Saturday, October 14, 2023

Weekly Indicators for October 9 - 13 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The recent improvement in the short leading indicators has made its way through to the coincident indicators. But, given the importance of gas prices, whether the turmoil in the Middle East spreads out to affect oil producing countries is a major issue.

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

Friday, October 13, 2023

Real average wages and decline, while real aggregate payroll gains remain below peak


 - by New Deal democrat

With the report on September inflation yesterday, we can update two measures of how well average American workers are doing: real average wages and real aggregate payrolls.

Nominally wages increased 0.2% for the month. With consumer prices up 0.4%, real wages declined -0.2%:

Real wages had been in an increasing trend since gas prices peaked in June 2022. Now that the decelerating trend in headline inflation has ended, that trend has ended as well. The initial peak right after the pandemic is somewhat illusory. It is a side-effect of the fact that during the pandemic lockdowns many more low wage workers (like in restaurants and bars) lost their jobs than white collar office workers. The September 2021 peak is more realistic. Real wages are down -1.5% since then.

Real aggregate payrolls for nonsupervisory workers tell us how much purchasing power the working and middle classes have as a whole. When it falls below inflation on a YoY% basis, it has been an excellent coincident marker for the onset of a recession going back 60 years:

There have been no false positives, and no false negatives.

As you can see, last year the lines got very close (about 1.5% apart) before inflation decelerated faster. Now that the deceleration in headline inflation has ended, even as the deceleration in wage gains has cointinued, the lines have gotten a little closer again, with YoY growth in nominal payrolls just over 2.0% better than inflation.

Of course, before YoY real aggregate payrolls turn negative (i.e., lower than inflation) real aggregate payrolls must necessarily peak. Here’s the historical 60 year graph of that:

Again, there is a perfect record, with peaks on average about 6 months before the onset of a recession. But not *every* peak, no matter how minute, leads to recession, which is why the YoY comparison is more meaningful.

Nevertheless, with the deceleration in payroll gains vs. inflation, real aggregate payrolls are down -0.4% from their July peak for the 2nd month in a row:

The longer we go without a new high in real aggregate payrolls, the closer the metric will come to its crossover point.

Thursday, October 12, 2023

Except for fictitious shelter and vehicle repairs, September inflation was moderate


 - by New Deal democrat

With the main exception of fictitious shelter, consumer inflation in September remained relatively subdued, but as anticipated has stopped decelerating. First I’ll look at the headlines, then the problem children.

Total inflation (blue in the graph below) rose 0.4% for the month, but only 0.3% less food and energy (red). Less shelter (gold) it rose only 0.1%:

On a YoY basis, total inflation was up 3.7%, core inflation up 4.1%, and ex-shelter up 2.0%:

In other words, as I have been saying all this year, since shelter makes up 1/3rd of the total index, and 40% of core, almost all of the elevated core and total readings can be attributed to fictitious shelter. 

Shelter itself rose 0.6% in September, “hot” compared with the last few months, although below its monthly readings one year ago:

More importantly, here’s my update of shelter (blue) and OER (light blue) YoY vs. the Case Shiller (red) and FHFA (gold) house price indexes:

OER and shelter generally took longer than house prices to rise to peak, and appear to be taking a similarly leisurely trip back down - but back down they will continue to go for roughly the next 12 months.

As an aside, here is the latest national rent report from Apartment List, showing a YoY decline of -1.2%:

Aside from shelter, the *only* categories up 4.0% or higher YoY were food away from home (restaurants), up 6.0%, and transportation services (auto insurance and repairs), up 9.1%.

New vehicle prices rose 0.3% in September, and used vehicle prices continued their cliff-diving, down -3.0%. But transportation services rose 0.7%:

On a YoY basis, new vehicles are now only up 2.5%, and used vehicles are *down* -8.0%. But transportation services are up 9.1%:

The story here is that repair parts cost more than they did before vehicle prices shot up, so insurance prices have had to increase sharply as well. Meanwhile many millions of owners are compensating by holding on to their older vehicles longer. These older vehicles need more, and more costly, repairs, driving those prices higher as well.

Nonsupervisory wages have actually kept up with new car prices since the pandemic began, but used car prices are still about 16% higher in real terms:

Basically, since I sharply discount fictitious shelter, with the exception of new vehicles, insurance, and repairs, the inflation news in September was benign.

Consumers will probably nevertheless continue to decry inflation, because their mortgage and monthly car payments remain sky high compared with the last decade.

The good news continues on initial claims


 - by New Deal democrat

I’ll parse the CPI report later this morning, but first, let’s update initial jobless claims.

Initial claims were unchanged at 209,000 this week. The 4 week moving average fell -3,000 to 206,240. With a one week lag, continued claims rose 30,000 to 1.702 million:

As usual, the YoY% changes are more important for this metric. And here, the news was pretty good as well. Initial claims were only up 1.5%, the more important 4 week average up 6.2%, while continuing claims were up 28.5%:

With the exception of continuing claims, these are not pre-recessionary readings.

As you may recall, I suspect there is some unresolved post-pandemic seasonality in these numbers. Although I won’t post a graph, in September last year claims averaged 190,500. In October they rose to 201,400. In November they rose further to 212,500.

With just one week of October in, the number is 3.8% higher than last year’s monthly average. If we do indeed have unresolved seasonality, I would expect claims to rise to roughly 220,000 or higher this month. We’ll see.

Wednesday, October 11, 2023

September producer prices confirm economic tailwind has ended


 - by New Deal democrat

My strong suspicion has been that the tailwind of declining commodity prices, typified by the big decline in gas prices in late 2022 is what allowed the US economy to grow so well so far this year, blunting the effects of major Fed interest rate hikes. For the last several months, my focus has been whether that decline is over.

This morning’s producer price report added more evidence that indeed producer prices have bottomed.

Commodity prices increased 0.5% in September:

They are up 1.9% since June:

Final demand prices for goods (blue) increased 0.2%, and final demand services prices (gray) increased 0.3% for the month:

Final demand goods prices are up 2.1% since June. Final demand prices for services are up 1.4%:

This returns to the more normal situation with producer and commodity prices. Historically, as seen in this 100 year graph of commodity prices YoY, typically there are big declines during recessions. This reflects a decline in demand:

But if you focus on more recent declines since the 1980s, you can see a number of incidents - 1986, 1997-98, and 2014-15 - where the big declines in commodity prices were dominated by declining gas prices, which put more money in consumers’ pockets to spend on other things. In all of these cases, there was no recession.

The nearly 10% decline in commodity prices between June 2022 and June 2023 was the biggest 12 month decline yet driven by lower gas prices, as well as the un-kinking of pandemic-related supply chains. Except for the very unlikely scenario that current  geopolitical events drive a further decline in gas prices, that is almost certainly over.

This is probably going to be reflected in tomorrow’s report on consumer prices as well. Remember, if consumer inflation simply stops decelerating, it will lessen the gap between prices and aggregate consumer income, meaning slower economic growth at least.

Tuesday, October 10, 2023

A note on Middle Eastern turmoil and gas and oil prices


 - by New Deal democrat

While we wait for producer and consumer inflation data later this week, here’s a note about gas prices.

With the newest shock in the Middle East, conventional wisdom is that the price of oil and gas will spike. And maybe they will, but the truth is, because of the involvement of both market and geopolitical players, nobody really knows.

Remember that Russia’s invasion of Ukraine in February last year caused gas prices to rise from $3 to $5 a gallon by June. And then they went right back down to $3 by last December.

Here’s a graph of oil prices for the past year, with this morning’s current price as I write this called out at the far right:

Gas prices ended last Friday at roughly $82.82 a barrel, and have risen over $3 a barrel so far this morning. But a week before prices were over $90 a barrel. So we haven’t even challenged that level yet.

Maybe oil prices will go over $100 a barrel because of this latest turmoil, if the petrosheikhdoms of the Middle East decide they have to put pressure on the West to in turn put pressure on Israel. Or maybe they will sit on their hands, and maybe oil slides back towards $70 a barrel.

The point is, nobody really has a clue. And even if prices move sharply in one direction in the next month or two, they may move right back shortly thereafter.

Monday, October 9, 2023

Scenes from the September jobs report: a look at leading indicators


 - by New Deal democrat

Today is a holiday, so no new economic news. So let’s take a look at some of the leading indicators I was tracking last week for the employment report, and some leading indicators for the economy within that report itself.

In the JOLTS report for August last week, quits rose slightly from their 30 month low set in July, leaving the declining trend intact. Since the quits rate has historically led the YoY% change in wages, I anticipated a further deceleration in wage growth, and that did happen, as YoY wage growth declined from 4.5% to 4.3%:

Meanwhile, initial jobless claims for the month of September were higher by 10.4%, indicating that the YoY% change in the unemployment rate should tend towards 3.8% or 3.9%:

The unemployment rate did indeed “stick” at 3.8%, unchanged from August. Here’s what the absolute levels of claims and the unemployment rate look like:

I suspect that initial claims will rebound this month, but we’ll see. If they remain lower, that would bode well for the unemployment rate in coming months.

The one trend that did not continue in September was deceleration in job growth, particularly on a 3 month basis. Here’s what the YoY% change in growth looks like monthly (blue) vs. quarterly (red):

What is particularly impressive is that the leading jobs sectors of construction and goods-producing as a whole have continued to improve. Manufacturing jobs also increased in the past two months, and for the past year are about flat, but have not declined in any meaningful fashion:

Within construction, residential building jobs also rebounded in the past couple of months and are generally flat for the past year, while nonresidential construction jobs have continued to increase and civil engineering construction jobs have increased sharply:

The one leading jobs sector which has continued to decline is temporary help, but even there it is possible that the 2021-22 surge was the actual anomaly, as shown in the below graph showing the past 20 years:

Another leading indicator, indeed one of the 10 components of the “official” Leading Index is the manufacturing workweek. In the post-WW2 period through the 1970s, any significant decline generally meant a recession was near at hand. But since 1983, a ar age factory hours have usually been well above the “full” 40 hour work week. Only declines to below roughly 40.5 hours a week have been consistent more often that not with recessions. To show that, below are the YoY change in the average factory workweek (red) vs. the absolute level of average hours, minus 40.5 hours (blue):

There have been many YoY declines in the workweek, but most of those where the workweek remained above 40.5 hours did not result in actual recessions.

Finally, let’s take a look at the fundamentals-based comparison of aggregate nonsupervisory payrolls YoY vs. consumer inflation YoY. Remember that when the former is less than the latter, it is a nearly perfect coincident indicator of recession:

Real aggregate payrolls consistently increased in the first part of this year (i.e., the lines got further apart). Unsurprisingly, the economy improved. YoY nominal aggregate payrolls have continued to decelerate, and I expect that trend to continue. The important question is whether YoY CPI also continues to decelerate, or whether that trend has ended. I suspect the latter is true, but much will have to do with the immediate future course of energy prices.

The bottom line for now is, we simply haven’t seen a widespread downturn in the leading sectors within the jobs report., although there are signs that the decelerating trend is likely to continue, despite September’s strong showing.

Sunday, October 8, 2023

Weekly Indicators for October 2 - 6 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

While interest rates have continued to rise to multi-decade highs, shorter term indicators continue to chug right along, both on the producer and the consumer side.

As usual, clicking over and reading will bring you up to the virtual moment on the data, and reward me a little bit for my efforts at organizing it.