Saturday, September 2, 2023

Weekly Indicators for August 28 - September 1 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The long leading indicators continue to forecast that a hard landing is out there, while the short leading indicators - aided by a sharp increase in consumer spending in the past few weeks - say it isn’t close to being here, at least not yet,

As usual, clicking over and reading will bring you up to the virtual moment as to the condition of the economy, and also bring me a little lunch money.

Friday, September 1, 2023

August jobs report: deceleration shows up in spades


 - by New Deal democrat

My focus remains on whether jobs growth continues to decelerate, particularly manufacturing and residential construction jobs, but also total construction and goods production jobs as a whole; as well as watching for the increase in jobless claims to translate into a higher unemployment rate (a leading relationship that it has had for over 50 years).

And, with help from some significant downward revisions, further deceleration did indeed turn up in spades during August.

Here’s my in depth synopsis.

  • 187,000 jobs added. This would be the lowest since January 2021, except for revisions to the prior two months, making June the lowest at 105,000 followed by July at 157,000.
  • Private sector jobs increased 179,000. Government jobs increased by 8,000
  • June was revised lower by -80,000 and July by -30,000, for a total of -110,000. The three month moving average decreased to 175,000, the lowest since the pandemic lockdowns except for January 2021.
  • The alternate, and more volatile measure in the household report rose by 222,000 jobs. The YoY% gain in this report is +1.8%.
  • The U3 unemployment rate rose -0.3% to 3.8%, the highest since February 2022 . The civilian labor force, the denominator in the figure, rose sharply (by 736,000), and the numerator, the number of unemployed, also rose sharply (by -514,000).
  • U6 underemployment rate rose 0.4% back to 7.1%, the highest since May 2022. 
  • Further out on the spectrum, those who are not in the labor force but want a job now rose 133,000 to 5.370 million, vs. its post-pandemic low of 4.925 million set this past March.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn.  These were mixed:
  • the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was unchanged at 40.1, equal to its lows earlier this year and down -0.6 hours from its February 2022 peak of 40.7 hours.
  • Manufacturing jobs rose by 16,000.
  • Within that sector, motor vehicle manufacturing jobs declined -100. 
  • Construction jobs increased by 22,000.
  • Residential construction jobs, which are even more leading, rose by 2,400. It nevertheless continues to appear likely that January was the peak for this sector.
  • Goods jobs as a whole rose 36,000. These should decline before any recession occurs. They remain up 1.6% YoY, which remains a very good pace compared with most of the last 40 years.
  • Temporary jobs, which have generally been declining late last year, declined further, by -19,000, and are down 242,000 since their peak in March 2022.
  • the number of people unemployed for 5 weeks or less rose 217,000 to 2,221,000.

Wages of non-managerial workers
  • Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.06, or +0.2%, to $29.00, a YoY gain of +4.5%, and the lowest since June 2021.

Aggregate hours and wages: 
  • the index of aggregate hours worked for non-managerial workers increased 0.3%, and is up 1.2% YoY, a slight uptick from last month’s 1.1%, which was the lowest since March 2021.
  •  the index of aggregate payrolls for non-managerial workers rose 0.6%, and increased 5.8% YoY, 0.2% slightly lower than last month, and the lowest since March 2021. Nevertheless this is significantly above the inflation rate, meaning average working class families have more buying power.

Other significant data:
  • Leisure and hospitality jobs, which were the most hard-hit during the pandemic, rose 40,000, -290,000, or -1.7% below their pre-pandemic peak.
  • Within the leisure and hospitality sector, food and drink establishments rose 14,900, but remain -32,400, or -0.3% below their pre-pandemic peak.
  • Professional and business employment rose 19,000. These tend to be well-paying jobs, But this series has been decelerating, and is currently up 1.4% YoY, its lowest YoY gain since March 2021.
  • The employment population ratio was unchanged at 60.4%, vs. 61.1% in February 2020.
  • The Labor Force Participation Rate rose 0.2% to 62.8%, vs. 63.4% in February 2020.


This was a weak report on both is Establshment and Household sections. I should emphasize that revisions to prior data significantly affected some of the numbers, but detailed discussion of those is a topic for another day.

Perhaps most significantly, the weakness that has been forecast for the last 5 months in the initial jobless claims data finally showed up in the unemployment and underemployment rates, both at their highest levels since the early part of last year. I should add that the level is *not* recessionary, as to fulfill the Sahm Rule it would have to be at least 4.0% for several months. 

But the headline jobs number as well as the revisions were weak and weaker - although I hasten to add that a three month average gain of 175,000 jobs is perfectly decent on an absolute scale. 

On the other hand, there were some definite bright spots, including the continued solid gains in aggregate pay for nonsupervisory workers even after inflation is taken into account, as well as gains in manufacturing and construction jobs. Last month I wrote that it looked like it would take about 9 months at the current pace of deceleration before goods producing jobs rolled over. This month there were outsized gains, but that estimate still looks good. This is significant because employment broadly in goods production typically turns down before a recession begins.

So, in sum: significant further weakness, but not at all recessionary, and on an absolute scale quite decent.

Thursday, August 31, 2023

Real personal spending (driven by vehicles?) spikes, income stalls, saving tanks, and inflation edges back up


 - by New Deal democrat

As I have repeated for the past several months, in the current economy the personal spending and income report is just as important as the jobs report. That’s because, despite the downturn in manufacturing production and many parts of the housing market, consumer spending especially on services has continued to power the economy forward.

Today’s report contained more good news on spending, but not such good news on income, saving, sales, or inflation.

Nominally personal income rose 0.2%, and personal spending rose a strong 0.8% (that was already telegraphed by the strong July retail sales report). But since the deflator increased 0.2% as well, real income was flat, while real spending rose 0.6%. This is shown In the below graph in which both real personal income (red) and spending (blue) are normed to 100 as of the onset of the pandemic:

Real income is up 3.8% since just before the pandemic, while real spending has zoomed 9.3%.

One of the 4 important coincident measures for the NBER, real personal income less government transfer receipts, also rose 0.2% to another new high:

Although I won’t bother with a graph, this is a 1.4% increase YoY.

On the spending side, here’s how goods vs. services spending compare. I show this because real spending on goods has in the past declined months in advance of recessions, while real spending on services has frequently powered right through:

Real spending on goods rose 0.9% for the month, while real spending on services rose 0.4%. The former is up a whopping 18.3% compared with just before the pandemic, while service spending is up 5.3% since then. On a YoY basis, real spending on goods has been rising and is now up 3.3% while real spending on services is up 2.9%:

Although I won’t show the long term graph, a 2.8% YoY increase in real spending on services remains historically very strong. 

Real spending on goods can be decomposed further into durable (blue) vs. non-durable (red) goods, showing that the bigger increase continues to be in durable goods:

My suspicion has been that the loosening of supply chain disruptions in motor vehicle production, and increased sales in the same, is what has been reflected in the big increase in durable goods consumer spending; and that suspicion once again seems vindicated.

With no increase in real income, but a big increase in real spending, the personal saving rate - income that isn’t spent - declined a very sharp -0.8% for the month to 3.5%, although it is still higher than its 2.7% level at its low water mark last June. The below graph subtracts 3.5% for a long term comparison:

With the exception of several months last year, and the 2005-07 lows, the personal saving rate is at its lowest level ever. This is leaving consumers quite vulnerable.

That’s important because consumers tend to get cautious and save more in the advance of a recession. That occurred in the last year, but it has completely reversed in the past two months. I am doubtful this will be sustained, but we’ll see.

Additionally, the personal consumption deflator gets used in the calculation of real manufacturing and trade sales, which is another important coincident indicator monitored by the NBER. These were unchanged in June, and are still -0.7% below their recent January 2023 peak, as well as their higher January 2022 peak:

Finally, the deceleration in the personal consumption deflator, which started with the peak in gas and commodity prices generally in June 2022, may have ended. YoY this deflator increased to 3.3% in July from 3.0% in June. The “core” deflator also increased from 4.1% to 4.2%:

Last month I summed up by writing that “If that tailwind [of YoY decelerating prices] is ending - and I suspect it is - what happens next?” This month provided more confirmation of that suspicion. I suspect the Fed will not be happy with these increases. If they respond by further raising rates, then without the tailwind of declining commodity prices the “soft landing” could come to a rather abrupt end, depending on how quickly the clogged housing and vehicle markets roll over.

YoY initial claims restart the yellow caution flag, suggest unemployment will rise towards 4.0%


 - by New Deal democrat

I’ll post on personal income and spending a little later.

But first, initial jobless claims declined -4,000 to 228,000 last week. The more important 4 week average increased 250 to 237,500. With a one week delay, continuing claims increased 28,000 to 1.725 million:

For forecasting purposes, the YoY% change is more important. There, initial claims are up 10.6%, while the 4 week average is up 13.0%. Continuing claims are up 28.4% YoY:

Note that YoY comparisons in the coming couple of months will be very challenging, as they will be against the lowest of all the post-pandemic numbers.

Finally, here is the monthly average of claims (blue, left scale) which is up 13.0% YoY, vs. the YoY change in the unemployment rate (red, right scale). Remember that the former has a long history of leading the latter with a lag of a few months:

In summer and autumn of last year the unemployment rate averaged 3.6%. Initial claims suggest that unemployment will rise towards 4.0% in the coming months. This is not quite enough to trigger the Sahm Rule, which requires an average YoY increase of 0.5%, but on the other hand that initial claims are up more than 12.5% YoY crosses the threshold restarting the yellow caution flag. A full two months of such numbers are required for a recession warning.

Wednesday, August 30, 2023

July JOLTS report: is the game of reverse musical chairs in employment ending?


 - by New Deal democrat

For the past 18 months, I’ve likened the job market to a game of reverse musical chairs, where there are more chairs put out by potential employers than there are job applicants willing to fill them. Also for many months, I have noted the gradual deceleration in that game. July’s JOLTS report not only continued that trend we’ve seen for the past 15 months of a jobs market slowly returning towards a convergence of the number of players and chairs, but in terms of actual hires and quits, the convergence has happened.

Below are job openings (blue), hires (red), and quits (gold), all normed to 1 as of the average of their last 3 months before the pandemic hit:

In July actual hires were -3.4% below that average. Quits were only 0.6% above that average. In other words, in terms of hires and quits, the number of each in July was almost identical to the number in the period of December 2019 through February 2020.

Only job openings remained significantly higher, to wit, 26.8% higher than their 3 month average just before the pandemic hit. But since their post pandemic high in 2021 was 72.7% higher, almost 2/3rd’s of the surge in openings has abated. And since I have always been a little skeptical of the veracity of the official openings numbers (e.g., how many are permanent, or simply fishing for applicants) the situation may have attenuated more than that.

The number of layoffs and discharges (blue below) also remains significantly tighter than before the pandemic, at -18.2% below their level for the 3 month pre-pandemic average (vs. -30.2% lower at their post-pandemic trough in June 2021). Since there is a tendency for the trend in layoffs and discharges to slightly lead new unemployment claims (red, right scale), those are shown relative to their pre-pandemic 3 month average as well:

Finally, I came across a blurb on Seeking Alpha that stated that the quits rate (blue in the graph below) was a good leading indicator for the pace of wage gains (red, right scale). I checked it out, and it did check out:

This makes sense, since I’ve described the YoY% change in wages as a long-lagging indicator, that only bottoms after the unemployment rate turns down after recessions, and indeed only when the U-6 underemployment rate declines to the 8%-9% area. And indeed it is suggesting that nonsupervisory wage gains will decelerate to about 3.8%-4% in the coming six months.

 one of these statistics move in a straight line, so it would be a mistake to project this report’s relatively big moves forward. But the trend clearly remains in place. While the same is true for the unemployment rate and number of jobs gained each month in that report, I expect this same continued deceleration trend to continue in the August report this Friday. 

Tuesday, August 29, 2023

Frozen homeowners mean record low inventory, meaning existing home prices have stopped declining


 - by New Deal democrat

Before discussing this morning’s reports on existing home prices, let’s start with a look at new listings and total active listings of housing inventory, which are very instructive:

This information is not seasonally adjusted, and obviously follows a seasonal pattern. The important thing to notice is that since late last year, new listings have collapsed to levels even lower than conquerable months just before and during the onset of the pandemic. Basically, mortgage rate increases have frozen existing homeowners in place.

And with the extreme shortage of inventory, prices have not corrected (vs. new house prices, which have declined over 15% from their peak).

In June, the FHFA (red) reported that existing house prices increased 0.3%, the 10th seasonally adjusted increase in a row:

YoY prices are 3.1% higher as measured by that index. The Case Shiller index (blue) is not seasonally adjusted, but YoY prices are down less than -0.1%:

As I have frequently pointed out, house prices typically have led Owners’ Equivalent Rent in the CPI (black above) by 12 or more months. Here is the close-up of the last 4 years:

As I forecast many months ago, OER was going to start decelerating, perhaps sharply, on a YoY basis, following house prices. It took OER somewhat longer (about 24 months vs. 18 months for house prices) to go from pandemic trough to post-pandemic peak, so now the question is, will there be a similar delay? If so, then OER is not going to decline below 3% until about autumn of next year. Keeping in mind that inflation ex-shelter is only about 1% YoY even now, will the Fed insist that OER do so before lowering interest rates?

Monday, August 28, 2023

Fed rate hikes in the face of declining commodity prices: an analysis of 4 precedents


 - by New Deal democrat

We live in interest-ing commodity times. Over the weekend, my latest piece at Seeking Alpha highlighted the strong contrary pulls of higher interest rates and lower commodity prices. While not unique, as we’ll see below, the disconnect is the most severe in 100 years.

So let’s start with a comparison of the YoY change in interest rates (blue) vs. the YoY% change in commodity prices (red) for the past 65 years:

Typically interest rates and commodity prices move more or less in tandem, as the Fed chases increased inflation with higher rates on the way up, and lowers rates as demand destruction causes commodity prices to decline. But in addition to the present, there have been several exceptions, where the Fed increased interest rates even as commodity prices declined: 1959, 1981, 2006, and to some extent 2015. Probably unsurprisingly, the first three instances were just before recessions, two of them among the most severe during that period. In 2015, the Fed did not raise rates, but was unable to lower them due to already being at the zero lower bound; and also, no recession occurred.

Let’s now look at some real world correlates during those 4 instances.

Below are two sets of graphs for each period. The first compares YoY real retail sales (blue), YoY real personal spending on goods (light blue green), and YoY industrial production. The second breaks out YoY real personal spending on services (black).

Here is the period including 1960 through 1982:

Aside from the usual note that real retail sales leads industrial production, all three series decline sharply to and ultimately below “0” YoY as or shortly after the 1960 and 1982 recessions began. Real spending on services, as is so often the case, never turned negative during the recessions, but did decelerate sharply just as they began.

Here is 2001-2019:

In 2006, only real retail sales turned negative YoY. Both industrial production and real spending on goods held up until several months into the Great Recession. By contrast, in 2015, only production declined. Consumer spending measured both ways continued to sail along. Spending on services, which had declined into 2014, actually *increased* sharply during 2015.

Now here is the post-pandemic situation:

Much like the 3 recessionary periods between 1960 and 2007, both measures of consumer spending on goods have declined, although after a decline last year, this year consumer spending on goods measured both ways has been improving. Meanwhile, real spending on services has held steady at roughly +2.5% YoY, which if you compare with the previous graph, is still stronger than at almost any time between 2000 and 2020.

It is the large YoY% gain in spending on services which is most reminiscent of 2015’s “no recession” vs. the three prior periods of increased interest rates in the face of declining commodity prices. As in those three periods, it was when real spending on services sharply decelerated that the recessions actually began.

 Finally, below I show the YoY change in the interest rates charged for auto loans (dotted lines) vs. mortgage rates (gold) since 1985:

As you can see, these are the sharpest increases in nearly 40 years. Despite the fact that multi-family housing construction and vehicle sales currently seem to be levitating, I have to think these increased rates will soon enough have a big effect. The question then becomes whether consumers simply continue to spend on services, or whether those too are ultimately affected. We’ll get an update on that for July on Thursday.