but without giving rise to any new “wave” of increased infections or deaths at all:

Cases have been in the range of 100,000-110,000 for over 8 weeks, and deaths in the range of 275-350 for 10 weeks.
[Note: Oklahoma had a big data dump of deaths a few days ago; without that deaths would not have increased at all in the past week until yesterday, which was likely a result of comparison with non-reporting on July 4 one week prior.]

There has been plenty of information that, due to home testing, confirmed cases are undercounting actual cases by a large amount. But when we turn to BIobot’s graph of nationwide wastewater testing results, we see that, while “actual” cases as indicated by wastewater are 2.5x the number of “confirmed” cases, the trend of the two is similar:

In other words, between mid-May and the end of June, there was no increase in cases whatsoever. Since then wastewater has indicated that cases have increased by roughly 10%.

Since cases have almost always peaked by the time a variant reaches 90% of the total, which is likely to occur in about one week, BA.4&5 are not likely to be creating so much of a wave as a ripple.

The longer term view of deaths (solid line) compared with cases (dotted line) continues to show that each new variant has resulted in fewer deaths compared with cases than the previous variant:

Similarly, below is a graph from Trevor Bedford, an epidemiologist who has been invaluable in estimated the impact of each variant as it has appeared. The graph shows that new variants are appearing with more rapidity, and is replaced by the next variant at lower levels of penetration by the previous variant:

What I see is a disease heading towards endemicity. Last year I was hopeful that, between vaccinations and previous infections, some approximation of herd immunity would be reached and the disease would fade into the background. Instead it is clear that the disease is evolving towards the ability to repetitively infect survivors.

Consider the following: if the first line defense of the immune system, antibodies, fade over (for example) 6 months; and there are two similarly infectious variants beginning to circulate; then the variant that is least like the variants circulating in the past 6 months is the one that is going to predominate. Because the variants most like the ones circulating in, say, the last 3 months, are going to be most susceptible to being neutralized by existing antibodies still active in peoples’ immune systems. The variant least likely to be neutralized by those antibodies, vs. antibodies that have already faded away over time, is the one that is going to take over.

And so we see a fairly rapid turnover of variants; but on the other hand, because B-cells and T-cells are relatively permanent, those lines of defenses are increasingly able to blunt serious disease among those whose immune systems are not weak or compromised. So the death rate is much lower than before, but remains concentrated among the elderly (of course, those elderly most susceptible to COVID probably already died of it in 2020 or 2021).

The next variant of concern appears to be BA.2.75, which started in India in May and has spread to many countries since, but has not yet become dominant in any other country. If it follows the pattern of BA.2.12.1 and BA.4&5, it will take over dominance in the next several months, but there will not be a big spike in the number of infections, as had been the case in 2020 and 2021.

Monday, July 11, 2022

Aggregate hours and payrolls of nonsupervisory workers and the onset of recessions


 - by New Deal democrat

An important reason I focus on whether or not the economy is heading into recession, is that during recessions income and jobs both decline for the middle and working classes as a whole.

In that regard, Jared Bernstein, a member of Biden’s Council of Economic Advisors, posted two graphs over the weekend contra the panic about a potential negative Q2 GDP reading. 

He tweets (slightly cleaning up his abbreviations):

“Macroeconomists have long recognized the high, + correlation between aggregate hours worked and real GDP. Here's a scatter[plot] of these two var[iable]s (ann[ualized] q[uarterly] growth rates”:

Here is his graph of real GDP vs. aggregate hours averaged quarterly:

Here is a longer term graph of the YoY% change in aggregate hours:

Over the weekend I had a question on Seeking Alpha about whether I was worried about another negative GDP print. I replied that the NBER themselves have written that they primarily weight real personal income and nonfarm payrolls, and that history shows they actually put a lot of weight on industrial production - all 3 of which have been positive all year so far.

Bernstein is essentially arguing that Q1 GDP was out of sync with hours, and Q2 hours were also very positive, which is very similar to my point above.

For the past 4 months, jobs have been added at a fairly steady pace of .25% per month, as shown in the graph below:

Historically, as shown in the next two graphs, with the exception of 1960 it has taken *at least* 6 months after such jobs readings for a recession to have begun (1970 and 1974)(note: subtracting -.25 so that the current level shows at the zero line):

While monthly readings are noisy, over a longer moving average basis the trend in jobs tends to be much smoother. And what the above suggests is that it is unlikely for there to be such small job gains, or declines, consistent with the onset of a recession through the end of this year.

On the negative side, one important indicator I track shows the aggregate income per capita available to working and middle class families at any time. I derive this by taking nominal aggregate income of nonsupervisory workers, adjusting for inflation, and then adjusting by the working age population (ages 16-64 in the above graph; I’d like to measure ages 0-65 but that isn’t available):

Real income per capita for workers is down -1.5% since the end of last year. As you can see, this isn’t good and has reliably happened - and *only* happened for more than a month or two - in the 6-12 months before the onset of all recessions in the past 50 years.