Saturday, October 22, 2022

Weekly Indicators for October 17 - 21 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

If you thought the long leading indicators couldn’t get any worse - well, they could.

As usual, clicking over and reading will bring you up to the virtual moment as to how the economy is doing right now, and how it is likely to perform over the next 12 months+.

Friday, October 21, 2022

Coronavirus dashboard for October 21: the autumn lull continues, despite new subvariants


 - by New Deal democrat

No economic data today, so let’s update the status of COVID-19.

We are currently in a relative lull, with confirmed cases, hospitalizations, and deaths all near or at low levels only matched or exceeded at mid-year 2021 and early spring of this year.

Here is the 6 month view of confirmed cases and deaths:

At the moment deaths are averaging a little under 350/day, in the range of this spring’s lows. At 35,200, confirmed cases are down 75% from their June peak and at a 6 month low.

Here is the long-term view since the beginning of the pandemic:

As I wrote above, current levels are only higher than 3-4 months during the entire past 2 years.

Similarly, hospitalizations have continued to decline to 24,000, just a little over half of what they were at their recent June peak, and only higher than 4 of the past 24 months:

BIobot’s wastewater analysis shows the West and South declining at low levels, the Midwest steady, and the Northeast also declining but from very elevated levels:

Nationwide (not shown), levels are consistent with about 225,000 “actual” cases of COVID daily.

Demographically, as of August the biggest proportion of hospitalizations - by far - is among unvaccinated seniors, followed by the late middle-aged unvaccinated, and that followed closely by vaccinated seniors:

Aside from the unvaccinated younger middle-aged, everybody else has very minimal risk of hospitalization from COVID:

Finally, here is this week’s variant update from the CDC:

BA.5 continues to fade, and BA.4 is all but gone. The new alphabet soup of variants account for about 3/8’s of all cases, but since the number of cases has declined in the last 1 and 2 weeks, numerically the new subvariants altogether probably increased from an average of 11,000 to 13,000 cases daily. So far this looks much more like the BA.2.12.1 increase of late last spring rather than any major wave like Delta or the original Omicron.

Which makes sense, since as this graphic shows, all of the new alphabet soup of variants are either “children” or “grandchildren” of BA.2, and most are also “children” of BA.5:

COVID-19 is somewhat seasonal. So we get spikes in the South in the summer, and in the NOrth during the winter, both coinciding with the time of the most indoor social activity. We will almost certainly get some kind of winter wave, but at may simply resemble the BA.2.12.1 wave from this past summer, rather than a monster wave like the last two  winters.  

Thursday, October 20, 2022

September existing home sales and prices decline


 - by New Deal democrat

With the exception of their big impact on prices, I do not particularly pay attention to existing home sales. Their economic impact is small compared with the construction of new homes; at best they add confirmation to a trend in new home sales, permits, and starts.

In September, existing home sales did continue to decline, by 2%, to 4.71 million units annualized (Note: all the graphs except for one in this post come from Mortgage News Daily, and have not yet been updated with this morning’s September data):

Their total decline from their January peak is a little over 25%, and -31% from their even higher peak in October 2020, in line with what we saw in yesterday’s Permits and Starts report.

Prices declined for the month, but that is expected since they rise in the late winter and spring, and decline from summer into winter. More important is the YoY metric, and there prices rose 8.4% Note the big declines in July and August vs. prior years:

This is higher than last month’s 8.2% YoY, but lower than any other month in the past 2 years. It is also less than 1/2 of the biggest YoY% increase in the past year, which by my rule of thumb for non-seasonally adjustable data means that it is in decline from the absolute peak.

Inventory, which also is not seasonally adjusted, was slightly lower, by -0.8%, from one year ago:

This has become a chronic problem, but usually inventory rises after prices begin to fall, as sellers are initially reluctant to accept that the $$$ peak is in. Here is what the longer term inventory data looks like:

Inventory has generally increased from 2021, but is still well below inventory before 2019.

In sum: September existing home sales is confirmatory evidence that sales have continued to decline, and that prices have started to decline as well. Total inventory has increased, while new listings are slightly lower than one year ago.

Jobless claims flat for the moment


 - by New Deal democrat

There’s no big news in the jobless claims release this week.

Initial claims fell -12,000 to 214,000, but the 4 week average increased 1,250 to 212,250. Continuing claims, which lag somewhat, increased 21,000 to 1,385,000:

To the extent there is any discernible trend, I would call it sideways in the past few weeks.

I had expected gas prices to continue to rise following OPEC’s decision to cut production earlier this month. But that hasn’t happened:

It may well be that several OPEC countries are cheating (i.e., continuing to produce as before while relying on others to cut back and drive up prices. It could also be affected by Biden’s decision to release oil from the Strategic Preserve.

In any event, I expected jobless claims to rise again with gas prices. Needless to say, so far that hasn’t happened. Which is good news, so I’ll take it.

Wednesday, October 19, 2022

Housing on track for an early 2023 recession, but with a major caveat


 - by New Deal democrat

I don’t think anybody was expecting a good housing construction report this month, and those non-expectations were certainly fulfilled.

Housing permits rose slightly, 1.4%, from last month’s 2 year low. Single family permits, which contain even more signal, declined -3.1% to the lowest level in 3 years excluding two pandemic lockdown months. The more volatile starts declined -8.1%, while their 3 month average declined -11.3% during the 3rd Quarter, also to a 2 year low:

Measuring from their respective recent peaks, starts are down -20.3%, permits down -17.5%, and single family permits down -27.6%:

These are well within the ranges of declines that have previously been consistent with recessions, with the exception of 1966, although frequently the actual recession hasn’t started until there has been a -40% decline:

And it certainly looks like we are likely to get to that -40% milestone, and soon. 

Here is a variation on a graph I have run many times over the past 10 years, comparing the YoY change in interest rates, in this case mortgage rates (inverted, *10 for scale) with the YoY% change in housing permits:

As I always point out, interest rates lead housing permits roughly by 3 to 6 months. YoY interest rates have climbed 4%. That was only exceeded by 5% and 6% increases in 1980 and 1982 respectively, which coincided with -50% declines in housing permits. In other words, we should expect housing permits to have declined by about -40% within the next 3 to 6 months - putting a likely recession start date in the 1st quarter of 2023.

There is one silver lining, or at least an asterisk, in this forecast. Because of a shortage of building materials, there have been record numbers of housing units that have been permitted, but have not yet been started (blue in the graph below), and consequently a big lag in housing under construction compared with housing permitted (red):

The former may have peaked in July, and has been essentially flat for the past 6 months. The latter has continued to increase, but only by 2.5% in the past 5 months. 

Because housing under construction is the actual economic activity, this suggests that in the 3rd Quarter residential housing contributed ever so slightly to GDP growth. 

With the sole exception of the 2020 pandemic lockdown recession, construction, which is an even smoother metric than single family permits, has always peaked at least 6 months before the onset of recession, with a median time of 18 months, and as much as 47 months; and has declined at least 6.5%, and as much as 34%, with a median decline of 20% from peak:

In other words, there is a significant element of “it’s different this time,” in that construction has in the past typically followed a decline in permits by 0 to 11 months, with a median of 5.5 months. Further, a recession has typically followed a decline in construction by between 6 and 47 months, with a median time of 18 months; and has declined at least 6.5%, and as much as 34%, with a median decline of 20% from peak.

We are now 9 months out from the peak in permits, and construction has not yet rolled over. Thus past history would suggest no recession begins until at least 6 months from now, and possibly much later - depending on how quickly construction rolls over and how abruptly it declines.

Tuesday, October 18, 2022

September industrial production comes in very strong


 - by New Deal democrat

September’s industrial production report puts the final nail in the coffin in the notion that the US is already in recession.

I call industrial production the King of Coincident Indicators because, more than any other single metric, it coincides with the peaks and troughs of US economic activity as determined by the NBER. In September total production increased 0.4%, and August was revised higher by 0.3%. Manufacturing production increased 0.5%, and August was revised higher by 0.1%:

Total industrial production is at an all time high. Manufacturing is higher than at any previous level with the exception of the end of 2006 through early 2008.

Today’s report, including revisions, also reverses the decelerating trend which I noted last month, as shown by the YoY% changes:

Because this is, as I said at the outset, a coincident indicator, it does not materially change my forecast for next year. But it is good news for now.

Monday, October 17, 2022

The “Consumer nowcast” recession warning is triggered, as real wages decline, real aggregate payrolls near stall, plus record mortgage payments


 - by New Deal democrat

No economic news today. So, now that we have the September inflation read, let’s take a look at a couple of important consumer indicators: real average wages, and real aggregate payrolls for non-supervisory workers.

Real average hourly wages for non-supervisory employees have declined almost relentlessly since last September, only broken during months where gas prices were steady or declined:

The total decline since then is -2.5% YoY:

Frequently - but not always, this level has been associated with recessions:

The only way to keep up consumer spending in the face of such a decline is either to cash out an asset (e.g., a cash out refinance of a house) or to dig into savings (in the 1980s, it was assisted by women’s entry into the workforce, which boosted *household* income). And as I’ve written the past couple of months, the personal saving rate, at 3.5% in August (after a 15 year low of 3.0% in June), is near all-time lows, equivalent to the 2005-07 period:

Meanwhile, as I suggested they would several weeks ago, real aggregate payrolls for non-supervisory employees did improved in the 3rd Quarter:

As I wrote then, that pretty effectively kills the idea that a recession has already begun.

But they are only up 1.1% in the past year:

As I wrote recently, real aggregate non-supervisory payrolls are a good coincident to short leading indicator for a recession, because they tend not to be noisy, and with the notable but I believe irrelevant exception of the 2003 “jobless recovery,” whenever they have declined YoY (1967 and 1996 were close to zero, but no cigar), a recession has either begun or is going to start in less than a year:

In the past year, real aggregate payrolls have decelerated at a pace of 1% every 4 months. Which means that if that pace continues, they will turn negative in January or February of next year.

And remember: although I won’t bother with the graph, consumption leads employment, and real consumption has been essentially flat to slightly declining for over a year. So there is no reason to expect the pace of employment not to keep slowing down.

In fact, there are a couple of reasons to expect that it *will* keep declining.

First, gas prices stopped declining with OPEC’s cutback in production:

One month ago the nationwide average gas price was $3.64/gallon. It rose as high as $3.95 before declining back to $3.85 today.

What is more serious is what has happened to mortgage payments. I last looked at this back in April.

Here’s what has happened to mortgage rates in the past year:

They have risen from just over 3% last October to just over 7% now.

Back in April I calculated that house prices in real terms were almost identical to their 2006 highs. They got a little higher by summer, and have fallen back a little since, so they are about the same now as they were then. 

That being the case, let’s compare a $250,000 mortgage at the peak of the housing bubble 15+ years ago and now at the prevailing mortgage rates in real terms. Here’s the monthly payment for each in today’s $$$:

April 2006: $1865.
July 2006: $1913.
October 2021: $1337.
October 2022 $1947.

That’s a new all-time record high. And an extra $600/month is going to price a lot of people out of the market. We’ll see what September housing permits and starts bring us Wednesday, existing home sales on Thursday, and new home sales next week. But it’s not likely to be good.

Finally, this brings to the fore my alternate, “consumer nowcast” model of recession. This states that when real wages decline, if consumers can’t cash in an appreciating asset like stocks (down almost 25% since their peak in January), or housing equity (which likely peaked over the summer), and they start to save more (possibly the 3.0% June saving rate was the low for this expansion), a recession is imminent. This model has now been triggered: it signals that a recession is likely, and very soon, as in Q1 2023. The only questionable component is whether the increase in the savings rate persists.

In summary, we have average Americans with very little more money in real terms to spend in total vs. one year ago, and less money per capita. This by itself should cause new hiring to flag somewhat more than it already has from last year’s blistering pace. And two very big, very important spending items aren’t getting any better and in one case has gotten much, much worse. This is, to say the least, not a recipe for expecting a turnaround to the downward pace.