Saturday, April 15, 2023

Weekly Indicators for April 10 -14 at Seeking Alpha


 - by New Deal democrat

My ‘Weekly Indicators’ post is up at Seeking Alpha.

The slow drip-drip-drip of deceleration generally continues. Perhaps most significantly, YoY consumer spending as measured by Redbook sank to a new post-pandemic lockdown low of only +1.5%. But other coincident indicators in particular, like tax withholding, appear resilient.

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

Friday, April 14, 2023

Real manufacturing and trade sales probably rose to a new record high in February; may have declined in March


 - by New Deal democrat

Real manufacturing and trade sales is one of the 4 monthly coincident indicators most monitored by the NBER to determine whether the economy is in expansion or recession. Because the reporting of this series lags badly (by 2 months), I have developed several placeholders to estimate it on a more timely basis.

The first back of the envelope method is a simple averaging of industrial production and real retail sales. The latter is about 1/3rd of the actual measure of real business sales, and the former is a proxy for manufacturers and wholesalers sales (what it leaves out is manufacturers’ inventories and the wholesalers’ portion). It isn’t that accurate on a month to month basis, but generally gets the trend right.

Since this morning both real retail sales and industrial production were reported for March, we have our first estimate of March real business sales, suggesting they more likely than not declined, at an estimate of -0.6%. Note that February is also estimated to have declined -0.4% by this method:

The second method, which has been much more accurate on a monthly basis (generally coming in within +/-0.3%) as well as the trend, is to take total business sales (which were reported this morning) and to apply a simple average deflator of the PPI for commodities, intermediate, and finished goods as well as the CPI. Since total sales declined very slightly on a nominal basis (less than -0.1%) for February, but the average deflator was negative, this suggests that real manufacturing and trade sales actually increased in February by +0.2%:

If this holds, it will mean that this important coincident indicator made another new high in February:

But as per the first estimating method above, may have declined in March.

Positive revisions make for a good March industrial production report


 - by New Deal democrat

If retail sales for March were bad, industrial production (blue in the graph below) was at very least mixed to the upside. Total production increased +0.4%, and on top of that February was revised higher by +0.2%, and January was revised higher by +0.5%.

The not so good news is that while manufacturing (red) was also revised higher by +0.5% for February, it was all taken back by a -0.5% decline in March:

With these revisions and additions, industrial production is still -0.5% below its September peak (a big improvement from last month’s original -1.8%), while manufacturing production (red) is -1.2% below its peak from last October, also an improvement from the original -2.0% last month.

In both 2016 and 2019 there were bigger declines than even as measured one month ago without there being a recession, because manufacturing has shrunk so much as a percentage of the overall economy. Still, this remains one of the 4 main coincident indicators relied on by the NBER, and more often than not in the past its peak has meant the cycle peak as well.

Once the February nominal manufacturing sales data for February is reported later this morning, I will make estimates of that important coincident indicator in real terms as well.

March real retail sales lay an egg, suggest downturn in nonfarm payrolls by the end of summer


 - by New Deal democrat 

After a quiet early part of the week, today we get a deluge of data: retail sales and industrial production for March, and total business sales for February. Because real total business sales are one of the 4 big coincident indicators tracked by the NBER, and because retail sales are about 1/3rd of the total, and industrial production helps us estimate the rest, after the data comes out I can give estimates of the *real,* not just nominal, values for both February and March.

But first, retail sales . . . Which laid an egg, as they do once or twice a year.

In this case nominal retail sales declined -1.0% for the month. Because consumer prices increased less than 0.1% in March, real retail sales also were down -1.0%. Combined with a -0.6% decline in February, real retail sales have taken back close to 2/3’s of the big January gain, and are down -3.0% from their March 2021 peak:

YoY real retail sales are down -1.9%, the biggest decline since the pandemic lockdown. As I write nearly every month, they are a noisy but time-tested short leading indicator (/2) for jobs. Here is the updated look at that comparison:

YoY nonfarm payrolls have declined about 1/3rd, from +4% to +2.7% in the past 6 months. At this rate they will have declined by more than 1/2 of that +4% in 3 or 4 months, which by my rule of thumb means it is likely there will be a seasonally adjusted actual decline in monthly payrolls by the end of this summer.

UPDATE: Checking the historical record all the way back to 1948, a YoY decline in real retail sales of -1.9%, our current value, has *always* occurred at the outset of or during a recession with the only exceptions of 1951-52, and the months of September 1987 and October 2002.

Thursday, April 13, 2023

Initial claims continue to warrant yellow caution flag


 - by New Deal democrat

Initial jobless claims last week rose 11,000 to 239,000. The more important 4 week average rose 2,250 to 240,000. Continuing claims, with a one week delay, decreased 13,000 to 1,823,000:

At this juncture the YoY change is more important, because increases of more than 10%, especially in the 4 week average, or monthly, are a yellow caution flag for recession, and an increase of more than 12.5% which persists for at least 2 months is a red flag recession warning. 

And on a YoY basis, while the one week number is only up 7.7%, for the month of March (blue)they were up 11.0%. For the first 2 weeks of April (not shown) they are up 8.3% YoY so far. The 4 week average is up 11.1%. Continuing claims, which lag, are up 13.8%%:

Because of the 4 week average and the monthly YoY increase for March, a yellow caution flag remains warranted. It will take further increases into the 240’s that persist into May for the data to warrant a red flag recession warning.

Wednesday, April 12, 2023

Properly measured, consumer inflation is only about 3.0% YoY, and the economy has experience DEflation since last June


 - by New Deal democrat

One month ago, I “officially” took the position that inflation had been conquered, and that, properly measured, the economy had actually been experiencing deflation since last June. This morning’s report only confirmed that position.

The primary reason, as I have been pounding on for almost 18 months, is that the shelter component of official inflation, which is 1/3rd of the total, and 40% of the “core” measure, badly lags the real data - as in, by a year or more.

Before we get into all that, let’s look at the headlines, with the monthly and YoY rates of change:

Total CPI up 0.1% m/m and 5.0% YoY
Core CPI up 0.4% m/m and 5.6% YoY
Owners Equivalent Rent up 0.5% m/m and 8.0% YoY
CPI less shelter up +0.2% and 3.4% YoY
Energy down -3.5% m/m and -6.4% YoY
Food unchanged m/m and 8.5% YoY
New cars up 0.4% m/m and 6.1% YoY

Core inflation is being driven by Owners’ Equivalent rent (shelter) and new cars. Total inflation is also being driven by food. But because shelter is such a large component of the aggregate, even including new cars and food leaves consumer inflation at a YoY rate that ought to be in the Fed’s comfort zone.

 So let’s start with an updated long term YoY graph of the big culprit, Owner’s Equivalent Rent (red), which increased another 0.5% in February, with the FHFA house price index (blue, /2 for scale), which has been declining since last June and stood at 5.2% as of its last reading for January:

Here are the last 3 years for the close-up look:

The *relatively* good news s that OER appears to be leveling out, right on schedule about one year after house prices. If the FHFA index has continued to decline in the 2 months since then, it is only up about 2.3% YoY currently, vs. 8.0% for OER. If the FHFA index were substituted for OER, then total YoY CPI for March would only be 3.1%. Core inflation, which ex-shelter is up 3.5%, would only be up 3.0% if the FHFA house price index were substituted for OER.

There is no reason for the Fed to be raising rates if properly measured total CPI is increasing only 3.1% YoY, and core CPI is up only 3.0% YoY.

But it gets even worse, because last June, when house prices peaked and gas prices reached $5/gallon, was an inflection point. So the below graph norms total and core inflation as well as CPI less shelter, to 100 as of that month. Here’s what inflation since then looks like:

Total inflation is up 2.4% in the last 9 months, or at an annual rate of 3.2%.
Core inflation us up 3.8% in the last 9 months, for an annual rate of 5.1%.
 Consumer prices ex-shelter are in *deflation,* down -0.2% in the past 9 months, for an annual rate of -0.3%.

Because the FHFA house price index is down -0.6% in the 7 months since June through January, if it were projected forward through March, it would be down -0.8% in the past 9 months.

In other words, consumer prices ex-shelter, plus shelter properly measured, indicates that the economy has been in outright *deflation* over the past 9 months.

And yet the Fed is still contemplating further rate hikes. 

Tuesday, April 11, 2023

Scenes from the March employment report 2: unemployment recession indicators


 - by New Deal democrat

A reminder: I may be offline for the next couple of days. In the meantime, yesterday I looked at the 5 leading indicators contained in the employment report, and summarized how they either signal recession now or within the next 3 to 6 months.

Today I want to focus on unemployment and underemployment. Economist Gloria Sahm’s Rule, namely that when the 3-month average unemployment rate rises a half percentage point above the low of the prior 12 months, the economy is in recession, or is about to be, is sufficient to indicate the onset of a recession, but is not necessary. Recessions in the past have started with even a 0.1% increase.

So, let’s look at some indicators which give us quicker signals. 

1. Initial jobless claims lead the unemployment rate

This is something I have written and updated numerous times in the past decade. Initial jobless claims are one of the 10 items in the Index of Leading Indicators, and as shown below, have a 50+ year track record of turning both higher and lower before the unemployment rate does:

Here is the update for the past two years:

The relationship shows up even better when we compare the YoY% change in both up until the pandemic (note this means a % of a % in the case of the unemployment rate, so an increase from 4% to 8% would be a 100% increase):

Usually, but not always, the unemployment rate has been higher YoY by the time a recession begins.

Here is the YoY update for the past two years:

In March, initial claims finally did turn higher YoY, and the unemployment rate is on track to do so as well within the next several months. As I’ve indicated a number of times in the past year, my “red flag” marker is initial claims, on a monthly basis, being 12.5% higher for two months in a row. We’re not quite there yet.

2. Permanent job losers

This series began in 1994, so we only have about a 30 year history. But it does seem to be a good marker for weakness in the job market, as shown below measured 2 ways: its absolute level (blue), and YoY% change (red):

While there have been several brief false positives, notably 1996, where the 3 month trend is higher YoY, it has usually meant a recession is near. 

There is a similar series of total job losers that goes all the way back to 1967. Here’s what that looks like YoY (blue) compared with the newer, permanent job losers series (red):

With the noted exceptions of 1974 and 1981, the older series has also turned higher YoY prior to all other recessions.

Here is a close-up of the past 2 years:

These metrics - as well as initial claims, discussed above - have just hoisted a yellow flag. If next month’s report is also higher YoY, that would merit a red flag, indicating a recession is very close, perhaps imminent.

Monday, April 10, 2023

Scenes from the March employment report 1: leading sector indicators


 - by New Deal democrat

There’s no significant economic news this week until Wednesday’s CPI report, and as a side note, I might be offline for a day or two later this week. In the meantime, today and tomorrow let’s take a look at some of the important information from last Friday’s employment report.

Today, I’m taking a look at the leading employment sectors and several other leading components of the report.

To recapitulate from my monthly updates, there are 5 leading indicators in the report:
1. The manufacturing work week (which is 1 of the 10 components of the Index of Leading Indicators).
2. Manufacturing employment.
3. Construction (especially residential construction) employment.
4. Temporary help
5. The number of unemployed less than 5 weeks (this series is similar to, but noisier than, initial claims - but the data starts years earlier, so there is a longer record).

Here are the first 4 series all normed to 100 as of their highest month:

Both the manufacturing work week and temporary help employment have been down for over a year. Manufacturing employment has declined very slightly (-1,000) in each of the past two months. Finally, residential construction employment, which had been increasing as the number of housing units under construction also did, also appears to have peaked in January.

Because each individual sector has waxed and waned with great variation in past cycles, below I show them YoY for the past 40 years leading up to the pandemic:

A marker of all of the recessions in the past 40 years prior to the pandemic is that all 4 turned negative prior to each recession, with the sole exception that the manufacturing work week was flat YoY prior to the 2008 recession. When even 2 of the 4 were positive YoY, there was no recession.

Here is the same graph for the past 12 months:

Temporary help and the manufacturing work week are negative. Manufacturing and residential construction employment are decelerating, but still positive. If their current paces of deceleration were to continue, residential construction employment is on track to turn negative in 3 months; manufacturing employment in 8.

Finally, the number of persons who have been unemployed for less than 5 weeks decreased slightly in March, but at 2.722 million, is at a level higher than all but 4 months in the past 2 years:

Here is the historical track record of this indicator, averaged quarterly YoY for 70 years prior to the pandemic:

While it is indeed noisy, it has turned higher YoY in the quarter of, and almost always prior to, the onset of recessions.

Here is the quarterly YoY view since Q4 of 2020:

The only reason it was not higher YoY in Q1 of this year is the comparison with the extremely weak month of January 2022 which was included in the average.

To summarize: all 5 of the leading components contained in the jobs report have turned down (or in the case of short term unemployment, up) from their best levels. Several are already at levels consistent with recession. The remaining ones are on track to signal recession within 3 to 6 months.

Tomorrow: unemployment indicators