Saturday, April 27, 2024

Weekly Indicators for April 22 - 26 at Seeking Alpha


 - by New Deal democrat

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

Not much churn in the short leading or coincident timeframes this week. But one of the long leading indicators joined the “less bad” parade. This is what I would expect to see coming out of a recession, before growth in the shorter term improves. Just one week, but still . . .

As usual, clicking over and reading will bring you up to the virtual moment as to the economy, and bring me a little pocket change for the week as well.

Friday, April 26, 2024

Another strong personal income and spending report, but beware the uptick in inflation


 - by New Deal democrat

Personal income and spending has become one of the two most important monthly reports I follow. This is in large part because the big question this year is whether the contractionary effects of Fed tightening have just been delayed until this year, or whether the fact that there have been no rate hikes since last summer mean that the expansion will strengthen.

Because real personal spending on services for the past 50 years has generally risen even during recessions, the more leading components of this report have to do with spending on goods. Additionally, there are several components that form part of the NBER’s “official” toolkit for determining when and whether a recession has begun, including real spending minus government transfers, and real total business sales. 

Let’s look at each of them in turn. Note that in all graphs below except for YoY comparisons, and the personal saving rate, is normed to 100 as of just before the pandemic.

Real income and spending

In March, nominally income rose 0.5%, while nominal spending for the second month in a row rose a sharp 0.8%. Prices as measured by the PCE deflator increased 0.3% for the month, meaning that in real terms income increased 0.2% and spending rose 0.5%. Since just before the pandemic real incomes are up 7.2%, and spending is up 11.3%:

On a YoY basis, the PCE price index is up 2.7%, the second monthly increase in a row from January’s three year low of 2.4%. While n the previous 16 months, the YoY measure had been declining at the rate of 0.25%/month, suggesting that it would hit the Fed’s 2.0% target this spring, that trend has stopped:

The issue going forward is going to be if this was a temporary pause, a stalling of progress towards the Fed’s goal of 2.0%, or an outright reversal of trend. Suffice it to say, the Fed is not going to cut rates in the near future under either of the two latter scenarios.

As I indicated in the intro, 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 0.2%, while real goods spending rose a sharp 1.1%:

Further, real durable goods spending tends to turn before non-durable goods spending. The former rose 0.9% for the month, and the latter 1.3%. Both of these have now totally or almost totally reversed previous months’ sharp declines:


Another important metric for the near future of the economy is the personal savings rate. In February it declined a sharp -0.5%. In March it declined another -0.4% to 3.2%. This longer term look shows how the present compares with the all time low rate of 1.4% in 2005:

On the positive side, the declining trend in this rate since last May indicates a lot of consumer confidence. But on the negative side it is close to its post-pandemic low of June 2022 of 2.7%, as well as its previous all-time low range, indicating vulnerability to an adverse shock. One of my forecasting models uses such a shock as a recession warning indicator. In any event, there is no such shock indicated at the moment.

Important coincident measures for the NBER

Also as indicated above, the NBER pays particular attention to several other aspects of this release. Real income excluding government transfers (like the 2020 and 2021 stimulus payments) rose 0.2% for the month, continuing its consitent increasing trend since November 2022:

Finally, the deflator in this morning’s report is used to calculate, with a one month delay,  real manufacturing and trade sales. This rose 0.5% in February, but is still below its November and December 2023 readings:


I had described January’s report as being pretty close to “Goldilocks,” and last month’s as something of “anti-Goldilocks.” In March we were closer to Goldilocks than not. Real Income, including real income less government transfers, and spending both rose, and spending on goods rose sharply. Real manufacturing and trade sales also rose. The saving rate shows near term confidence, but is a longer term concern. Aside from that the only significant negative was the second straight increase in YoY PCE inflation.

The consumer remains healthy, but is digging into their savings to support much of the increase in spending. In addition to the price of gas, which has recently been rising again, but if this renewed sharp increase in spending is feeding through into a renewed increase in the inflation rate as well (and it may well not be), that would not be good. Because if that’s the case, the Fed is going to consider not just not lowering interest rates, but possibly another increase as well. 

Thursday, April 25, 2024

Leading indicators in the Q1 GDP report are mixed


 - by New Deal democrat

Most of the commentary you will read about Q1 GDP that was released this morning will be about the core coincident components. For that I will simply outsource to Harvard’s Prof. Jason Furman:

“much of the slowdown was in non-inertial items like inventories (-0.35pp) and net exports (-0.86pp). The better signal of final sales to private domestic purchasers was 3.1%.”

I agree.

With that out of the way, as usual, my focus is instead on what the leading indicators contained in the report can tell us about the months ahead. There are two such long leading indicators: private residential fixed investment (basically, housing) as a share of GDP, and deflated corporate profits.

Let’s look at each one in turn.

Nominal private residential fixed investment increased 3.5% during the first quarter. Real private residential fixed investment increased 3.3%. Since both of those were bigger increases than the % change in nominal and real GDP for the quarter, respectively, both improved as a share of GDP, as shown below:

Not strong improvement, but improvement nevertheless. 

Since corporate profits for the Quarter aren’t reported in the first release, we turn to the proxy of proprietors’ income. The proper measure deflates by unit labor costs, but those won’t be reported until later either, so the GDP price deflator is a good proxy. Going back 50+ years, our substitute typically turns coincident with or one quarter later than the official leading indicator.

Nominally proprietors’ income rose 0.5% in the quarter. But since the GDP deflator increased 0.8%, their deflated income declined slightly (blue in the graph below):

Real proprietors’ income has been essentially flat for the past two years.

It’s worth noting that (nominal) corporate profits as reported to Wall Street, updated through last week, with the exception of Q3 of last year haven’t gone anywhere in two years either:

When profit growth stalls, companies start looking around for costs to cut, and usually that includes employees. So that’s not good.

So our leading indicators from the Q1 GDP report score as one positive and one neutral. Several other of the long leading indicators have gotten “less bad” in the past half year. Once Q1 bank lending conditions are reported in a week or two, I will update my top-of-the-line long leading forecast through the end of the year.

Jobless claims continue their snooze-fest


 - by New Deal democrat

[Note: I’ll put up a post discussing Q1 GDP later today.]

Initial and continuing claims continued their snooze-fest this week.

Initial claims declined -5,000 to 207,000, continuing their nearly 3 month long range of between 200-220,000 per week. The four week average declined 1,250 to 213,250. This average has remained in the 200-225,000 range for over half a year! Finally, with the typical one week delay, continuing claims declined -15,000 to 1.781 million:

As per usual, for forecasting purposes the YoY range is more important. Here, initial claims were down -1.0%, the four week average down -1.8%, and continuing claims higher by 3.4%, still the lowest comparison for continuing claims since February 2023:

Needless to say, this is potent evidence that we can expect the economy to continue to expand in the next few months.

As you also might expect, with initial claims lower YoY for the month of April so far by -2.9%, this also suggests that the unemployment rate will trend lower YoY over the coming months, towards 3.7% or even 3.6%:

Since initial claims (and to a lesser extent continuing claims) lead the unemployment rate, the Sahm rule for recessions is not going to be triggered.

Wednesday, April 24, 2024

In addition to housing, manufacturing is range-bound as well


 - by New Deal democrat

First off, let me reiterate that my focus this year is on manufacturing and construction. That’s because these are the two sectors the waxing and waning of which have almost always determined if the US economy is growing or not. By contrast, for the past half century or more the production and consumption of services has tended to increase even right through most recessions.

With that framework in mind, yesterday I wrote about how, following interest rates, housing is range-bound.

This morning durable goods orders for March were reported, which gives me a good opportunity to update the state of the maufacturing sector.

Total durable goods orders rose 2.6% month over month. Core capital goods orders rose 6.0%. These series are very volatile. Thus the big increase in orders was only the third largest in the past 9 months, during which there have also been three months where orders declined -4% or more.

Stepping back and taking a longer term look shows that core capital goods orders (black in the graph below) have been generally flat for the past two years, while total orders (blue) may have risen and then fallen a little. This is similar to the trajectory of manufacturing production (red) which peaked in late 2022, but has only declined about -1% since then:

The YoY look at the same data shows just how “unchanged” the trend has been:

When we compare with the 25+ years before the pandemic, we see a number of instances - 1998, 2012, 2015-16, and 2019 - where both new orders and production declined significantly into negative territory YoY without a recession occurring:

The sideways trend is also apparent in manufacturing employment (blue in the graph below), which has stayed in a 0.2% range for the past 18 months. Average weekly hours (red) has declined -1 hour or more, which before the China shock of 2000 and since had always meant a recession. But hours above 40.5 per week are mainly about overtime; thus since then the decline must go below 40.5 hours to be signficant:

Finally, turning from the production to consumption side, real personal consumption on goods, which was similarly rangebound from 2021 through the first half of 2023, has been on an increasing trend since:

While having both housing and manufacturing in a rangebound, mainly flat trend isn’t good, it isn’t recessionary either, as services provision and spending continue to perform very well.

Tuesday, April 23, 2024

The range-bound new home sales market continues


 - by New Deal democrat

As per my usual caveat, while new home sales are the most leading of the housing construction metrics, they are noisy and heavily revised. 

That was true again this month, as sales (blue in the graph below) increased almost 9% m/m to 693,000 annualized, after February was revised downward by -25,000 to 637,000. As the five year graph below shows, after the initial Boom powered by 3% mortgage rates, sales declined almost 50% in 2022, but have stabilized in the 650,000 +/-50,000 range for the past 16 months. For comparison I also include the much less noisy, but slightly less leading single family housing permits (red), which as anticipated appear to have started to follow sales down from their peak:

Here is a re-run of the graph I posted last week, showing the differing trajectories of new vs. existing home sales, showing that existing home prices remained elevated longer, and have taken longer to decline, by 40% vs. 50%:

Because mortgage rates have risen somewhat in the past few months (from 6.67% to 7.10%, I expect this range in new home sales to continue, with a slight downward bias in the immediate months ahead.

Also unlike existing home sales, where inventory is being constrained by would-be sellers trapped in 3% mortgages and thus prices remain near all-time highs, the median price of new homes declined as much as -16% from peak at their lows last year, and are still down -13.3%:

But, like sales, on a YoY basis prices have stabilized, and are only down -1.9%.

As I almost always point out, sales lead prices. Thus as shown above the range-bound sales for the last 16 months are leading to more stable prices.

The bottom line is that I expect this range-bound behavior in sales and prices, as well as the bifurcation between the new and existing home markets to continue until such time as the Fed moves significantly on interest rates.

Monday, April 22, 2024

Real median wage and income growth through March continued the recent increasing trend


 - by New Deal democrat

This is an update of some information I last posted several months ago.

Real median household income is one of the best measures of average Americans’ well-being, but the official measure is only reported once a year, in September of the following year.

So right now the most recent official measure is for calendar year 2022 (when you might remember gas prices surged to $5/gallon). In other words, it’s hopelessly out of date.

There are several ways of approximating real median household income on a more timely basis available in the public data. 

For this purpose, wages are a very imperfect proxy, because income includes things like stimulus payments or debt relief during the pandemic, and also because - especially during the pandemic - layoffs were concentrated among low wage workers, thus distorting the averages higher.

The best proxies make use of personal income. We can also get information from total payrolls. The below graph shows both real personal income (blue) and real aggregate payrolls (red), both divided by population. Here’s the data starting before the pandemic:

And here is the close-up after the end of pandemic related stimulus payments:

The big difference between the two is that real payrolls only include wages and salaries, while real incomes includes all sources of income, including stimulus payments and things like social security. Thus real per capita payrolls declined sharply during the fist months of the pandemic, and did not recover until late 2022, while incomes soared due to the pandemic related programs. Further, real payrolls stalled during 2022, while real incomes per capita actually declined.

Since late 2022, both measures have consistently increased. 

Additionally, a few private services have been able to use monthly data from the survey that gives rise to the jobs report to create a far more timely and illuminating monthly update. The best of these that I know of is Motio Research.

Here’s their most recent update, through March:

Like personal income, household income really spiked with the pandemic relief programs in 2020. It then went nowhere for almost three years, stuck at the same level it had been in 2019. Again, like personal income, that’s because of the spike in inflation, and the fact that jobs and real payrolls didn’t return to their pre-pandemic levels until 2022 and 2023 respectively.

The one remaining puzzle is why real *median* household income declined again into mid-2023, vs. *average* personal income, which increased.  One explanation might be the expiration of pandemic stimulus and relief programs, although I would expect that to show up in the broader income measure.

Some light can be shed by looking at *median* wage growth, as documented by the Fed:

Note that, compared with inflation, median (rather than average) wages continued to decline until early 2023. 

Another important explanation is likely that income growth has been concentrated among the the lowest quintile of households. In connection with the latest annual update, US News and World Report wrote:
While overall household wealth in America fell from the end of 2021 through the first three quarters of 2022, the bottom 20% of households by income saw their wealth grow.

“In total, household wealth for the lowest-income quintile rose by nearly 10% while wealth in all other income quintiles fell, according to figures from the Federal Reserve and nonpartisan data center USAFacts.

Here is the accompanying graph:

This very much helps explain why Biden’s approval ratings have been so poor throughout 2022 and 2023.

But, to return to the Motio Research graph, note that since last June, the trend has been rising again, and in March real median household income reached its highest level ever except for the 2020 stimulus months. What this means is that, if real household income growth had been concentrated among the lowest quintile through 2022, by mid-2023 it had spread upward to include the median group as well, and with some fits and starts this growth has continued.

Which is good news for the average American household.

Sunday, April 21, 2024

Weekly Indicators for April 15 - 19 at Seeking Alpha


 - by New Deal democrat

I neglected to pt this up yesterday, so here it is now. My “Weekly Indicators” post is up at Seeking Alpha.

There continues to be a fair amount of churn and noise in the short leading and coincident time range. Nevertheless, the underlying theme is one of positivity. Aside from the swoon in the stock market this past week, the other big move was in industrial commodities, which spike higher late in the week. This is the first time they have been positive YoY in well over a year.

Typically that is because of higher demand straining against current supply, which means an expanding economy (with inflationary pressure building up).

As usual, clicking over and reading will bring you up to the virtual moment on all of these trends, and reward me with a little pocket change for organizing the data and bringing it to you.