Saturday, December 17, 2022

Weekly Indicators for December 12 - 16 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The coincident indicators, especially employment, are hanging on by the proverbial skin of their teeth.

I don’t think they roll over until gas prices stop declining.

In any event, clicking over and reading will bring you up to the moment on the status of the carnage, and bring me a little reward for the effort I put in.

Friday, December 16, 2022

The status of the coincident indicators

 - by New Deal democrat

In addition to real GDP, which is only updated quarterly and with a lag, the NBER has indicated that it relies upon four other datapoints in determining the onset month of a recession: payrolls, industrial production, real income less transfer payments, and real manufacturing, wholesale, and retail sales.

The below shows all four, with the exception that, because real manufacturing and trade sales lag the publication of real retail sales by two months, I show the latter. Since real retail sales are the largest component of manufacturing and trade sales, and usually turn before the manufacturing and wholesale components, this is a little more leading anyway:

Real income peaked last November, real retail sales in April, and industrial production may have peaked in September. With the decline in gas prices, real sales and income have rebounded somewhat since June, but are still below their peaks. Only payrolls have continued to increase throughout the time period, and their growth continues to decelerate.

I suspect the actual recession will not begin until gas prices make a bottom; and we probably won’t know about payrolls until at least the yearly revisions kick in next March. But with the Fed hiking interest rates another 0.50% on Wednesday, my best guess is that there is a 95% chance we will be in a recession by the middle of 2023. 

Thursday, December 15, 2022

November real retail sales turn down, return to negative YoY


 - by New Deal democrat

Real retail sales is one of my favorite indicators for both the current economy and the jobs situation 3 to 6 months ahead.

This morning nominal retail sales for November were reported down -0.6%, which only takes back about 1/2 of October’s strong +1.3% increase. Since consumer inflation rose +0.1% for the month, real retail sales decreased by -0.5%. Here are the absolute values for real retail sales since the beginning of 2021:

Note sales remain -1.1% below their recent peak in April.

As I’ve noted many times, YoY real retail sales turning negative YoY for 75 years has been an excellent harbinger of a recession. With this morning’s data, they one again have turned negative. Below is the last 25 years of data:

I am willing to discount the negative numbers in the first half of 2022 because they are compared with the strong stimulus-induced spending spree of 2021. But the numbers since June are much more cautionary. In particular, it has been noted that consumer spending has shifted from goods to services this year. While that point has lots of merit, as pandemic related spending fades further into the background, I think the historical relationship will assert itself more and more.

As I’ve also noted many times, real retail sales /2 are a good albeit noisy leading indicator for jobs reports 3-6 months in the future. Here is the historical record since the beginning of the modern retail sales series until just before the pandemic:

And here’s what they look like since June 2021:

That they have continued to be near zero or even negative YoY for many months strongly implies continued deceleration in the monthly jobs numbers over the next few months.

November Industrial production: has the King of Coincident Indicators peaked?

 - by New Deal democrat

Industrial production declined -0.2% in November, and manufacturing production declined -0.6%, essentially returning both indicators to their levels of July:

I call industrial production the King of Coincident Indicators, because its peak most often coincides with the month of the onset of a recession as determined by the NBER. So the fact that total production has been close to flat for 4 months, and down -0.3% from 2 months ago is an important caution sign; especially since real retail sales, the primary component of total manufacturing and trade sales which is also relied upon by the NBER, also turned down significantly in November.

On a YoY basis, total production remains higher by 2.5% and manufacturing production up 1.4%. The below graph shows the past 50 years of this metric with both values normed to 0:

Back when the US was the world’s manufacturing powerhouse, these YoY values were recessionary. But in the past 30 years, as the US economy became more dominated by services, YoY readings like these also equated to slowdowns during expansions.

In any event, if the King of Coincident Indicators has truly peaked, then the report on personal income next week, which minus transfer payments is another important metric used by the NBER, assumes added significance.

Jobless claims: still weakly positive


- by New Deal democrat

My focus on jobless claims has shifted to when and whether they will turn negative, flashing a short leading warning for recession. A reminder that my criteria are a 10% increase from their low point (already in place) and an increase YoY for a yellow flag, and a 15% increase from their low point (also in place) and a 10% increase YoY for a red flag.

Initial jobless claims declined -20,000 to 211,000 last week. The 4 week average declined -3,000 to 227,250. Finally, continued claims, which lag by one week, rose 1,000 to 1.671 million:

All three still remain lower YoY, although the comparisons are getting much less positive:

Also the data is much more subject to seasonal distortions from Thanksgiving through early January, so extra caution is warranted.

Bottom line: for now, jobless claims remain a positive.

Wednesday, December 14, 2022

Real average and aggregate non-managerial wages for November


 - by New Deal democrat

With November’s consumer inflation report in the books, let’s update two of my favorite measures of how the working/middle class is doing - real average non-supervisory wages, and real aggregate payrolls.

Nominal average wages for non-supervisory workers rose a strong 0.7% in November. Inflation fell sharply to 0.1%. So real average wages rose 0.6% last month. Still, they are down -1.2% YoY, and down -2.2% since December 2020; but 1.9% higher than they were in January 2020 just before the onset of the pandemic:

The recent inflection point, as I pointed out yesterday, was in June; and the below graph of gas prices tells you just about everything you need to know:

With gas prices down almost $2/gallon from 6 months ago, putting 15 gallons of gas in your vehicle costs you almost $30 less than it did then, which can improve a heckuva lot of statistics.

Next, real aggregate payrolls for non-managerial workers measure how much wealth the middle/working class is earning as a whole. In the past 60 years, when that has outright declined on a YoY basis, it has almost always coincided, give a month or two, with the onset of recessions, so it is an excellent coincident indicator as well:

In November, aggregate payrolls increased 0.6%, so real aggregate payrolls increased 0.5%. YoY they were up 1.6%:

To signal an imminent recession, nominal payroll growth would have to decelerate significantly more than inflation. So long as gas prices keep declining, it is very unlikely that will happen. Good news for now.

Tuesday, December 13, 2022

November CPI: Thank you, gas prices! No thank you, owners’ equivalent rent


 - by New Deal democrat

Just like producer prices as reported last Friday, consumer prices for November confirm the inflection point of last June. Thank you, lower gas prices! Here’s what total and core (ex-food and energy) inflation look like, normed to 100 in June:

Since June, overall consumer inflation has increased 1.0%, so is increasing at a 2.2% annual rate. Core inflation has increased 1.9%, or a 4.7% annual rate. 

To cut to the sectorial chase, here is the breakdown of all the important categories, first m/m and second YoY:

Total: +0.1%, +7.1%
Core +0.2%, +6.0%
Shelter +0.6%, +7.1%
Food +0.5%, +10.6%
Energy -1.6%, +13.1%
New vehicles -0-, +7.2%
Used vehicles -2.9%, -3.3%

As you can see, there remain only two sources of major inflation: shelter and food. In particular, take shelter out of total inflation, and consumer prices since June are *deflating* by -0.3% at an annual rate, and core prices since June are increasing at a 2.2% annual rate.

Further, as I’ve been pounding on for more than a year, “owners’ equivalent rent,” which is how house prices are measured for the CPI, lags badly, i.e., by a year or more. Here’s this morning’s update on what YoY house prices as measured by the FHFA (/2 for scale) look like compared with YoY owners’ equivalent rent:

As I anticipated, YoY OER has continued to increase, and is now up 7.1%. Meanwhile the FHFA house price index, through its latest reading for September, was up 11.0%.

The YoY increase in the FHFA price index has decreased by 33% in the past 4 months. At that rate actual house prices will be unchanged YoY by next April. Meanwhile I expect OER to continue to increase to 7.5% or so through winter.

I also want to comment briefly about new and used vehicle prices. Nominally they have both increased sharply since the start of the pandemic, up over 20% and 40% respectively. However, since average hourly wages are up 17% since then, in real terms new vehicle prices are only up about 3%, while used vehicle prices are still up about 25%, despite their decline this year:

In shot, the big decline in gas prices is having a huge impact on consumer prices overall. Food and used vehicle prices in particular remain problems. But inflation remains distorted to the upside due to the way CPI measures house prices.

As I’ve said for the past several months, at this point the Fed, via interest rate increases, is chasing a phantom menace, needlessly causing a recession, or at least a deeper one than would be otherwise necessary to achieve its objectives.

Monday, December 12, 2022

A brief overview of the current state of the economy


 - by New Deal democrat

This week we get the final most important data of 2022, with consumer prices tomorrow and industrial production and retail sales Thursday. The Fed will also be making its final rate hike decision of the year. Next week and the week after, the only data will be housing construction and prices, plus personal income and spending.

So let’s take a look at few salient datapoints explaining where the economy is. Remember that my primary purpose in discussing expansions vs. recessions is their effect on jobs and income for middle and working class Americans.

To begin with, gas prices are now at their lowest level in the entire last year - even lower than last winter:

Just as sharply rising gas prices put a damper on the economy in the first half of this year, they are putting a floor under it now. Q4 GDP is expected to be good, and I it is very unlikely that the economy will roll over so long as gas prices continue to fall. But at some point they will bottom out, and that is when I would expect Trouble.

One good reason to expect Trouble is the much-discussed yield curve in Treasury bonds. The below graph shows nearly a complete inversion, with the shortest term yields paying the most:

The graph does not show the 6 month and 1 year Treasuries. If it did you would see that the 6 month Treasury is now the highest-paying, followed by the 1 year, with both paying more than the 2 year. In other words, only the Fed funds rate and 3 month Treasuries are not inverted.

This is a historic leading indicator of recession. At this point the inversions are so deep that it would be unprecedented *not* to have a recession soon.

Which brings us to the 4 monthly coincident indicators used to date recessions. Below all 4 - industrial production (blue), real retail sales* (red), real income less transfer payments (gold), and payrolls (gray) -  are normed to 100 as of June (*the NBER uses total real manufacturing and trade sales, but those don’t get reported timely, and real retail sales are their most leading component):

Industrial production, the King of Coincident Indicators, has gone nowhere. Both real sales and real income have increased (thank you, lower gas prices!), but are still lower than they were one year ago, and payrolls have continued to increase but at a decelerating rate.

As indicated above, we’ll get updates on two of those four coincident indicators later this week. If industrial production has started to decline, then the remaining shoes will probably drop once gas prices stop dropping. 

Sunday, December 11, 2022

Weekly Indicators for December 5 - 9 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The most noteworthy trend over the past several months has been the almost relentless deterioration in the YoY measures of consumer spending and employment. That trend continued last week.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me a little bit for my efforts.