Saturday, January 27, 2024

Weekly Indicators for January 22 - 26 at Seeking Alpha


 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Every now and then the data has a particularly noisy week, and this past week seems to have been one, as a number of - especially coincident - indicators hit an air pocket.

Perhaps more concerning is that the 4 week total of tax withholding YoY has gone negative again. But consumer spending, in both nominal and real terms, remains very robust.

In any event, clicking over and reading will bring you up to the virtual moment as to the economy, and reward me a little bit for my efforts in organizing and digesting the data.

Friday, January 26, 2024

December 2023 personal income and spending: Goldilocks is in the house UPDATED


 - by New Deal democrat

[Note: The St. Louis FRED site is down for maintenance, which means unfortunately there are no graphs available to accompany this post at present. As soon as FRED is back up and adds the data, I will update with graphs. Additionally, one metric - real manufacturing and trade sales - also cannot be calculated until FRED updates.

UPDATED: The problem is now fixed.]

Personal income and spending has become one of the two most important monthly reports I follow, because it nets out the impacts of higher interest rates and abating inflation due to the unlinking of the supply chain.

Nominally income rose 0.3% in December. Nominal spending rose 0.7%. Prices as measured by the PCE deflator increased 0.2% for the month, meaning that in real terms income rose 0.1% and spending rose a strong 0.5%. Since just before the pandemic real incomes are up 6.3%, and spending is up 10.5% (NOTE: Data in all graphs below except for YoY comparisons is normed to 100 as of just before the pandemic):

On a YoY basis, the PCE price index is up 2.6% for the second month in a row, the lowest since February 2021, and almost back to the Fed’s target of 2.0%:

Perhaps most importantly, for the last 11 months this price index is only up 1.7% - under the Fed’s 2% target. Last January this index rose 1.0%. If in next month’s report it only rises 0.3% or less, the Fed’s target will have been fully met:

For the past 50+ years, real spending on services has generally increased even during recessions. It is real spending on goods which declines. Last month real services spending rose 0.3%, and real goods spending rose a strong 1.1%:

As per form, real services spending has risen consistently since the pandemic, while goods spending have been somewhat of a mirror image of gas prices, which peaked in June 2022.

Real durable goods spending tends to turn before non-durable goods spending. The former increased a very strong 1.5% for the month, while the latter increased 0.9%:

Durable goods spending had been very much affected over the past several years by the shortage of new vehicle inventory, which has largely abated as this year has progressed.

The one significant blemish on this report is that another important metric for the near future of the economy is the personal savings rate, which declined -0.4% to 3.7%:

As I’ve noted for the past few months, this remains among the lowest rates of savings ever. Only the record lows of 2005-07, and 2022 were lower in the entire history of the series.

On the positive side, this indicates a lot of consumer confidence. But it also indicates vulnerability to an adverse shock.

The NBER pays particular attention to several other aspects of this release. Real income excluding government transfers (like the 2020 and 2021 stimulus payments) continued to increase, up 0.1% for the month, to a new record high:

Once again, this has been something of a mirror image of gas prices, rising consistently since June 2022.

Finally, the deflator in this morning’s report is used to calculated real manufacturing and trade sales, another metric relied upon by the NBER. This increased a strong 0.9%,also to a new record high:

In summary, this month’s report continued to reflect a consumer economy that is doing very well. Inflation has returned to the Fed’s preferred baseline rate, and both incomes and spending are up substantially. You would be well within your rights to call this a “Goldilocks” economy.

Core capital goods orders, three month average of manufacturers’ new orders both make new all-time highs


 - by New Deal democrat

Before I update this morning’s personal income and spending data, I wanted to briefly note some significant news in yesterday’s report on manufacturers new orders. (I’ll discuss the important leading metrics from the GDP report next week.)

New orders are one of the long-time components of the index of leading indicators. Typically (but not always!) they peak 3 to 9 months before a recession:

Because they are noisy, I usually don’t pay a lot of attention.

But yesterday was significant, because the manufacturing sector of the economy has been flat to mildly recessionary for over a year. For example (not shown), industrial production has not made a new high in 16 months, and the ISM manufacturing index has shown contraction for over a year as well.

But yesterday core capital goods orders (red in the graph below) made a new all time high. Total new orders were flat for the month, but were one of the three highest readings ever, and the three month average (not shown) also made a new all time high:

One of the big issues for this year is whether, with the resolution of supply chain disruptions in the rear view mirror, the effects of higher interest rates for the past 2 years finally bite manufacturing, construction, and general goods consumption at the same time. Yesterday’s report on new orders suggests that the impact on manufacturing may be  abating. If so, this is very good news.

Thursday, January 25, 2024

New home sales: if you lower prices, they (buyers) will come


 - by New Deal democrat

New home sales are the most leading of all the housing metrics, but suffer from being heavily revised as well as extreme volatility. 

With that caveat out of the way, in December new single family home sales (blue in the graph below)rose 49,000 on an annualized basis to 664,000, just about in the middle of their last year’s range:

Because the much less volatile new single family home permits tend to follow the trend with a slight lag, I show them as well. Today’s report suggests permits will probably level off near current levels.

The median price for a new home, meanwhile, declined to $413,200, the lowest in two years (blue, right scale). Since this isn’t seasonally adjusted, the YoY metric (red, left scale) is more important, and that declined -13.8%, the second worst point in the past year:

and the 3rd worst comparison in over 50 years:

To give a more complete picture, since mortgage rates (gold, inverted in the graph below) lead sales (blue): which in turn lead prices (red), below I show all of them YoY:

The above graph shows not only the impact of increased mortgage rates, but how homebuilders’ strategy of coping by lowering prices by the biggest percent in 50 years, has affected the market. All thins being equal, continued higher mortgage rates should have led to continued negative YoY sales. But by lowering prices aggressively (as seen on the red line), as well as mortgage adjustment programs, homebuilders have managed to turn sales higher YoY.

Should the Fed start lowering interest rates, as widely expected, sales should continue higher YoY, while pricing discounts will start to vanish.

Initial claims suggest the unemployment rate will drift back close to 50 year lows


 - by New Deal democrat

Initial claims increased 25,000 last week from their near all-time lows to 214,000. The four week moving average declined 1,500 to 202,250, only about 12,000 above its 50 year low set in 2022. Finally, with the usual one week delay, continuing claims rose 27,000 to 1.833 million:

The relative upward stickiness of continuing claims appears to be a result of laid off Silicon Valley workers having difficulty finding suitable new employment.

On the more important YoY% basis for forecasting, claims we up 10.3%, but the more important four week average was only up 0.5%. The four week average has been running very close to unchanged YoY for 1.5 months.  Continuing claims were up 10.6%:

Since initial claims lead the unemployment rate, the 4 week average suggests no further weakening for the jobs market. Here’s a look at initial claims averaged monthly (blue) compared with the unemployment rate (red):

This suggests that we won’t see higher than 3.8% unemployment in the next few months, and are more likely to drift down towards 3.5%, close to its 50 year low of 3.4%

The jobs market remains positive.

Wednesday, January 24, 2024

Attacks on Red Sea shipping, and its tie to US energy consumption


 - by New Deal democrat

The drought in economic data continues today. So let me continue on the issue of energy, tying into yesterday’s note on hybrid and electric vehicles.

Here’s an eye-opening graph from JP Morgan via Carl Quintanilla’s social media feed, showing an 80% decline in shipping through the Suez Canal following Houthi attacks on commercial vessels at the entrance of the Red Sea:

That’s a much bigger decline than can be explained by the alleged limitation of Houthi attacks on shipping tied to Israel and the US.

There is some financial media speculation that this is leading to a big increase in shipping costs, which could create another inflationary push due to supply line constriction. Well, yes and no. Here are container ship rates from Harpex for the past year:

Shipping rates *declined* in the first two months after the Israeli-Hamas conflict started, and only rose in the past month. While that increase may appear sharp, had I taken the graph back two years instead of one, it would show the index at 4500! So a move from 800 to 950 is pretty tame.

On the other hand, the attacks on shipping in the Red Sea highlight for the umpteenth time the economic and social cost of dependency on energy sources from the Middle East. Here’s another graph from Quintanilla’s social media feed, showing how much energy is consumed in the US by source:

Over the past 50 years, the US has become much more energy efficient, cutting its energy needs per unit of GDP by about 70%, in particular by coal and oil.

But as the above graph shows, this is not by shifting away from fossil fuels so much as it has been a shift towards natural gas. It also doesn’t show the trend in renewable energy sources, such as solar and wind. Here’s what the trend in those look like compared with other energy sources since the onset of the pandemic (h/t Kevin Drum):

On a percentage increase basis, solar and wind energy are both making great strides. But this is because of the small number base. 

And indeed, renewables as a share of US energy generation have now surpassed coal:

On the longer term time frame, gains in energy efficiency have been offset by population growth. Hence the growth in the total amount of energy used up until 2005:

The big decline in the use of coal only takes it back to 1960s levels. Fossil fuels in total still make up 80% of US energy usage. And the big growth in renewables still only takes them to less than 15% of total usage. 

Taking this back to the effects of turmoil in the Middle East, phasing out oil fueled power plants as well as internal combustion engines is a must. Coal should continue to be phased out as quickly as possible, and ultimately nuclear power (at least as a bridge) and renewables, together with switching to battery powered consumer appliances, should be the way forward.

Tuesday, January 23, 2024

A discussion: EV sales have been stalling, while hybrids are flying off dealer lots


 - by New Deal democrat

In addition to housing, the other big area where supply shock inflation has not completely resolved is vehicles. Basically almost the entirety of 2020 production was lost, leading to roughly a 10 million vehicle shortfall in the amount necessary to replace old vehicles. As the below graph shows, while new vehicles cost no more in “real” terms compared with average hourly supervisory wages, used vehicles continue to command a substantial premium:

Until both new and used vehicles normalize compared with wages, the supply crunch is not completely resolved.

While the latest data is three months old, and rates have probably come down somewhat since then (like all other interest rates), the interest rate on auto loans has gone up considerably since before the pandemic:

This is a good introduction to a discussion of why EV sales are waning somewhat, as indicated in the below graph (via Kevin Drum):

Here’s the snapshot. As of November,

Car dealers across the country say they had a 114-day supply of new EVs … , compared to a 71-day supply of inventory for the auto industry overall. Historically, a 60 day supply across the auto industry was considered ideal.”

“New hybrids … are the quickest to sell, spending an average of 37.2 days on the lot.”

PBS had a very good discussion of why buyers have been turning more to hybrids than to EV’s. I recommend that you read it in its entirety, but here is a bullet point summary:

So far in 2023, Americans have bought a record 1 million-plus hybrids — up 76 percent from the same period last year, according to….[plus] 148,000 plug-in hybrids, which drive a short distance on battery power before a gas-electric system kicks in.

Though electric vehicle sales are nearing an annual record of over 1 million this year, their year over year growth rate has begun to stall.

The reasons why hybrids have quickly become the preferred choice for many buyers vary. They range from the higher prices of comparable EVs to concern about the scarcity of charging stations to a recognition that hybrids provide many of the same advantages without the hassles of EVs. 


Here are snapshots of the issues discussed in the article:

  • Prices: “EV prices have being dropping, mainly a consequence of federal tax credits and price cuts by Tesla, the market leader. Yet they’re still pricier than hybrids or gas vehicles”
  • Range issues: customers do not want to have to stop frequently for lengthy recharging of EV batteries, and worry that charging stations may not be available on long trips where they need them.
  • Cold weather issues: “hybrid buyers appear to have done research and know that cold weather reduces the range of an EV battery. Tests conducted in Norway, … found that EVs lose between 10 percent and 36 percent of their range during winter.” The widely publicized debacle this past week in Chicago, where many EV’s were bricked because charging stations’ speed slowed to a crawl, and vehicles died while waiting in line, isn’t going to help.
  • Reliability: “ Consumer Reports found that hybrids were the industry’s most reliable type of power system. Electric vehicles were least reliable.”

Two things the article did not mention: the necessity to pay for the installation of a 240 volt line in your garage to charge an EV, if you don’t want to rely on the public stations. And the fact that most hybrids now accelerate nearly as fast as, and sometimes even faster than, their internal combustion engine counterparts.

In the long run, if there is improvement in the range of EV batteries, the speed of recharging, and if prices decline to a level competitive to gas powered models, they will be an excellent improvement, both in terms of global climate and geopolitically ending the power of petrosheikhdoms.

In the meantime, as I noted in an earlier post, recently I had no choice but to get a new vehicle. Ultimately I chose a hybrid over an EV for almost all of the reasons discussed in the article above.

Monday, January 22, 2024

Are working class wages really still a malady?


 - by New Deal democrat

Via Kevin Drum, NY Times columnist Nick Kristof says, "There isn’t a good term for the bundle of pathologies that have afflicted working-class Americans . . . ."

“One gauge of how many Americans are struggling is that average weekly nonsupervisory wages, a metric for blue-collar earnings, were lower in the first half of 2023 than they had been (adjusted for inflation) in the first half of 1969. That’s not a misprint.”

Drum says that’s not true if you use the PCE deflator rather than CPI. But I’m dissatisfied for another reason - I don’t think weekly measures are appropriate.

Here is the graph of Kristof’s metric:

It does indeed show that weekly wages, even as of last month, were equal to wages in most of the latter part of the 1960s and early 1970s.

But the problem is that the work week itself has gotten much shorter in the past half century, declining from an average a little below 39 hours in the 1960s to under 34 hours in the past 15 years:

It’s no wonder that, in real terms, people working 5 hours less per week might be earning less.

Indeed, as I have pointed out many times, real average *hourly* wages for nonsupervisory workers (red in the graph below) made a new all-time record earlier in the post-pandemic period, and are still higher than at any point before the pandemic now:

But let me make a further comparison with real aggregate payrolls for nonsupervisory workers. In the below graph I also divide payrolls by the number of workers on payrolls as well as by inflation (gold):

Real payroll per worker as of last month was within 1% of its value 50+ years ago in the late 1960s. If the economy continues to expand this year, there’s a pretty good chance it will surpass that level.

Bear in mind that the biggest reason of the decline in wages was the entrance of the huge baby boom into the jobs market, including for the first time most women. Once that was finally fully digested (in the 1990s) real wages started to rise again.

Real wages now are 20% - 25% higher now than they were at their nadir in the 1990s. There are certainly maladies affecting the working class, and over the long term wages have been an issue, but certainly not recently.