Saturday, February 25, 2023

Weekly Indicators for February 20 - 24 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

While several of the important coincident indicators continue to hover just above neutrality, importantly neither long term Treasury yields nor corporate bond yields nor mortgage rates have made a new high in the past 4 months, and historically that has been significant.

As usual, clicking over and reading will bring you up to the virtual moment as to the nowcast and the forecast for the economy, but reward me a little bit for putting it all together for you.

Friday, February 24, 2023

New home sales: a bright spot in the housing indicators

 - by New Deal democrat

New home sales are very noisy, and are heavily revised, which is why I pay more attention to single family housing permits. But they do have one important value: they are frequently the first housing indicator to turn at both tops and bottoms.

And it increasingly looks like new home sales have already made their bottom for this cycle. In January they rose a 45,000 annualized rate to 670,000. This is their second strong monthly advance in a row, and 127,000 above their low in July (blue in the graph below). This is largely a function of the lower mortgage rates we have seen in the past several months, shown in red, inverted, below:

Since mortgage rates have increased in the past few weeks, we’ll find out in the next month or two whether this positive trend in sales can be sustained.

Meanwhile, for the first time since before the pandemic the median price of a new home declined YoY, by -0.7% (gold in the graph below). Since prices are not seasonally adjusted this is the only valid way to look at them. For comparison purposes I also show sales (blue) YoY as well:

Prices follow sales with a lag. YoY sales peaked in 2020, with a secondary peak early in 2022. Prices YoY peaked in 2021 and the increases have been decelerating ever since, before finally turning negative last month.

The last time I looked at new home sales, several months ago, I noted that new home sales were “suggesting the [economic] downturn may not be that long (Fed willing, of course).” That continues to be true.

Strong upward revisions push real personal income to new highs, put 2 important coincident indicators firmly in expansion territory


 - by New Deal democrat

Almost all of the news in this morning’s release for personal income and spending for January was positive.

Nominally, personal income rose +0.6% and personal spending rose 1.8%. The deflator also rose +0.6%, making real personal income close to unchanged, and real spending (after rounding) up 1.1%. 

But that wasn’t the biggest news. There were major upward revisions to real personal income in the past 6 months. The below graphs show the former values (blue) vs. the current revisions (red):

What had looked like moderate growth in real personal income suddenly looks very strong (once again: a big decline in gas prices can work wonders for inflation-adjusted data!).

This affects one of the coincident indicators used by the NBER to calculate if a recession has begun, real personal income less transfer receipts:

Again, what looked like tepid growth or even a YoY stall now looks strong.

There were only minor revisions for the last several months to personal consumption expenditures, making December -0.2% lower than previously reported. Still, the big growth in January took real personal spending to its highest level ever. As I’ve previously noted, personal spending is like the opposite side of the transaction from real retail sales. Here’s what the monthly changes in each look like for the past 18 months:

Both had an extra dose of seasonality, as big declines in November and December were offset by big increases in January.

The good news also applied to real manufacturing and trade sales for December, which was updated this morning as well, jumping 1.5% for the month to an all time high except for March 2021 and January 2022:

This is also one of the coincident indicators tracked by the NBER, which means that both of them are at the moment firmly in expansion territory.

The only negative in this morning’s report was that the personal saving rate increased 0.2% to 4.7%:

While that’s good for individual households, due to the paradox of saving it is bad for the economy. When in the aggregate consumers save more, they spend less, which is a negative for the economy as a whole. As the above graph shows, typically as expansions go on, consumers save less. Then, as financial conditions like interest rates worsen, they tighten their belts and save more. That’s what we are seeing now.  

Thursday, February 23, 2023

The “gold standard” of jobs data shows a strong rebound in Q3 2022


 - by New Deal democrat

The preliminary estimate for the Q3 2022 QCEW was released yesterday. Although the monthly nonfarm payrolls report gets all the glory, it is only a survey. The QCEW is an actual census of the roughly 95% of all businesses that pay unemployment insurance - but is reported with about a 6 month delay, and is not seasonally adjusted.

The bottom line is that while Q2 was very weak, it was followed by a strong Q3. My take is essentially that shown on the dot plot below for the Philadelphia Fed, via Prof. Menzie Chinn at Econbrowser:

Just “how” weak and strong they are depends entirely on how one seasonally adjusts. Generally speaking, June was extremely weak, only better than 2009 since the turn of the Millennium, while July was extremely strong only weaker than 2020 and 2021. The two months together are also stronger than any year since 2001 except for 2020 and 2021. More on that below.

But first, here is my big problem: I continue to be concerned about why the QCEW, which is the gold standard, is so consistently below the YoY% growth comparisons in the CES survey for an entire year (so far) beginning in September 2021. 

Here is the YoY% change in the QCEW monthly beginning in 2020:

And here is the same data for private nonfarm payrolls:

As I wrote above, note that in September 2021 the YoY% change in the QCEW is 4.8%, while that for nonfarm payrolls is 4.9%. That’s no big deal, but the overperformance of the private nonfarm payroll survey continued to intensify all through 2022 until in June there was a 1.3% divergence, with the QCEW only up 4.0% YoY, but private nonfarm payrolls up 5.3%. That continued through the latest QCEW data for the Third quarter of 2022.

Let’s see how various methods of seasonally adjusting affect the monthly data.

If I take CES seasonally adjusted data through March 2021 as gospel, and apply the QCEW YoY% growth rates starting with that, I get a Q2 that only adds 45,000 jobs in total, but then a roaring Q3 that adds 884k jobs in July, 750k in August, and 733k in September.

On the other hand, if I take the QCEW numbers for each month of Q3, compare with the closest matching QCEW numbers in the 20 previous years, and then average how the CES seasonally adjusted those numbers, I get +1.2-1.3M in July, but only about +175k in August and +150k in September. 

The first method gives me a seasonally adjusted CES # of +2,367,000 jobs added in Q3, while the second gives me only +1.7M jobs added. 

Finally, if I were to follow my rule of thumb for non-seasonally adjusted data, which is that a decline of 50% or more in the growth rate within 12 months means that the data has actually turned negative, it shows that both April (5.0% vs. 11.7% in 2021) and May (4.7% vs. 9.7%) probably had actual job losses, followed by a recovery afterward.

The big discrepancy between the two measures may be an issue of very strong solo proprietor new business formations (since the self-employed don’t pay unemployment insurance), but the Census Bureau really ought to address this ongoing issue.

Initial claims continue recent excellent streak


 - by New Deal democrat

Initial jobless claims continued their recent excellent reports, as there were only 192,000 new claims, down -3,000 from the week before, and close to their 50+ year lows of last March and April. The 4 week average increased 1,500 to 191,250, still an excellent number. Continuing claims, with a one week delay, declined -37,000 to 1,654,000, still in their slightly elevated range that started in November:

On a YoY basis, contnuing claims were slightly higher, while initial claims were slightly lower:

Remember, I do not believe there is any recession signal until initial claims on a 4 week moving average basis are at least 10% higher YoY.

The almost complete lack of layoffs remains one of the two biggest signals (along with near-record housing units under construction) contra any near-term recession.

Wednesday, February 22, 2023

Consumption leads jobs: a comprehensive update


 - by New Deal democrat

Yesterday I encountered a post on Seeking Alpha from the chief economist for a major trading platform, who probably makes in a week the amount I pocket in an entire year from my writing, who wrote:

if one loses one’s job, one likely spends less. If one witnesses colleagues lose their jobs, one may cut back on spending. If extended family members lose their jobs, spending may be reduced.”

Here’s their accompanying graph:

Note the heading: “consumption is still growing because jobs are expanding” This is an argument I encountered many times during the Great Recession: as more an more jobs were lost, it was a sure thing that people would spend less and less.

Except for one thing: in the aggregate, it’s completely wrong. Generally speaking, in recessions prices go down more (or go up less slowly) than wages. Interest rates paid for things like mortgages and car loans go down. As a result, even as jobs are still being shed, bargains simply become compelling for some people who are employed, and they go out and spend more. Similarly, even as jobs continue to get added to expanding economies, if prices and interest rates rise more than wages (as they typically do late in expansions), consumers in the aggregate start to cut back.

In short, it is the changes in consumption that lead to the change in employment, as sales growth or shortfalls lead employers to amplify or trim their hiring and firing. 

Even shorter: consumption leads employment, not visa versa.

Since I haven’t run the graphs in support of this relationship in quite a while, let me re-post the evidence.

Here is a graph, going back 75 years through 2019, of the YoY% change in real retail sales (blue, /2 for scale) vs nonfarm payrolls (red), averaged quarterly:

While there’s not an exact 1:1 correspondence, the graphic evidence is simply compelling that the peaks and troughs in consumption YoY lead peak growth or losses in employment by one or more quarters. For 75 years.

Because the pandemic year of 2020 would make everything else before it look like squiggles, here’s the update since then:

The spending came first; then the job growth. Then consumer spending YoY went flat, and job growth has been decelerating.

Which leads me to a criticism of a second article I read yesterday, by Lance Roberts, formerly (if I recall correctly) of Time Magazine, a conservative commentator who is often my poster child for “someone is wrong on the internet.” Except most of his current argument - that the Fed is very unlikely to give us a “soft landing” - is correct. After noting that both sales growth and jobs growth have been decelerating, he wrote:

While most of the jobs recovery was hiring back employees that were let go, the surge in stimulus-fueled retail sales will ultimately revert to employment growth. The reason is that people can ultimately only spend what they earn. As shown, the disconnect between retail sales and employment is unsustainable.”

I agree. Where I take issue is his graph in accompaniment to the point, shown below:

Note the differing left/right scales. The graph tends to imply a 1:1 relationship between retail sales growth and jobs growth. But that’s misleading, because as I’ve shown above real retail spending has tended to increase or decrease by twice the change in jobs. So let me show you the data since the modern retail sales series started in 1992 another way.

The below graph norms both real retail sales and nonfarm payrolls to 100 as of roughly mid-cycle for the 1990s. That’s because, as an outgrowth of the leading/lagging relationship, sales grow relatively more quickly than jobs earlier in expansions, and less quickly later. Then I do a little mathematical trick: dividing sales by 2 and adding 50 to result to arrive at advances and declines in real sales that equal changing at half the rate of jobs:

Note that the “shortfall” between job growth and retail sales growth appears considerably smaller than in Roberts’ graph. Here’s the close-up:

In the past 2.5 years, job growth has made up about 8/9’s of what it is needed for the relationship to return to trend. So, to be clear, I agree with Roberts’ assertion that “the surge in  . . . retail sales will ultimately revert to jobs growth,” or more accurately, the two series will converge. 

Exactly where and when that convergence will happen, we don’t know.

The long leading forecast through year end 2023 at Seeking Alpha


 - by New Deal democrat

Normally in late January I update my top-line long leading forecast for the entire year. A little late this year, it is now up at Seeking Alpha.

If you follow my updates on the leading indicators, the result isn’t very surprising. The twist is that recessions are almost always much shorter than expansions, so the long leading indicators turn up on a shorter time span than they turn down in advance of recessions.

Anyway, clicking over and reading will tell you how I expect the trend for the remainder of this year to unfold, and bring me a little reward for my efforts.

Tuesday, February 21, 2023

Existing home sales and prices decline further. BUT . . .


 - by New Deal democrat

Even though existing home sales make up about 90% of the total market, they have much less economic impact than new home construction. They are best used to confirm trends. In January they continued to confirm that sales have continued to decline, and prices, which follow sales with a lag, have joined in.

January sales declined another -0.7% to 4.2 million annualized, a -37% YoY decline from a peak of 6.34M one year ago:

The median price of an existing home, which isn’t seasonally adjusted, also declined further to $359,000, up only 1.3% YoY from 2022’s $354,300. Since my rule of thumb for non-seasonally adjusted data is that the trend has turned when the YoY increase is less than 1/2 of its maximum increase in the past 12 months, which was the +17.1% growth of 12 months ago, needless to say this confirms that prices have turned down in a significant way:

The decline in sales, as well as housing permits and starts, is certainly consistent with a recession - which has normally coincided with a decline of about 20% or more. As I’ve pointed out several times already, what is “different *so far* this time” is that this hasn’t fed through into any significant decline in the backlog of authorized housing not yet started, or housing under construction:

Until housing under construction turns down substantially, housing is not exerting any significant downward pressure on the economy.