Saturday, December 16, 2023

Weekly Indicators for December 11 - 15 at Seeking Alpha


 - by New Deal democrat

My “Weekly Indicators” post is up at Seeking Alpha.

The big decline in long term interest rates this week in the wake of the Fed’s announced “pivot” towards lowering rates created one of the biggest changes in the long leading indicators for several years. Meanwhile most of the coincident indicators continue to speak of a strong economy.

The intersection that is going to tell the tale going forward in the next 6 months or so is with the short leading indicators, including manufacturing, construction, and commodity prices.

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

Friday, December 15, 2023

Industrial production remains below late 2022 peak even after end of UAW strike


 - by New Deal democrat

Industrial production historically has been the King of Coincident Indicators, turning up and down at the onset and end of recessions in the past. But as I wrote last month there are signs that has changed in the past 20+ years since China was admitted to normal trade relationships with the US. Because manufacturing is a much smaller share of domestic economic activity, and employment, downturns which before 2000 would always have meant recession probably do not do so now.

More specifically to the past several months, we had a very effective UAW strike in the motor vehicle industry which distorted both of the last two months. To wit, after revisions motor vehicle production in October declined -9.9%, and this morning’s report indicates a rebound in November of 7.1% which obviously is not complete.

More broadly, industrial production as a whole rebounded 0.2% in November. Manufacturing production increased 0.3%. But there were negative revisions of -0.3% to total production, and -0.2% to manufacturing, meaning that after rounding on net total production was unchanged, and manufacturing only improved 0.2%. The below graph show their levels compared with their post-pandemic peaks in September 2022:

Total production remains down -0.8% since then, and manufacturing down -1.4%.

On a YoY basis, total production is down -0.4%, and manufacturing production is down -0.8%. Going back over 100 years before 2016, there have only been 6 occasions when negative readings did not coincide with a recession within the next 6 months, and on only 2 of those occasions did the negative readings last more than one month:

But that changed in 2016, when production was down YoY for over a year, and yet no recession happened:

In other words, while industrial production remains recessionary, it has not been enough to produce a recession in the entire economy without the participation of other sectors, most notably construction.

Thursday, December 14, 2023

Real retail sales mildly positive, but still suggest further deceleration in job gains


 - by New Deal democrat

Before proceeding further, I should mention - and should have mentioned as to jobless claims - that we are in that part of the year where seasonality often wreaks havoc, so outsized gains or losses should be taken with a grain of salt.

This is particularly true as to YoY comparisons of retail claims, because last year November and December stunk, and then there was a huge rebound in January. And this morning’s numbers, as well as the next two reports, will be compared YoY with a pretty big whipsaw.

With that out of the way, nominal retail sales increased 0.3% in November. After adjusting for inflation, they increased 0.2%. Meanwhile October was revised down by -0.1%, so the net real gain was only +0.1%. On an absolute scale, real retail sales are still slightly more than -2% below their April 2022 peak, although they have been improving pretty consistently if slowly all this year:

The relative improvement is best shown in the YoY comparisons. The first graph below shows the past 30 years of real retail sales YoY (dark blue), and also real personal consumption expenditures for goods (light blue), which tend to follow a similar trend. Additionally, the YoY gains are /2 for purposes of comparing with employment grains (red):

As I have pointed out many times, real retail sales /2, while noisy, is a very good short leading indicator for the trend in employment. Put another way, consumption leads employment.

Here is the post-pandemic record of the same:

One year ago was one of the very few times that a YoY negative number for real retail sales did not accurately forecast a recession (gas prices going from $5 to $3/gallon, and a general post-pandemic decline in supplier prices can work wonders for the economy!). 

Nevertheless real retail sales continue to forecast some further deceleration in jobs gains in the coming months.

Jobless claims: good news all around


 - by New Deal democrat

This was one of the best weeks as to jobless claims all year. Initial claims declined -17,000 to 202,000, a tie for the 2nd lowest number in 10 months. The four week average declined -7,750 to 213,250. With the usual one week delay, continuing claims rose 20,000 to 1.876 million:

Even more importantly for forecasting purposes, the YoY% changes both for the weekly number and the four week average were negative, i.e., lower than one year ago, at -1.9% and -0.1% respectively. Meanwhile continuing claims, while elevated at +17.2%, are nonetheless lower on a YoY basis than at any point in the past 8 months:

This makes initial claims an outright positive for the economy in the near future. And it cuts against the idea that continuing claims were forecasting a recession.

Since initial claims lead the unemployment rate, this also adds a level of comfort to the forecast that the elevated comparisons earlier this year will not trigger the “Sahm rule” as to the YoY change in the unemployment rate:

To reiterate, simply: good news all around.

Wednesday, December 13, 2023

Producer prices, “sticky” consumer prices - basically, everything except shelter show nearly complete abatement of inflation


 - by New Deal democrat

The producer price index released this morning for November is yet further confirmation that inflation ex-shelter is simply not in the pipeline. Both total and core PPI were unchanged for the month. Both commodities (blue) and finished goods (red) declined by another -0.5%, as shown in the below graph normed to 100 just before the pandemic, and including headline CPI as well (gray):

On a YoY basis, commodities are down -3.6%, and finished goods inputs down-0.9%, compared with the 3.1% rise in consumer prices:

Some of this difference probably remains producers refusing to pass on price decreases to consumers, and since consumers still have more income and savings in real terms than they had before the pandemic, consumers are able to pay those increased costs. 

And of course, a big part of the difference is shelter. The idea that the official measure of shelter lags reality seems to have gained increased currency. Steve Liesman of CNBC made a point of it this morning, saying it lagged by 3 Quarters. Meanwhile Scott Grannis (a/k/a Calafia Beach Pundit) put up the below graph with an 18 month lag:

After the official CPI came out yesterday, the Cleveland Fed posted its “sticky price” CPI, which also showed that, absent shelter, even sticky prices are up only 3.1%, vs. both total and core sticky price inflation including shelter, both up 4.7%:

One important question going forward is whether the supply chain has been fully “de-kinked.” The Goldman Sachs Supply Chain Index suggests that it has. Before the pandemic, the average typically varied between 0 and -1 on the index. After the huge pandemic-related increase, it went below -1 earlier this year. In November, for the first time since summer 2022, it went above 0 again:

The Bloomberg Industrial Metals Index, which I use because it does not include gas and oil, also peaked in early 2022, and has settled into a flat to slightly declining trend for the last 6 months:

In summary, pressures on producer prices have completely abated. The un-kinking of the pandemic related supply chain seems to have been completed. Consumer price increases ex-shelter also continue to be within a short distance to the Fed’s 2% target. What’s left is shelter, and ironically by constricting the supply of existing houses on the market, the Fed’s increases in that regard have become counterproductive.

Fortunately, as I pointed out yesterday, average and aggregate earnings have exceeded inflation for the past year. I do continue to be concerned that a substantial downturn in actual residential construction is going to materialize in the next few months, with all that it implies as a leading indicator.

Tuesday, December 12, 2023

Real aggregate payrolls rise to new high as CPI ex-shelter continues somnolent


 - by New Deal democrat

With few exceptions, the November CPI report once again demonstrated how important fictitious shelter is to its calculation, as well as how important the inflection point of $5 gas in June 2022 has been.

Headline inflation rose only 0.1% in November, and is up 3.1% YoY. Core inflation less food and energy increased 0.3%, and is up 4.0% YoY.

Shelter, which is 1/3rd of the headline index, and 40% of core, increased 0.4% for the month and was up 6.5% YoY. Perhaps more importantly, CPI ex-shelter was *down* -0.1% for the month, and up only 1.5% YoY.

Per the above, below I show headline (blue), core (red), and CPI less shelter (gold) all normed to 100 as of June 2022:

Ex-shelter, in the past 16 months prices have risen only 1.7%, while headline inflation has risen 4.5%, and core inflation has risen 6.5%.

In other words, take out shelter and inflation is a non-issue.

The former problem areas of new and used vehicles continue to cool, with new car prices declining -0.1% in November, while used car prices increased 1.0%. YoY new car prices are up only 1.3%, while used car prices are up 3.8%.:

But for several reasons, including that people are holding on to their older vehicles longer, which means they need more repairs, as well as the fact that insurance has had to keep pace with both the prices of new cars as well as the increased costs of repairs, the “transportation services” subset of CPI increased another 1.1% for the month, and is up 10.1% YoY:

The other current problem children are food away from home (restaurants), up 0.4% m/m and 5.5% YoY, and medical care commodities, up 0.5% m/m and 5.0% YoY. But these make up relatively small weights in the index, and are not nearly the problem that shelter continues to be.

As to shelter, here’s the update of Owners’ Equivalent Rent YoY compared with the Case Shiller index (recall that the former has a history of lagging the latter by 12 or more months):

As has been the ongoing case, YoY shelter rose more gradually than house prices, and is falling more gradually, but it is continuing to fall. At its current pace of decline, it will take another 12 months or more to be back into the Fed’s comfort zone.

Finally, we can also update real aggregate payrolls. These rose nominally by 0.9% in November, so after inflation they rose 0.8% to a new all-time high:

This means that in the aggregate average working and middle class Americans have more buying power now than ever before, and is a very potent positive for the economy over the next few months.

Monday, December 11, 2023

Scenes from the leading sectors of the November jobs report: why I sounded a note of caution


 - by New Deal democrat

I seem to have been something of a negative outlier with respect to last Friday’s jobs report. Not because I was downbeat - although I said there were “warning signs of weakness,” but almost all the other commentary I have seen was upbeat.

So today let’s take a look at the leading sectors in the jobs report, to show why I sounded a note of caution.

Let’s start with the manufacturing workweek, which is one of the 10 official components of the Index of Leading Indicators. It typically has turned down in the past even before manufacturing employment itself does. Here’s its record from the end of WW2 almost 80 years ago:

Almost always (exceptions 1966, 1985, and 1995) when manufacturing hours and overtime have declined more than by -.05 hours, a recession has followed. In the past 18 months, hours have declined by -0.9 hours, and overtime has declined by -1.1 hours.

Next, here is the long term look at manufacturing employment up until the “China shock” began in 2000:

With rare exception (twice in the 1950s plus 1981), manufacturing employment turned down before a recession began.

Here’s the recent record, also splitting out motor vehicle manufacturing, which has benefited from the unlinking of the supply chain:

In total, manufacturing employment has been close to unchanged for a year. Excluding motor vehicle employment, it has declined slightly.

But as I’ve written recently, manufacturing plays less of a role in the US economic cycle than it used to. So let’s look at other sectors as well.

Another jobs sector that has always turned at least flat in advance of a recessions is construction, and residential building construction has always declined:

Residential building construction employment has been flat for almost a year, while general construction employment (aided by the restoring of manufacturing capacity) has continued to increase:

Typically residential construction employment has coincided with the number of residential units under construction, and it has done so this year as well:

Another leading sector of employment has been truck transportation, which with the exception of 2000 has also turned down in advance of recessions:

It has turned down as well in the past half year:

All of the above are generally in the “goods” rather than “services” employment sector. Goods employment has generally flattened, and occasionally declined in advance of recessions:

It is still increasing, although at a more subdued rate this year:

Last week I discussed the importance of real spending on goods, noting that it led employment. On a YoY basis, real goods spending is up 2.1%, while goods employment is up 1.1%. The below graph norms both values to zero, to show how they compare historically:

Both real spending on goods and goods employment are actually weak on a historical basis, but both are consistent with a number of slowdowns that did not turn into recessions in the past. 

There is also at least one services segment which has also historically been leading: temporary help services:

These have declined sharply in the past year:

Finally, although they are not a leading sector, I noted in my report Friday that professional and business employment is down, and is virtually unchanged YoY. These are well paying jobs that are the backbone of the affluent portion of th middle class. They have never been at this level YoY without a recession occurring:

In summary, we have several sectors - the manufacturing work week, temporary help, professional and business jobs, and truck transportation - that are consistent with an oncoming recession right now. There are several others - manufacturing and residential construction - which are flat, but have not turned down as they frequently have in advance of recessions. And finally, there are several sectors - overall construction and goods production - which are in expansion mode.

As I wrote in the context of the personal income and spending report last week, with interest rates still elevated, I am paying particular attention to real spending on goods, as a short leading harbinger for whether weakness will spread further into the economy.