Saturday, August 12, 2023

Weekly Indicators for August 7 - 11 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

For the moment we are in something of a holding pattern, in particular with the coincident indicators. Buoyed by the big downturn in commodity prices, and somnolence of consumer prices ex-fictitious shelter, the short leading indicators continue to be much more positive.

As usual, clicking over and reading will bring you up to the virtual economic moment. And while you are at it, I also updated my fundamentals-based “Consumer Nowcast” model, as to which this is the most important graph:

Both will reward me a little $$$ bit for my efforts.

Friday, August 11, 2023

July producer prices: economic tailwind weakens, but still in place


 - by New Deal democrat

Normally I don’t pay too much attention to the producer price index, but because the steep decline in producer prices has been such a boon to businesses, and a big tailwind for the economy as a whole, whether that continues or not is important.

And in July, the deflationary pulse generally continued. While final demand producer prices for goods edged up by 0.1%, intermediate stage prices for goods declined -0.7% and raw commodity prices declined -0.3%:

The YoY comparisons improved, because last July’s big initial decline (led by energy prices) rotated out of the comparisons:

Still, end state producer prices are down -2.5% YoY, intermediate stage by -7.8%, and raw commodities by -7.0%.

Bottom line: the tailwind is not as strong as before, but it is still in place.

Thursday, August 10, 2023

July CPI: almost everything except fictitious shelter costs are getting close to the Fed’s comfort range


 - by New Deal democrat

Gasoline prices and fictitious shelter prices are once again moving in opposite directions, in a direct reversal of what the situation had been in the past 12 months. During late 2022 into this year, energy prices came down sharply, while owners’ equivalent rent was increasing. Now energy prices are beginning to increase again, while fictitious shelter CPI finally catches up.

Here’s the closer look.

First, both headline and core CPI grew at a mild 0.2% pace in July. The former is only up 3.2% YoY (an increase from last month’s 3.0%), while the latter is up 4.7% YoY:

Headline inflation is really no longer a problem. But when we take out gas, and keep in shelter, it is still elevated.

Which brings us to shelter. Ex-shelter, CPI was unchanged last month, and is only up 1.0% YoY:

If we used actual monthly house price and rents, YoY CPI would probably be up only about 0.6%.

The fictitious owners’ equivalent rent increased 0.5% for the month, which is still better than the 0.7% and 0.8% it was increasing monthly late last year:

So let’s update OER (blue) with the FHFA (red) and Case-Shiller (gold) house price indexes:

Exactly as predicted, OER is following house prices down with roughly a one year lag. OER is up 7.7% YoY now, decelerating at roughly 0.2%/month. The big question is how quickly it will continue to decelerate. If it does so at the same pace as house prices did, it will take only about another 6-8 months to get back to the level of the Fed’s comfort zone. If it continues to decline at only 0.2%/month, it will take several years instead. I lean towards the former outcome, but we’ll see.

Another pocket of high inflation was food prices. This too continues to subside, up 0.2% for the month and 4.9% YoY:

At its current pace of YoY decline, it will be in the Fed’s comfort zone in about 3 more months.

Next, new and used car prices have also been a major driver of inflation. Both declined in July, the former by -0.1% and the latter by -1.3%. They are up 3.5% and down -5.6, respectively, YoY:

Again, it will probably take about 3 more months of this for new vehicles to get into the Fed’s comfort zone.

But the situation is different when we look at “transportation services,” which includes things like insurance, vehicle rentals and repairs. This was up 0.3% for the month, but is still up 9.3% YoY:

I’m giving you the full 35 year history of this series to show how, even with recent steep declines, the YoY rate is still extremely high by historical standards. A lot of this has to do with owners hanging on to older model cars rather than get the full force of new vehicle sticker shock. Those older model vehicles need lots of repairs, and lots of repair shop employees to do the work. Hence a spike in demand feeding a continued spike in prices. Even at the current pace of decline, we’re probably still about 6 months away from a more “normal” rate of inflation here.

Finally, let me show you the Fed’s preferred metric these days, which is sticky price CPI. On a headline basis, this continues to decelerate slowly YoY, but note that the 1 month and 3 month annualized rates are very close to the Fed’s comfort zone:

The same is true of the core sticky price metric:

I strongly suspect the Fed will still do at least one more rate hike, although there may be a brief pause. But if current trends continue for 3 more months, then nearly everything except fictitious shelter is going to be close to or within their comfort zone. Which may or may not make a difference to them.

A second final comment is that if there is a mild re-acceleration of headline inflation, but that is coupled with continued deceleration in wage gains, then I would expect to begin to see signs of consumes feeling squeezed within a few months. Which would not be good in tandem with a Fed continuing to raise interest rates.

Initial jobless claims: a little soft, but continued expansion signaled


 - by New Deal democrat

I’ll put up an analysis of this morning’s CPI later. In the meantime, initial jobless claims rose 21,000 last week to 248,000. The more important 4 week moving average rose 2,750 to 231,000. With a one week delay, continuing claims declined -8,000 to 1.684 million:

On an absolute level, all of this remains very good.

The YoY% changes are more important for forecasting purposes. There, for the week initial claims are up 15.9% YoY. However, the 4 week moving average is only up 7.9% - far too low an increase to be consistent with any imminent recession. Continuing claims remain very elevated YoY, up 24.6%:

Remember, because YoY claims did not cross the 12.5% threshold for 2 full months, we re-set the clock. While claims suggest a slight increase in the unemployment rate on the order of 0.2%-0.3% in the next few months, that is not nearly enough to trigger the Sahm Rule.

In short, a little softness, but no recession signaled.

Wednesday, August 9, 2023

What to look for in tomorrow’s CPI and Friday’s PPI


 - by New Deal democrat

We’re still in the post-jobs report lull in economic news today. That will end tomorrow with initial jobless claims, and also CPI and PPI tomorrow and Friday respectively.

I always watch CPI, but I believe the PPI is uniquely important at present as well. To show you why, let me show you the YoY relationship between PPI and CPI for the past 75 years in two graphs below:

I’d like to focus your attention on those times when (1) both PPI and CPI were decelerating or declining YoY, and (2) PPI was decelerating or declining at a faster pace than CPI. 

Until recently, this relationship typically has occurred either in the latter part of recessions, or else early in recoveries just after the end of recessions. That’s because recessions kill demand, and since producer prices are more volatile than consumer prices, producer prices go down faster. Which lays the groundwork for the next expansion, as producers can produce goods more cheaply, enabling consumers to get a good deal - thus stimulating demand again.

But the relationship also has happened repeatedly in the middle of expansions in the past 40 years. Not always, but some of the time that has been not because of a decrease in demand, but rather an increase in the supply of commodities, chiefly but not necessarily limited to gas and oil. In those cases, consumers have just motored right through what otherwise would have looked like recessions.

Now cast your eyes to the far right. In the past year, commodity prices have declined almost 10% - one of the steepest declines ever. And that has *not* been because of a massive killing of demand, but rather because supply chain bottlenecks created by the pandemic have unspooled dramatically. 

At present the YoY% change in PPI prices are running -12.6% below that for the CPI, the highest in the entire 75 year period except for the very bottom of the Great Recession:

I am increasingly of the opinion that this amounts to a hurricane force tailwind behind the economy.

So tomorrow and Friday I will be looking to see if this trend continues, or if there are signs of a reversal. Tomorrow that may be evident in CPI ex-fictitious shelter, and on Friday we may see the first increase in PPI for raw commodities since January and only the second in the past year. If the downward trend continues, the tailwind is continuing. If the downward spiral breaks, then as the tailwind abates the lagged effects of Fed rate hikes will likely come to the fore.

Tuesday, August 8, 2023

Coronavirus special update: the annual summer wave has arrived


 - by New Deal democrat

As I wrote at the beginning of this year, I would only post Coronavirus updates if there appeared to be something significant happening. And there is.

There is a completely new alphabet soup of XBB subvariants that are competing with one another, and one of them, EG.5.1, has been surging in a number of countries worldwide and is now the fastest growing subvariant in the US as well:

Since the CDC and most States have stopped reporting, our only reasonably reliable metric for infections is Biobot’s waste surveillance, which shows that for the fourth summer in a row, from an all-time low in late June, particles in wastewater have more than doubled, to levels last seen back in April:

The increase is occurring across all four US Census regions:

Hospitalizations started increasing during the week of July 15, and are now about 50% higher than their recent nadir, although they are still lower than 10,000, which was their previous low in summer 2021 and spring 2022:

Deaths probably started rising from their all-time weekly low under 500 during the same week, although reporting is not final yet:

It’s too soon to tell how high the peak of this summer save will be, or when it will take place. But it is clear now that we are having yet another summer wave, aided no doubt not just be summer get-togethers, but also be an increase in indoor activities and the absence of any mitigation measures whatsoever. And also the facts that resistance due to prior infections and/or vaccinations are likely waning, and the next booster won’t be available until (apparently) sometime this autumn.

I have begun to temporarily revert to my prior precautions, mainly masking in any indoor public venues.

Monday, August 7, 2023

Scenes from the July employment report


 - by New Deal democrat

On Friday I noted that the July employment report was a perfectly good, solid one in absolute terms, but that almost all the leading components were soft and weakening, as I would expect to see near the final stages of an expansion.

Let’s take a look with some graphs today.

First, the good news.

The employment population ratio for the prime age working group, ages 25-54, at 80.9%, is the highest it has ever been except for the tech boom of the late 1990’s:

And the unemployment rate, at 3.5%, is only 0.1% higher than its lowest level during this expansion, and is tied with the lowest levels of 2019, which are the lowest in over 50 years:

Wages for non-managerial workers rose 0.5% for the month, and at an annual rate of 4.8%, which is 1.7% higher YoY than the last monthly read on inflation:

Wages rising at 1.7% over inflation is better than all but about 7 the last 60 years:

Finally, except for the pandemic it has *always* been the case that real, inflation-adjusted payrolls for workers have peaked a number of months before a recession. Unsurprisingly, this typically causes consumers in the aggregate to cut back spending, an immediate precursor to recessions:

In July in nominal terms aggregate payrolls rose 0.6%, or 6.4% YoY, a full 3.3% higher than inflation as last measured, to another all-time high.

In short, just about everybody who wants a job can find one, and the economy is functioning as close to completely full employment as it has been in over half a century, and those workers are earning wages at a level over inflation better than at almost 90% of all times in the past 60 years.

That is pretty darn good.

Now for the storm clouds out on the horizon.

Before industrial producers cut jobs, they cut back hours. And weekly hours for nonsupervisory workers in manufacturing have been cut back by almost 1 full hour, a decline typically seen shortly in advance of most past recessions:

In general manufacturing, residential construction, and temporary help jobs are among the first to turn down before a recession, as shown below for the past 50 years, or as long as records have been kept respectively (note 2 series are shown on right scale for easier comparison):

Now here is a close-up of the past year:

Temporary help jobs are down sharply, residential construction jobs down significantly, and manufacturing jobs are flat. The broader measure of goods-production jobs generally has increased only 0.4% since February, a declining rate typically seen late in expansions:

With the exception of factory hours and temporary help, none of these numbers are what I would expect right before a downturn starts. But definitely later in an expansion, on the order of 12-18 months before a recession.