Friday, July 22, 2022

Coronavirus dashboard for July 22: the BA.4&5 wavette has (probably) peaked


 - by New Deal democrat

No economic news today, so let’s update the COVID situation.

As of yesterday, nationwide (dotted line below) cases declined slightly to 123,000. Cases have been slightly elevated from their previous 100-110,000 range for several weeks, but appear to have peaked. Deaths (sold line) rose slightly to 429, and are roughly 100 above their average for the prior 3 months:

The above graph for the past year shows that the death rate per infection has steadily declined, particularly when you take into account the massive number of cases in the past 6 months where people rely on home testing and so the cases are never confirmed (probably around 2.5x the number of confirmed cases). Note that since the beginning of February almost 6 months ago, the US has weathered the BA.2, BA.2.12.1, and now BA.4&5 variants without a big (compared with original Omicron) increase in cases, and in general the case levels have been below even Delta at its peak. Nor did any of the new variants in the past 6 months substantially increase the number of daily deaths.

Cases in all four census regions of the US are either flat or declining (the West, thanks to California):

That isn’t just the case for the US. The below graphs by Trevor Bedford for various countries all norm deaths to infections at 1:1 for the initial 2020 wave. In all countries there are many multiples more infections for each death by now:

The situation isn’t quite so good as to hospitalizations, which have continued to rise in the US, to 45,200:

Dr. Eric Topol has highlighted a study out of Denmark that found worldwide higher hospital admissions due to BA.5, indicating it has more pathogenicity:

In the US, this may also reflect that most seniors have failed to get their second booster shot, so their protection has been fading even as the evidence has accumulated of the effectiveness of a second booster against this variant.

Speaking of variants, BA.4&5 constituted 91% of all new cases in the US by last Saturday, the remainder being almost all BA.2.12.1:

There was not much variation regionally:

Globally the BA.4&5 wave appears to have peaked in the large majority of big countries, and I suspect we are at or just past peak in the US (note: wastewater reporting has not been updated in the past 9 days, so it’s impossible to confirm with that data). In South Africa, where BA.4&5 first appeared, cases actually are currently *below* their pre-Omicron levels.

Finally, BA.2.75 continues to appear in more countries on an isolated basis, with no evidence of any waves outside India. If it proves to be a damp squid, the US could get another respite.

Thursday, July 21, 2022

Increasing trend in jobless claims continues; on track to give recession warning in November


 - by New Deal democrat

Initial jobless claims rose another 7,000 to 251,000 last week, an 8 month high. The 4 week average rose 4,500 to 240,500, a 7+ month high.  And continuing claims also rose 51,000 to 1,384,000, which is 78,000 above their 50 year low set on May 21:

Three 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.”

There is now a clear uptrend in all three numbers. The 4 week average of initial claims is about 40% higher than its low. If the present trend continues till about November, initial claims will be higher YoY, which would signal an imminent recession.

Just speculating here, but an entire very speculative sector of the stock market - internet based delivery services - which boomed during the time of pandemic restrictions, has blown up. I suspect many of the increased layoffs are coming from that sector.  Meanwhile more and more businesses are probably learning to make do with being short-staffed as the result of being unable to fill job openings. In any event, the rising trend in layoffs is very much intact. Because initial claims lead the unemployment rate, I fully expect to see an uptick in that rate in the next month or two.

Wednesday, July 20, 2022

Existing home sales now down 25% from peak; but price increases keep steamrolling on


 - by New Deal democrat

Although existing home sales are less economically important than new home sales, what has been happening with their prices, given the experience of the housing bubble and bust 15 years ago, is of added importance.

The simple summary is that sales have declined precipitously, while price appreciation keeps stubbornly rolling on due to (still!) a severe lack of normal inventory.

Sales of existing homes declined 4.4% for the month, seasonally adjusted; 9.4% YoY; and 25% from their October 2020 peak. At 5.12 million annualized, sales were at the lowest level since June 2020:

In fact, pulling back 5 years, excluding the pandemic lockdown months, sales were at their lowest since January 2019 (note graph does not show this morning’s data):

This is very much a level consistent with an oncoming recession.

The story is completely different as to prices. At $416,000, the median price of an existing home increased 2.1% for the month, and 13.4% YoY (Note: prices aren’t seasonally adjusted, so the YoY view is the best measure; graph does not show this morning’s data):

The peak in YoY growth in prices was May 2021, where prices increased 23.6% YoY. The low this year was April’s 10.4% YoY growth. Since my rule of thumb as to non-seasonally adjusted data is that a decline of 1/2 of peak YoY change is necessary for a real-time peak, we still are not at the point where prices are actually declining - although there are lots of anecdotal signs that we may be close.

The reason for this is in inventory. Last month I wrote that. “in May inventory was still down -4.1% YoY. Importantly, the NAR’s weekly update showed inventory increasing YoY in the last week of May and the first several weeks of June, so this may be the last hurrah for that metric.”

And indeed it was, as inventory in June was up 2.4% YoY:

A longer term look from the NAR’s new and active listing data, which goes back 6 years (note: seasonal peaks have typically occurred in May) shows that while *new* listings in June were higher than in any previous June except for 2019, active listings are still only about at 50% of their typical pre-pandemic levels:

New listings were up 100,000 YoY in June, but they need to increase to about +600,000 YoY to make up the total shortfall in active listings. Needless to say, we have quite a ways to go. 

So price increases have rolled on. So far.

Tuesday, July 19, 2022

Sharp downturn in June housing starts confirms earlier negative signals from permits, sales, and mortgage applications


 - by New Deal democrat

For the last few months, I have highlighted the record number of housing units that had permits, but had not yet been started, pointing out that it distorts the economic signal. Last month I closed with the statement:

“The conundrum is whether the 50 year high backlog in units not yet started will delay the downturn until it clears - which might take another 6 to 12 months. Since starts are the actual economic activity, until I see an unequivocal downturn there, the massive negative signal from permits, mortgage rates, and mortgage applications remains open to question.”

I would say that today we got the signal. Both permits for single family units and total starts turned down sharply. In the month of June single family permits declined -8.0% to a 2 year low - a little more than a 20% total decline from their January 2021 peak (red in the graph below); and starts declined -2.0%, tying their one year low at 14% below their peak in April of this year. Since monthly starts are noisy, the quarterly average is a much better signal, and in Q2 starts did decline -4.0% (blue). The quarterly average for single family permits (gold) also declined over -12.0% (gold):

In other words, with permits continuing to fall, and starts now also in decline, we have a verified leading signal.

What about housing under construction? To put that in perspective, the below graph shows housing data as it “moves through the belly of the beast;” including total permits (red), units permitted but not yet started (gold),starts (blue), units under construction (black), and housing completions (gray), for the past 3 years:

Both permits and starts have peaked. Further, it appears that units not yet started also peaked several months ago. Housing under construction appears to be peaking now. Completions still appear to be in a slight uptrend.

Housing under construction is the ultimate coincident marker of housing economic activity. Once that begins going down, housing’s contribution to the economy is negative in real time. We are probably only a month or two from that point. In other words, the leading indicators will be joined by the coincident indicator.

Not to be totally Doomish, let me show you the same information as in the first graph above, for the period of time when the 2000s housing boom turned into a bust:

In that case, permits were down about 33%, and starts down 25%, at the point when the Great Recession began. In other words, this downturn to date is only about half as bad as the one that presaged the Great Recession.

The final housing domino to fall will be prices. We’ll get a very important read on them tomorrow when existing home sales are published.

Monday, July 18, 2022

A note on inflation and whether the Fed should continue to raise rates - and whether it is “behind the curve”


 - by New Deal democrat

No important economic releases today, and almost no reporting by States as to COVID counts over the weekend, so let’s back up and take a look at something that’s been simmering on my intellectual back stove, so to speak: should the Fed be raising rates to combat this inflation? Has inflation already peaked? Or is the Fed way behind the curve and needs to raise rates a lot more?

Menzie Chinn has a guest post up, indicating that if the Fed had been following their own rules, they would have started raising rates during 2021. At the end of the day, I agree. Here’s why.

To begin with, I agree that if the sole sources of inflation are supply-based (the same amount of money chasing a shortfall in products), there’s no real point in raising rates. You can raise rates to 10% or 100%, if there’s a supply bottleneck, it’s not going to solve your problem; it’s just going to create lots of unemployment. In other words, for supply bottlenecks the best strategy is to leave high inflation alone, and don’t try to bring down employment.

But if inflation is demand based (more money chasing the same amount of goods as before), then raising rates to tamp down on demand makes sense.

Which one - or how much of each - do we have?

One good part of the answer is that inflation is global phenomenon, it’s not just limited to the US, as this chart helpfully put up by Kevin Drum shows:

If the source of inflation were US domestic stimulus, we wouldn’t see that type of global chart.

That suggests that, at least globally, the primary source of inflation is supply-based bottlenecks.

In the US, there have been 3 major sectors of inflation: energy (oil and gas), vehicles, and housing. Let’s look at them in order.

In the case of the price of gas, that did get tight by late last year, rising to $4/gallon over autumn and winter.  But the real spike took place at the end of February, when Russia invaded Ukraine, and sanctions were imposed:

This is a supply shortfall, caused by a geopolitical event. Per my note above, the Fed shouldn’t be raising rates because of gas prices.

Next is motor vehicles:

These spiked due to a computer chip shortfall sourced to Chinese and Taiwanese factories, in large part due to those governments’ “zero COVID” or strict lockdown policies. Again, this is a supply shortfall and raising rates is not going to cause either jurisdiction to make more computer chips (If I were Biden, I would have invoked the Defense Production Act long ago to substitute US-made chips during the COVID emergency, but that’s another issue)

Finally, here is housing:

Housing appears to have strong elements of both supply *and* demand at issue. On the supply side, existing homeowners more or less stopped putting their houses up for sale even before COVID hit, and definitely during the teeth of the pandemic:

Only now is increasing inventory coming on the market.

Further on the supply side, the price of lumber in particular skyrocketed:

This caused a huge backlog of houses under construction that were not completed:

But on the other hand, it’s also clear that extremely low interest rates, with record low monthly mortgage payments in “real” terms spike a surge in demand:

As night follows day, the record surge in house prices in 2021 and so far in 2022 has spilled over into rent increases and thereby in “owners’ equivalent rent,” the official CPI measure of housing inflation (we’ll come back to the black line, real GDP, later):

Housing is 33% of the entire CPI, and over 40% of core CPI.

So, is the main driver a shortfall in housing supply, or a surge in housing demand?

To look at that, I compared the growth in the total US population since the turn of the Millennium with the total amount of housing stock available in the US, which is helpfully estimated by the Census Bureau:

And the answer is, the available amount of housing stock has indeed kept up with population growth (by the way, this would be true even if I had measured from the worst possible comparison point just before the Great Recession). While there are certainly particular areas where that has not been true, and prices have been nuts for a long time (California!), the simple fact is that, averaged over the country, that is not the case.

In other words, housing inflation is primarily a demand, not a supply, issue, and since it is the single biggest slice of the CPI, that should have started to be addressed by the Fed once real GDP caught back up to its pre-pandemic levels, which according to the black line in the graph above was Q2 of 2021.

Had the Fed started raising rates then, it would have been attacking a CPI level of about 4%, and would have had a much better chance of obtaining a “soft landing” than it has now. In fact, the only way I see of the US avoiding recession at this point is if gas prices move all the way back down to the $4/gallon level, very soon, and stay there or below.