Saturday, July 30, 2022

Weekly Indicators for July 25 - 29 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

There have been some interesting counter-trend movements in the indicators. For example, interest rates on mortgages have declined by more than 1% since their peak one month ago. Gas prices have declined by about $0.80/gallon, or almost half of their increase that coincided with Russia’s invasion of Ukraine invasion (remember my posts in 2010-14 about the “Oil choke collar?”).

It’s a reminder that, even as recessions potentially begin, the leading indicators may begin to foretell its end.

As usual, clicking over and reading will bring you up to the virtual moment on the data, and reward me a little bit for collating it for your benefit.

Friday, July 29, 2022

Real income continued to fall in June, while consumers dug deeper to spend


 - by New Deal democrat

In June personal income rose 0.6% nominally, and nominal spending rose 1.1%. The personal consumption deflator, i.e., the relevant measure of inflation, clocked in at 1.0%, meaning real income fell -0.4%, while real personal spending rose 0.1%.

I have been comparing both real personal income and spending with that with their level after early 2021’s round of stimulus. Accordingly, the below graph is normed to 100 as of May 2021:

Since then, real spending is up 2.2%, while real income has actually declined by -1.3%.

Comparing real personal consumption expenditures with real retail sales for May (essentially, both sides of the consumption coin) shows that both were close to flat:

Finally, the personal saving rate declined -0.4% to 5.1%, the lowest since right after the Great Recession in 2009 (note: below graph subtracts -5.1% to norm the current reading at zero):

Usually the savings rate tends to decrease as expansions grow longer, leaving consumers more vulnerable to shocks (e.g., gas prices); and June’s suggests that consumers are digging deeper into savings in order to make purchases. Which isn’t entirely bad news, since recessions typically start when consumers get spooked enough to increase their savings rate.

The bad news is that the last two months have been below the April peak in real personal spending; the good news is that this report confirms the very modest increase in Quarterly real spending that we saw in yesterday’s GDP report. 

In short, a very mixed report, as real incomes continue to fall, while consumers are sanguine enough to dig a little deeper and keep spending rather than pull back.

Thursday, July 28, 2022

Long leading indicators embedded in Q2 GDP suggest a recession is near at hand


 - by New Deal democrat

Where does the economy go from here?  If it’s not in recession, it isn’t doing much better. There are two components of GDP which are helpful in finding out what lies ahead: real residential fixed investment (housing) and proprietors income (a proxy for business profits). Both of these have long and good track records as helping forecast the economy one year in advance. 

Let’s start with real residential fixed investment. As was indicated in the BEA’s accompanying graph this morning, it was one of the two worst sectors of the economy in the 2nd Quarter, down -3.7%:

Nominal and real residential fixed investment as a share of GDP (the actual measurement that is part of the long leading indicators) also both declined sharply:

Recessions have typically happened on average 7 quarters after the last peak in this measure, which took place in Q1 2021. This puts the most likely onset of a recession in Q4 of this year.

The news is much more equivocal when it comes to proprietors’ income.

Frequently both corporate profits and proprietors’ income turn together, but sometimes proprietors’ income lags by 1 or 2 Quarters. But the actual leading metric deflates for unit labor costs, which also aren’t known yet for Q2. So here is a bar diagram for the last 21 months of the Quarterly % change in corporate profits (blue), proprietors’ income (dark purple), and unit labor costs (red):

If unit labor costs rise in accord with their last 3 quarters, then proprietors’ income will still be slightly positive for the Quarter, but still below their peak in Q2 2021. In other words, our proxy for corporate profits indicates that a recession could begin at any time, since the last peak was 1 year ago.

In addition to the above two long leading components of GDP, real money supply for June was reported on Tuesday, and the news wasn’t good there, either.

Recessions have typically occurred one year or more after real M1 turns negative, or real M2 is up by less than 2.5% from one year previous. Here’s what they look like now:

Real M1 and M2 are consistent with an onset of recession next spring.

In short, the long leading indicators that were updated this week suggest that a recession, if not here now, is nevertheless likely near at hand.

Increasing trend in initial claims continues; on track to signal recession in November


 - by New Deal democrat

Initial jobless claims declined 5,000 to 256,000 last week. But hold your celebrations, because that was because last week’s 251,000 was revised 10,000 higher! The 4 week average rose another 6,250 to 249,250, a nearly 8 month high.  On the positive side, continuing claims declined 25,000 to 1,359,000:

Typically, but not always, initial claims have 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 now 50% higher than its low. Further, at their present rate, claims will turn higher YoY in November, which would be the signal for an imminent recession.

Finally, because initial claims lead the unemployment rate, it is likely that there will be an uptick in that metric in next week’s jobs report for July.

First comments on Q2 GDP: no, we’re not in a recession (yet)


 - by New Deal democrat

When the negative print on Q1 GDP first came out three months ago, I wrote:

yes, it was a negative GDP print. No, it doesn’t necessarily mean recession…. But the big culprits were non-core items. Personal consumption expenditures, even adjusted for inflation, were positive. The three big negatives were a big decline in exports vs. imports, followed in about equal measure by a decline in inventories and a downturn in defense production by the government.”

Lo and behold, the above is almost equally true about Q2 GDP! Here’s the helpful graph summary from the BEA in the official release:

I’ve also included the first bullet point explaining the inventory issue, which was the big negative in the report. Net exports minus imports wound up being a positive. Government spending was again negative, but this time was led by non-defense spending as, unsurprisingly, defense spending ramped up. The big negative addition was the big downturn in housing spending, about which I’ll have more to say later.

But I’ve made the point previously that the current expansion is very similar to the first two “Boom” expansions following the end of WW2. There was lots of inflation, but little change in interest rates. In fact, the Fed sat completely on the sidelines. It was when the “Bust” kicked in, as consumers were temporarily locked out of making durable purchases, that (shallow) recessions kicked in.

In fact, as Menzie Chinn wrote earlier this week, and Paul Krugman notes this morning, there were 2 consecutive quarters of negative real GDP in 1947, but no recession:

And Ben Casselman’s originating tweet points out that the negative and positive contributions to GDP at that time were very similar to the situation now:

My usual discussion of the long leading indicators in the GDP report will follow later.

Wednesday, July 27, 2022

Coronavirus dashboard for July 27: likely at or past the BA.4&5 peak


- by New Deal democrat

Let’s start with Biobot, since wastewater doesn’t lie. The bad news is, it shows a nearly 50% increase between June 29 and July 20. The good news is, in the last week of that period, between July 13 and July 20, it only increased less than 4%, suggesting that the BA.5/July 4 superspreader celebration wave has peaked, at a level equivalent to 500,000 “real” cases (from a starting point of 350,000):

The regional breakdown shows that the only region where wastewater has not plateaued is the Midwest:

Meanwhile, the CDC variant data indicates that by the end of last week, BA.4&5 constituted 95% of all cases:

This is consistent with infections from these variants being at or past peak. All regions of the country had similar variant profiles. There is no new variant (in particular, BA.2.75) making any appearance.

*Confirmed* cases (dotted line below) have remained between 120-130,000, with yesterday at 129,000. Deaths (solid line), at 429, have continued to plateau at roughly 100 more daily than in the April - June period (net the biweekly oscillations particularly in deaths are primarily an artifact of Florida’s reporting “system”):

Breaking down confirmed cases by Census region shows that only the Midwest shows a slight increase:

On the other hand, hospitalizations have continued to increase, to 46,700, consistent with evidence that BA.5 in particular is more virulent:

I think the BA.5 wavette has peaked, although whether we have a sustained plateau, or going into a substantial decline is completely unknown, but based on the experience of South Africa, which after the BA.4&5 wave declined to lows below even before the first wave of Omicron struck last November, I think the latter is more likely.

New home prices may have peaked after all


 - by New Deal democrat

Yesterday I wrote “The median price of a new home increased 1.7% in June (not seasonally adjusted), and remained sharply higher YoY at 15.1%.”

That’s true, but it wasn’t complete. The 15.1% figure is from the quarterly average. On a monthly basis, the YoY% change was 7.4%. Here are the monthly and quarterly figures together:

The monthly change is not seasonally adjusted, so my rule of thumb for peaks and troughs is that, when the rate of change is less than half the maximum YoY, the market has most likely turned. The biggest YoY% change in the past year was 24.2% last August, which means there has probably been a turn in the market.

But note that the monthly data, even YoY, is very noisy. For more confidence, we should at least average two months together. On that basis, the biggest YoY change was 23.7% for last July and August. This May and June together averaged 10.6%, so even on that basis it appears more likely than not that new home prices have peaked.

If so, this is the first of the four series (new home sales, existing home sales, the FHFA price index, and the Case Shiller price index) to have turned. 

Tuesday, July 26, 2022

New home sales continue to fall sharply, while prices for both new and existing homes continues to increase sharply


 - by New Deal democrat

New home sales declined further in June to 590,000 annualized and May was revised sharply lower as well:

This was the lowest number since the pandemic lockdown month of April 2020, and before that since December 2018. It is also over 40% lower than the peak reading of 1.036 sales annualized in August 2020. This is absolutely recessionary, as is easily seen in the above graph.

The median price of a new home increased 1.7% in June (not seasonally adjusted), and remained sharply higher YoY at 15.1%:

The FHFA and Case Shiller house price indexes were also released this morning. The also showed that house prices continued to increase sharply in May

The Case Shiller national index rose 1.0% for the month and 19.7% YoY, below last March’s 20.5%, which was the biggest YoY% gain ever. Meanwhile, the FHFA purchase only index rose 1.4% for the month, and 18.3 YoY, below its peaks of 19.3% in February, and 19.4% last July. The YoY% changes for both for the past 5 years are shown below:

While both are decelerating somewhat from their YoY peaks, they remain historically high.

Here is a longer term view, demonstrating that the current surge in house prices is the biggest in the past 30 years, surpassing even the housing bubble:

Owners’ Equivalent Rent (x2 for scale, black) is also shown above. As I have pointed out many times, OER follows house price indexes with roughly a 12-18 month lag. OER has also risen to a 30 year record YoY high, and can be expected to accelerate further for several more months at least.

We saw last week that the median price of an existing home sold in June also increased 13.4% YoY, indicating that sharp increases in those prices had not yet abated.

As I have frequently pointed out, sales lead prices. Prices can continue to rise for even a year after prices peak. But with this kind of sales decline, I fully expect outright price declines to follow, and soon.

Additionally, since OER plus rents contribute a full 1/3rd of the entire value of the CPI, and can be expected to accelerate further, I see very little reason to believe that, absent the Fed creating a recession, consumer inflation (outside of gas prices) is going to abate meaningfully anytime soon.

Monday, July 25, 2022

Book notes on Reconstruction


 - by New Deal democrat

No economic news of note today, and as usual insufficient Covid reporting over the weekend to make an update of that worthwhile, so let me dig out something from the back burner that I wanted to do for myself.

Last year I read Eric Foner’s 600+ page tome on Reconstruction, and this year read a treatment of “Lincoln and the Fight for Peace,” which described his final days and to the extent available his coalescing view of what Reconstruction should entail. I didn’t want to forget the main points, so I made a bullet-point synopsis:

1. John Wilkes Booth won. 

2. Why? Lincoln was replaced with Johnson, a loyalist Southern Democrat. Whereas Lincoln wanted to follow up the South’s complete surrender with a magnanimous peace for the masses, but to exclude the Confederacy’s leadership, and to require that the South accept the result of the war, Johnson’s intent was to restore Confederate States without restriction, i.e., to continue white supremacy, except with slavery technically outlawed. This poisoned the first several years of Reconstruction, until Congress wrested control.

3. The original sin of Reconstruction: no redistribution of all or at least some of Plantation land to the slaves whose uncompensated labor sustained it. Slaves were free but impoverished. Therefore no economic power.

4. Reconstructed Southern States went on a spending spree trying to attract railroads and other improvements. But in part because of the political fragility of Reconstruction, railroads and industry declined. Which created a vicious cycle, as it made Reconstruction even more fragile.

5. The North didn’t believe in racial equality either. Before the passage of the 15th Amendment, several Northern States defeated voting rights for Blacks, either Legislatively, or via failed ballot initiatives. As a general rule, the North wanted the racial issue settled, so they could move on.

6. In the final days of the lame duck period of his Presidency, Johnson issued pardons to all of the Confederate political and military leadership, enabling them to return to power, including both State and Federal elective office, which they subsequently did in droves - and also including 3 members of the Supreme Court that upheld segregation in Plessy vs. Ferguson. This was directly contrary to Lincoln’s plan, which would have specifically excluded them. In fact, Lincoln hoped Jefferson Davis would escape to South America, thereby depriving him of being either a martyr or a rallying point.

7. When white insurgency via the KKK and other insurgent groups started (many of them including those former Confederate military leaders), Reconstructed governments in the South were afraid to use military muscle, or to break “norms.” So white violence unpunished except in a few places where the Federal government stepped in.

8. On top of that, when the railroad investment bubble burst in the Panic of 1873, plunging the country into a deflationary recession, the North lost all remaining interest in expending energy on Southern Reconstruction. White insurgents pressed forward, toppling almost all of the Reconstructed Southern governments.

9. The contested Presidential election of 1876 was the final nail in the coffin of Reconstruction, as the Northern GOP traded the election of Rutherford B. Hayes to the Presidency in return for an end of Reconstruction in the South.

Had (at least large portions of) Plantation land been redistributed to the slaves who worked it, Freedmen would have had a base of economic power to hang on politically as well. They would have needed much less economic intervention and support from the Reconstructed State governments. 

It’s possible that the alacrity (between 1863 and 1869) with which freed Blacks were given full legal equality, but much more importantly, equal voting rights, was in large part responsible for the strength of the White backlash. In his final days, Lincoln seemed to favor a gradualist approach: immediate granting to voting rights to Black Union soldiers, plus those Blacks with property or education, with the remainder dealt with in some fashion later. *Maybe* had Black voting rights been phased in over a generation (with steps based on, e.g., education - as public schools, a priority for Freedmen, were one enduring legacy of the Reconstructed governments), with Federal protection in the interim, *perhaps* White fury would not have insisted in rolling back all of the progress made, and by 1900 Blacks would have been better off than they were under Jim Crow.

But the fact remains, the White backlash that reversed Reconstruction is a major example of a violent sustained insurgency that was successful, systematically rolling back rights that were explicitly guaranteed in the Constitution. That insurgency  remained successful for 80 years.

That opponents of the White violent insurgency now are making the same mistake of being afraid to violate “norms” in order to defeat it that the Southern Reconstruction governments made, makes me very pessimistic for the future of this country over the next few decades.

Sunday, July 24, 2022

Weekly Indicators for July 18 - 22 at Seeking Alpha


 - by New Deal democrat

I wasn’t able to get to this link yesterday, but my Weekly Indicators post is up at Seeking Alpha.

The situation with the leading indicators continues to ever so slowly deteriorate. But there is some good news as well, as gas prices continued to decline precipitously from their peak.

As usual, clicking over and reading should be educational for you, and slightly remunerative to me.