Saturday, January 28, 2023

Weekly Indicators for January 23 - 27 at Seeking Alpha


 - by New Deal democrat

“Slowly I turn. Step by step . . .” That old Vaudeville bit comes to mind in watching the coincident indicators creep towards a recessionary downturn on a weekly basis.

Also, some of the long leading indicators are also creeping in the direction of  no longer being negative.

Which is a longer way to say, my Weekly Indicators post is up at Seeking Alpha. As usual, clicking over and reading will bring you up to the moment on the economy, and bring me lunch money.

Friday, January 27, 2023

Good news and bad news on personal income and spending


 - by New Deal democrat

December personal income and spending had some material for both optimists and pessimists.

Let’s look at the good news first, mainly having to do with inflation. Both the total and core personal consumption deflator continued their overall deceleration in December, with the former up +0.3% for the month, and the latter, said to be much beloved by the Fed, up just enough to be +0.1% rather than unchanged. There’s been a lot of discussion about the abatement of inflation since June, and this is in line with that idea, as shown by the quarterly changes in both of the above metrics:

The quarterly changes in both deflators is at their lowest levels since Q1 2021.

The YoY% change also declined for both:

Similarly, real personal income excluding transfer receipts, one of the four coincident indicators typically used by the NBER to determine if a recession has occurred, also increased nicely, by 0.2%, in December, to a new all-time high:

If you wanted to tout good news, there it is. The bottom line is: a decline in gas prices from $5 to $3 in 6 months can do a world of good to inflation data.

Now let’s start to segue to the bad news.

Here is an update to the graph I’ve been running for about the past year, showing real personal income (red) and spending (blue) normed to 100 in May 2021, right after that spring’s stimulus spending splurge:

As noted above, real personal income continued to increase in December, and is up 1.3% since June, when gas prices were $5/gallon. But they remain -1.4% below their level of May 2021. And the increase in real personal spending appears to have reversed, down for the second month in a row, by -0.3%. It is down -0.5% since its peak at 4% over May 2021 levels.

Further, the personal saving rate increased 0.5% for the month, and is up 1.0% from its lowest level of 2.4% in September (which except for July 2005 was its all-time lowest reading):

Why is this bad? Because as expansions go on, consumers tend to go more and more out on a limb, i.e., their saving rate goes lower. When bad things start to happen, they pull in their horns, i.e., their saving rate increases. Although this is a noisy metric, it is one of the hallmarks of the onset of a recession, and is a crucial part of my “consumer nowcast” model, which turned negative about 3 months ago.

Also, real personal income excluding transfer receipts, discussed above, is only up 0.3% YoY. It has been essentially flat YoY since June. Here’s what that looks like historically:

A flat to negative YoY change in this metric has, with only one exception, for the past 60+ years meant a recession is occurring.

One final note: the personal income deflator goes into the calculation of real manufacturing and trade sales, another one of the “big 4” coincident indicators of recession used by the NBER. It declined for the second month in a row, by-0.4%:

It joins industrial production to become the 2nd of the “big 4” to have apparently rolled over. As discussed above, real personal income less transfer receipts remains positive (but with gas prices increasing again in January, it will have a much more challenging comparison next month), as does jobs growth.

To recapitulate: there was good news today on the inflation front, perhaps helping the Fed pause in raising rates; but there was bad news on most of the indicators which immediately precede or are coincident with a recession.

Thursday, January 26, 2023

Q4 2022 GDP positive, but both long leading components continue negative


 - by New Deal democrat

Here’s my last note for this morning.

Real Q4 GDP came in at +0.7%, or +2.8% annualized. While this is lower than most quarters in the past several years, as shown below:

Although not shown (due to the huge pandemic swings), it would have been slightly above average for any quarter in the 10 years that predated the pandemic.

But as usual, my focus is on the two long leading components in the GDP report: proprietors’ income, a proxy for corporate profits, and private residential fixed investment (housing) as a share of GDP.

 And the bottom line is, both were negative.

Proprietors’ income (blue in the graph below), a proxy for corporate profits (red), which won’t be reported for another two months, were up +3.2% nominally. The “official” leading metric uses unit labor costs as a deflator, which we also don’t know yet, so I’ve substituted the implicit GDP deflator as a temporary fix: 

As deflated, they were down -0.4% for the quarter, and -4.0% since their Q2 2021 peak. Employers who are making less profit start to cut back labor’s hours and jobs, or at least on hiring. In other words, this portends future further weakening of the jobs market.

Secondly, real private residential investment as a share of GDP is a long leading indicator popularized over 15 years ago by Prof. Edward Leamer. It tends to turn down 6-7 quarters before a recession hits. It is even slightly more leading when calculated in real inflation-adjusted terms. Unsurprisingly, in Q4 of last year this took another bad hit:

This metric has been screaming “recession!” for several quarters now; just remember that supply constraints mean that housing units under construction made an all time high last month, as reported in last week’s monthly update for December.

This adds even more evidence for the proposition that there will be a recession this year.

Durable goods orders come in mixed; leaving only employment indicators as short term positives for the economy


 - by New Deal democrat

Manufacturers’ durable goods orders, and in particular “core” orders, which exclude defense and transportation (a/k/a Boeing), are (albeit noisy) a short leading indicator. I normally don’t pay too much attention to them because of that noise, and because they are less reliable than other indicators; but until recently, they were one of the few positive short leading indicators remaining - so I have been interested in when they might roll over. 

Here’s the long term look at each for the past 25 years:

To cut to the chase, while total durable goods orders rose 5.6% for the month, core capital goods orders declined -0.2%:

This isn’t quite “rolling over,” but on the other hand, core capital goods orders haven’t made a new high since August.

The bottom line is that they are basically neutral. At this point only labor market indicators remain positive for the near term economy.

Jobless claims continue recent strong streak


 - by New Deal democrat

Programming note: I’ll put up separate posts on durable goods orders, real manufacturing and trade sales, and the Q4 GDP reports later.

Initial jobless claims have been the best performing - and perhaps only positive - element of the short leading indicators in the past few months. And that continued in this morning’s report.

Initial claims declined -6,000 to 186,000, the lowest number since last April. The 4 week average declined -9,250 to 197,500, the lowest since last May. Continuing claims with a one week delay increased 20,000 to 1.675 million, still -43,000 below their recent high in December:

Only continuing claims were higher YoY. Initial claims, and more importantly, their 4 week average, were down YoY. Unless and until this number moves higher by at least 10% YoY, there is no recession warning:

In that regard, I’ve read some commentary indicating that a recession can’t start with initial claims so low. This is not really true, as there is no “magic number” of initial claims that correlates with recessions. Rather, past history indicates it is the *change* in initial claims which is the best indicator.

To show that recently, here are initial claims averaged monthly for the past year (blue) vs. job grains for the past year (light brown, right scale):

On a monthly basis, initial claims have varied between 180,000 and 245,000. But monthly job gains declined from over 700,000 to just over 200,000 during that same period. There would be no such huge decline in the number of jobs gained monthly if there were the claims big correlation between the number of initial claims and jobs. 

Wednesday, January 25, 2023

Three most quickly reported measures of coincident indicators - all of which are close to turning negative

 - by New Deal democrat

While we await tomorrow morning’s deluge of Almost Every Economic Series Imaginable, I have posted over at Seeking Alpha a detailed look at one measure of consumer spending and two of employment which will give us extremely timely warnings as to whether a recession has started. I explain their trajectory in the past year in detail, and how close they are to actually turning negative.

I definitely expect them to turn negative before any monthly data confirms if and when a recession has begun.

As usual, clicking over and reading will help you understand the economic situation, and bring me a little change in my pocket.

Tuesday, January 24, 2023

Index of leading indicators says recession almost certain; so what of the coincident indicators?


- by New Deal democrat

This week is one of those where almost all of the important data is crammed into one day - in this case, Thursday, when Q4 GDP, initial claims, real manufacturng and trade sales, durable goods orders, and new home sales will be reported all at once.

In the meantime, you may have heard that yesterday the Index of Leading Indicators declined again, by -1.0%. This marks the 9th straight decline in the index, which is now -5% below its recent peak (via Advisor Perspectives):

(Don’t know why the December level is labeled 97.9%. I have verified that the Index has indeed declined -5% to 95% since its recent peak, as shown).

The index has *never* declined this much without a recession having occurred. In fact, its current decline is almost as much as, or even more than, 3 recessions in the past 60+ years (1960, 1970, 1982) and nearly 50% as deep as the maximum declines in 3 others (1980, 1990, 2001).

So, if the leading indicators are down sharply, what is the current status of the “big 4” monthly coincident indicators that the NBER has indicated it pays the most attention to? Here they are, each normed to 100 as of their respective most recent peaks:

Three of the four - industrial production, real sales, and real personal income - made troughs in June. Industrial production has since rolled over, but the other two have continued to rise since that time.

This tells us that the price of gas has played an important role in their levels, and especially in real sales and real income. Since gas prices continued to decline in November and December, that will give them another boost:

Even so, that is probably not going to be enough to save real sales for November, which will be updated on Thursday. We already know that real retail sales declined that month, and nominally, so did both manufacturing and wholesale sales as well, as shown in total (nominal) business sales:

Nominally total sales declined -0.8% in November. It is unlikely that the inflation adjustment will be enough to reverse that sign. If so, that will be the 2nd of the 4 metrics to have rolled over. We’ll see about real personal income less transfer receipts on Friday.

Monday, January 23, 2023

How “FHFA-CPI” using house prices rather than OER shows a sharp deceleration in inflation


 - by New Deal democrat

Paul Krugman made another foray into the “inflation is mostly gone” genre over the weekend with a thread on Mastodon that largely relied on the following graph:

concluding that

“[A]t this point the burden of proof lies on anyone claiming that we had more than a, well, transitory inflation spike that’s mostly behind us.”

I’m very disappointed with Krugman’s argument, mainly because his “supercore” measure of inflation boils down to “if we exclude all the items that CPI says are really going up in price, plus gas, then things aren’t really going up in price.”

Well, duh.

Since the inflection point of all this argumentation is June, I thought I’d try a fairer representation of the main sectors involved. So, below is a bar graph that breaks all of the measures down to the First and Second Halves of 2022, starting with overall inflation (blue), then subtracts food and energy (red), energy (gas) (gold), and shelter (purple). The final three bars focus on shelter (brown), house prices via the FHFA purchase only index (lavender), and finally energy (teal):

This makes it clear that both total and core inflation aren’t very different in H2 than in H1. In fact as officially measured shelter prices accelerated from +2.7% in H1 to +3.8% in H2. 

The big declines are in house prices, which aren’t in the official CPI and which declined from +8.6% in H1 to -0.4% (-0.27% through October, the last month reported, extrapolated to 6 months) in H2; and energy, which decelerated from +18.2% in H1 to +0.3% in H2 (this despite the huge drop in gas prices from $5 to $3 between June and December).

So I disagree with Prof. Krugman’s analysis using his cherry-picked “supercore.” Inflation, as officially measured, isn’t “mostly behind us.” 

Nevertheless, if the question is, “Should the Fed continue to raise rates?” then I arrive at the same conclusion, but for a different reason; namely, that officially measured CPI for shelter lags what is actually happening in the housing market (as represented by prices) by 12 or more months. I show that below via “FHFA-adjusted” total and core CPI, which substitutes the FHFA purchase only index for CPI shelter. The only difference is, since the FHFA has only been reported through October, the below graph is quarterly rather than semi-annual:

Now it is clear just how much inflation, as it more properly ought to be considered by the Fed, has sharply decelerated since June.

Sunday, January 22, 2023

Weekly Indicators for January 16 - 20 at Seeking Alpha


 - by New Deal democrat

I forgot to post this yesterday, so here you go today . . . 

My “Weekly Indicators” post is up at Seeking Alpha.

Every now and then you get a contratrend week, when a bunch of metrics move in the opposite direction as the overall recent trend. This past week was just such a week, primarily among financial indicators.

As usual, clicking over and reading will bring you up to date on what the contratrend move is, and will bring me a little change in my pocket.