Friday, June 30, 2023

Real income continues to set records, while real spending and real total sales falter


 - by New Deal democrat

Real personal spending faltered in May, and real total sales continued to falter in April, as of this morning’s report; while real personal income continued to be aided by the big decline in gas prices that started a year ago.

Let me start with the good news.

Real personal income less government transfer receipts is one of the important coincident metrics watched by the NBER. And it rose 0.3% in May to a new record high:

It is 2.0% higher than before the pandemic, and 1.1% higher than last year in May when gas prices were approaching $5/gallon. 

Real disposable personal income (not shown) also rose 0.3%.  And real personal income by itself (blue in the graph below) also rose 0.3%, and is 3.7% higher than it was just before the pandemic.

Now let me turn to the bad (or just ‘meh’) news. 

Real personal spending (red above) declined less than -0.1%, rounding to unchanged. Although it is 8.1% higher than just before the pandemic, it is up only 0.1% in the four months since January. On a YoY basis, it is still up 1.1%, but in the 50 years before the pandemic, such a YoY showing usually happened only as the economy was entering a recession:

Further, remember that real personal spending on services has a long history of rising many months into, and sometimes all the way through, recessions (and indeed was up another 0.2% in May to another record high). But real personal spending on goods, similar to real retail sales, tends to be a short leading indicator, and in particular a short leading indicator for employment growth.

And there, the news was not good, as real spending declined -0.4% for the month, and is down -0.9% since its recent peak in January.

Finally, the personal savings rate increased 0.3% to 4.6%, tied for an 18 month high with March. Here is the long-term historical record:

The savings rate tends to increase in the months before recessions as consumers get more cautious.

The bad news continues in the other metric updated this morning, real total sales (including manufacturing, wholesale, and retail sales) for April, which declined -0.2%, and is down -1.6% from its January peak:

So to recap: all of the real personal income metrics improved, in some cases to new all time highs. Barring revisions, this will likely be enough, along with payroll growth, to signal that the economic expansion is still continuing. This also reflects the continued tailwind from lower gas prices - a tailwind that is very likely to disappear over the course of the next six months. But total real spending, real spending on goods, the personal savings rate, and real total business sales were all unchanged or worse. Several of these are short leading or coincident indicators of recessions. 

Thursday, June 29, 2023

Initial jobless claims: still at distress levels, still not red flag recession warning


 - by New Deal democrat

Initial claims dropped -26,000 last week to 239,000, the top of their former range this spring. The more important 4 week moving average rose 1,500 to 257,500, a new 18 month high. With a one week lag, continuing claims declined -19,000 to 1.742 million:

For forecasting purposes, the more important comparison is YoY. By this metric, initial claims were up 12.2%, and the more important 4 week average up 18.8%. Continuing claims were up 30.0%:

Remember that, based on 50+ years of history before the pandemic, the dividing line for a “recession warning” is the 4 week or monthly averages being up 12.5% for 2 months in a row. One year ago the 4 week average was in the vicinity of 215,000. 12.5% above that is 243,000. So whether the recent spike is a false alarm or not depends on whether in the coming weeks initial claims are closer to the 260,000 level, or revert back to their prior range of 230,000-240,000.

Although I won’t post a graph this week, this continues to imply that the unemployment rate will rise slightly from one year ago. But it isn’t nearly enough to come close to triggering the Sham rule for recession nowcasting.

So stay tuned.

Wednesday, June 28, 2023

Pent-up demand and sales: an update


 - by New Deal democrat

There’s no big economic news today.

So while we wait to see if initial jobless claims continue to worsen tomorrow, and what happens with real personal spending and income, as well as real business sales on Friday, let me point you to an updated detailed discussion of why the Fed’s rate hikes haven’t yet caused the economy to turn down (hint: gas prices plus pent-up demand in several crucial sectors), at Seeking Alpha.

Additionally, as I discuss in that article, the evidence is simply compelling that leading manufacturing indicators do not have the importance that they used to before the “China shock,” i.e., the offshoring of much of the previous US-based manufacturing to China that began almost 25 years ago.

This means that consumption, which is about 70% of the entire economy, has assumed greater importance. Lance Roberts (whose economic analysis I usually find facile and ideologically motivated) nevertheless deserves credit for positing that an economically weighted average of the ISM manufacturing and non-manufacturing index is now more useful. And here it is:

On that same subject, I’ve been watching the weekly update of Redbook’s consumer spending measure like a hawk since at least the beginning of this year, because it has strongly suggested that consumer spending on goods peaked probably late last year. Because it is a nominal index, it doesn’t account for inflation, but nevertheless I’ve been waiting for it to cross the zero threshold. It’s been like watching paint dry, and it continues to tantalize:

The last 4 weeks have all seen YoY readings of less than 1%. The average is presently +0.6%.

We’ll get a much more complete picture, updated through May, on Friday.

Tuesday, June 27, 2023

Higher new home sales, with lower prices in May: good!


 - by New Deal democrat

Let me start with my usual caveat about new home sales: while they are the most leading of all housing metrics, they are very noisy and heavily revised.

With that out of the way, the bottom line is that they offered pretty definitive evidence that sales have bottomed, while prices are still declining, at least on a YoY basis. Which makes sense, because as I always sale, prices follow sales.

First, here are seasonally adjusted new home sales (blue, left scale) compared with the less leading, but much less noisy single family permits (red, right scale):

Both now show a significant and apparently sustained rebound from their respective lows last summer and winter. Unless the Fed jacks up rates further enough to drive mortgage rates well over 7%, the bottom certainly appears to be in.

Nevertheless, a longer term view shows that even with this rebound, new single family houses are being built and are for sale at no more than a moderate pace compared with the last 30 years:

Note that neither of these metrics include multi-family units, which as I discussed last week, are being built at an all-time record.

Turning to prices, which follow sales with a lag, there was a non-seasonally adjusted increase of 3.5% for the month (blue, right scale below), while on a YoY basis, prices declined -7.6% (red, left scale):

This was simply a very good report for the economy: lower prices and higher sales. Good!

House prices increase for third straight month, but Case Shiller index now negative YoY


 - by New Deal democrat

Seasonally adjusted house prices through April as measured by both the FHFA (red in the graph below) and Case Shiller (blue) Indexes rose, the former by 0.7% and the latter by 0.5%. This is the third straight increase in a row. Thus house prices have probably bottomed. But on a YoY basis, prices have continued to decelerate sharply, with the FHFA index only up 3.1%, and the Case Shiller index actually showing an outright decline for the first time, down -0.3%:

House prices are nevertheless presently increasing at among their lowest YoY rates in the past 25 years. Only during the Great Recession and its aftermath were they lower.

This continues to imply a further deceleration in shelter inflation in the CPI, as shown in the below graph which compares the current Case Shiller reading (/2.5 for scale) with Owners’ Equivalent Rent in the CPI:

The only question in my mind is how long OER remains at its current plateau of +8.0% YoY before it begins to decline sharply. I continue to think we will see shelter inflation in the CPI of only about 2% by the end of next winter.

I will report on new home sales separately later today.