Monday, May 15, 2023

The question for tomorrow: is the producer side of the economy rolling over?


 - by New Deal democrat

There’s no important economic news today, but tomorrow there will be several important updates, including real retail sales and industrial production for April, as well as non-deflated total business sales (manufacturing, wholesale, and retail together) for March. These will give us important updates on the production side of the economy, so let me provide an overview now.

The consumer side of the economy has continued to expand, as jobs (red) and real income excluding government transfers (blue) have continued to grow, albeit at decelerating rates:

The big coincident indicators for the production side are industrial production (red in the graphs below) and real manufacturing and trade sales (blue), the Quarterly % changes (to reduce noise) in which I show below, together with the manufacturing subset of industrial production (gold) for the 50+ years before the pandemic:

Usually quarterly growth rapidly turns into quarterly contraction as we head towards a recession. The exceptions have been several oil price shocks (1974, 1990) and Volcker’s Fed engineered recession (1981).

Here is the monthly % change update for the past 18 months (yes, it’s noisy):

I show this monthly since we do not have full Q1 2023 data yet. Note that industrial production and its manufacturing component have stayed in the vicinity of zero on a monthly basis, while real sales were negative during last spring, and rebounded somewhat subsequently.

The reason for the decline and rebound in real total sales has everything to do with oil and gas prices, the recent course of which are this:

With that in mind, now let’s look at the same monthly data for production and total sales, normed to 100 as of just before Russia’s invasion of Ukraine. Note I also include gas prices (gray, with volatility reduced for scale) to show its impact on real total business sales of the big run-up in prices due to Russia’s invasion of Ukraine, and then the big decrease as the West adapted:

Both total and manufacturing production may have peaked late last year, while total real sales declined in February (the last data available) from their January peak.

Real retail sales form about 1/3rd of real total sales, so tomorrow’s retail sales report will give us our first indication for April, while the nominal total business sales report, adjusted for both producer and consumer inflation, will give us more detailed information about March.

Tomorrow I will be looking to see if there are more definitive signs that production and real sales have been rolling over, as I suspect the producer side of the economy will decline before the consumer side, and in particular employment, does.