Weekly Indicators for September 2 - 6 at Seeking Alpha

 

 - by New Deal democrat

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

In the wake of yesterday’s weak jobs report, bond yields and mortgage rates declined to 12 month+ lows, commodities declined across the board, stocks sold off sharply, and the 10 year to 2 year Treasury spread un-inverted.

That’s bad news and good news. It’s bad news because it indicates a belief that the economy has weakened substantially, but good news because lower rates will enable increased activity out in the future.

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

August jobs report: for the first time, including revisions, more consistent with a hard landing

 

 - by New Deal democrat

My focus continues to be on whether jobs gains are most consistent with a “soft landing,” i.e., no further deterioration, or whether there is further decline towards a recession. 

For a change, this month the Establishment report was the weakest in several years, if still positive. Meanwhile the Household report rebounded for the month, but now shows an absolute decline in job holders YoY.

Below is my in depth synopsis.

HEADLINES:

• 142,000 jobs added. Private sector jobs increased 118,000. Government jobs increased by 24,000. 
• There were big downward revisions to the last two months. June was revised downward by -61,000, and July was revised downward by -25,000, for a net decline of -86,000. This continues the pattern from nearly every month in the past 18 months of a steady drumbeat of downward net revisions.
• The alternate, and more volatile measure in the household report, showed an increase of 168,000 jobs. On a YoY basis, however, this series has now actually *declined* by -66,000 jobs. With the sole exception of 1952 and one month in 1957, this has always and only occurred shortly before or during recessions.
• The U3 unemployment rate declined -0.1% to 4.2%, but the “Sahm rule” recession indicator Is still in effect.
• The U6 underemployment rate rose 0.1% to 7.9%, 1.5% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now rose another 37,000 to 5.637 million, vs. its post-pandemic low of 4.925 million in early 2023.

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. Outside of construction, all of the rest were flat or negative.

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, increased 0.1 hours to 40.7 hours, but is down -0.8 hours from its February 2022 peak of 41.5 hours.

• Manufacturing jobs declined -24,000.
• Within that sector, motor vehicle manufacturing jobs increased 2,500. 
• Truck driving declilned -1,400.
• Construction jobs increased 34,000.
• Residential construction jobs, which are even more leading, rose by 4,800 to another new post-pandemic high.
• Goods producing jobs as a whole rose 10,000 to another new expansion high. These should decline before any recession occurs. *BUT* these are only up 0.9% YoY, the lowest such increase since the pandemic shutdowns, thus showing clear signs of deceleration.

• Temporary jobs, which have generally been declining late 2022, fell by another -2,900, and are down about -500,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer rose 117,000 to 2,468,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.11, or +0.4%, to $30.27, for a YoY gain of +4.1%. This is an increase from 3.8% YoY growth last month, but the longer term trend continues to be deceleration from their post pandemic peak of 7.0% in March 2022. Importantly, this is significantly higher than the 2.9% YoY inflation rate as of last month.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers increased 0.1%, and is up 1.2% YoY, in trend for the past 12+ months.

•  the index of aggregate payrolls for non-managerial workers was rose 0.4%, and is up 5.3% YoY. These have been slowly decelerating since the end of the pandemic lockdowns, but have remained almost steady for the past 9 months. With the latest YoY consumer inflation reading of 2.9%, this remains powerful evidence that average working families have continued to see gains in “real” spending money.

Other significant data:

• Professional and business employment rose 8,000. These tend to be well-paying jobs. This series had generally been declining since May 2023, but earlier this year had resumed increasing again. As of this month, they are only higher YoY by 0.5% - a very low increase that has *only* happened in the past 80+ years immediately before, during, or after recessions.
• The employment population ratio remained steady at 60.0%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate also remained steady at 62.7%, vs. 63.4% in February 2020. The prime 25-54 age  participation rate declilned -0.1% from84.0%, the highest rate during the entire history of this series except for the late 1990s tech boom, to 83.9%.

SUMMARY

This month confirmed a significant further downshift in job creation. From 2020 through this past March, the lowest monthly job gains were 136,000 in December 2022, which was the *only* month during that period below this month’s 142,000. But since then, four of the five last months were below 150,000. In addition to this month, April showed 108,000 job gains, June as revised 118,000, and July 89,000. This is just barely enough to keep up with population growth. Further, as indicated the Household report (which has probably underestimated immigration substantially) now shows an absolute decline YoY.

The best news was the continued growth in nonsupervisory payrolls, which after inflation for August is reported will almost certainly show another all-time high. It is unheard of for a recession to happen while real aggregate payrolls for average workers are still growing. That the leading construction sector, and goods production as a whole, continued to show growth also are pluses, and negative any imminent recession.

But manufacturing seems at long last to have rolled over, with the lowest reading in almost two years except for one month in 2023, despite the slight increase in the manufacturing workweek. 

Along with the big downward revisions to the last several months, this month’s report is the first time that there is substantial evidence that the jobs market may have moved past a “soft landing” into a hard slowdown that could easily tip over into outright declines by the end of the year. This adds to the evidence that the Fed has been behind the curve, and needs to cut rates, perhaps aggressively, beginning asap. 

Economically weighted ISM indexes show an economy on the very cusp of - but not in - contraction

 

 - by New Deal democrat

Recently I have paid much more attention to the ISM services index. That’s because, since the turn of the Millennium, manufacturing’s share of the economy has contracted to the point where even a significant decline in that index has not translated into an economy-wide recession, as for example in 2015-16. 

When we use an economically weighted average of the non-manufacturing index (75%) with the manufacturing index (25%), it has been a much more reliable signal, particularly when we use the 3 month average, requiring it to be below 50. 

Once again this month the contraction shown in the manufacturing index has been more than counterbalanced by continued expansion in the services index, which was reported at 51.5. The more leading new orders subindex (not shown in the graph below) came in stronger, at 53.0:

Here are the last six months, including August, of both the manufacturing (left column) and non-manufacturing index (center column) numbers, and their monthly weighted average (right) :

MAR 50.3. 51.4. 51.1

APR 49.2  49.4.  49.3 

MAY 48.9. 53.8. 52.5

JUN 48.5. 48.8. 48.7

JUL. 46.8. 51.4. 50.2

AUG. 47.2. 51.5  50.4

And here is the same data for the new orders components:

MAR 51.4. 54.4. 53.6

APR 49.1. 52.2. 51.4

MAY 45.4. 54.1. 51.9

JUN. 49.3  47.3. 47.8 

JUL.  47.4. 52.4. 51.2

AUG. 44.6. 53.0. 50.9 

Note that the single month average for both the headline and new orders components showed contraction in June, but it did not trigger a signal based on the three month average. The current three month weighted average of the headline numbers is just below the 50.0 threshold at 49.7, while the new orders component is 49.97, which rounds to 50.0 for purposes of this analysis.

This is right on the cusp of giving a “recession warning” signal. In fact, had the new orders component of the services report been even -0.1 lower, it would have done so. Next month the poor June readings for the new orders subindex in particular go out of the average. It is quite possible that the weakness in the headline number, which is not leading, will pick up as well.

In the end, the economically weighted ISM reports show an economy which is not contracting, but in the aggregate has stalled, with contracting production being just balanced by weakly expanding services. This puts even more weight on what the leading components of the jobs report will show tomorrow.

Jobless claims: all good news

 

 - by New Deal democrat

The weekly news from jobless claims continues to be good. The hypotheses that the summer increase was unresolved post-pandemic seasonality, plus the several week spike post-Beryl was all about Texas, both have held up very well. And that has continued to be the case against more challenging YoY comparisons as the data heads into September.

Initial claims declined -5,000 last week to 227,000. The four week moving average declined -1,750 to 230,000. Continuing claims, with the usual one week delay, declined -13,000 to 1.838 million:

The two year chart really pays off in showing the unresolved summer seasonality post-pandemic both in 2023 and this year.

On the more important YoY basis for forecasting purposes, initial claims are down -0.4%, the four week average down -3.3%, and continuing claims up only 2.0%, the lowest YoY increase in over 18 months:

Needless to say, all of these forecast that the economic expansion will continue in the next few months.

Finally, let’s look at the unemployment rate, which will be updated tomorrow. Although I won’t show a graph, it appears that the post-Beryl increase in *continuing* claims in Texas has now abated as well. But because it continued into mid-August, it would not surprise me to show up in yet another 0.1% increase in the unemployment rate tomorrow. In any event, here’s the update graph of initial and continuing claims (right scale) vs. the unemployment rate (left scale):

This year the unemployment rate has departed from over 50 years of almost continuous precedent by not following initial claims in particular. What the above graph shows me is that, absent the surge in immigration-related unemployment, the unemployment rate would be trending down towards 3.8%.

July JOLTS report: relentless deterioration?

 

 - by New Deal democrat

The JOLTS survey parses the jobs market on a monthly basis more thoroughly than the headline employment numbers in the jobs report. In July, it painted a picture of what looks like pretty relentless deterioration.

The theme for three of the four data series I track was the same: job openings, hires, and quits, all had their lowest or second lowest readings since the start of 2021. In the case of the “second worst” hires and quits numbers, it was only because last month’s numbers were even lower.

Specifically, job openings (blue in the graph below), a soft statistic that is polluted by imaginary, permanent, and trolling listings, declined 227,000 to 7.623 million. Actual hires (red) rose 273,000 to 5.521 million (vs. a pre-pandemic peak of 6.0 million). Voluntary quits (gold) rose 63,000 to 3.277 million. In the below graph, they are all normed to a level of 100 as of just before the pandemic:

Both hires and quits are significantly below their immediate pre-pandemic readings, by -7.9% and -5.4% respectively.

To put them in a wider historical context the below graph shows all three series from their inception in 2001. But because the US population has grown almost 20% since then, I divide by the prime age population over the same time. I have also normed the current values to the zero line to better show the historical comparison:

On the one hand, hires, even on a population adjusted basis, are better than almost any time before the pandemic except 2005-06 and 2017-19. But note they are also at a level equivalent to during the 2001 recession. Quits are better than at any time before the pandemic except for just before the 2001 recession and 2018-19. This suggests to me that the real, “hard data” jobs market is still positive, and not weak by historical standards. It’s just not as strong as we have become accustomed to over the past several years.

Meanwhile, layoffs and discharges increased to their highest level since late 2020 except for several months in early 2023:

The above graph also shows the monthly average of initial jobless claims (red). It appears that layoffs and discharges did pick up the post-pandemic seasonality shown in the  summer increase during May through July.

Finally, the quits rate (blue in the graph below) has a record of being a leading indicator for YoY wage gains (red). For over half a year the quits rate had stabilized. That has no longer been the case in the past two months, as it also is at its lowest point since late 2020:

As you can see above, this forecasts continued deceleration in nominal wage gains, down to 3.5% YoY or even lower in the coming months. Unless consumer inflation moderates further as well, this will put some financial pressure on ordinary workers (not a negative, just significantly less positive).

Manufacturing and construction together suggest weak but still expanding leading sectors

 

 - by New Deal democrat

As usual we start the month with two important reports on the leading sectors of  manufacturing and construction.

First, the ISM manufacturing index showed contraction yet again, with the headline number “less negative” by way of increasing from 46.8 to 47.2, and the more leading new orders subindex declining sharply by -2.8 from 47.4 to 44.6:

Including August, here are the last sis months of both the headline (left column) and new orders (right) numbers:

MAR 50.3. 51.4

APR 49.2   49.1

MAY 48.9. 45.4

JUN 48.5. 49.3

JUL. 46.8. 47.4

AUG 47.2. 44.6

Because manufacturing is of diminishing importance to the economy, and was in deep contraction both in 2015-16 and again in 2022 without any recession occurring, I now use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.

The three month average of the headline manufacturing number is 47.5. The average for the new orders component is 47.1  For the past two months, the average for the non-manufacturing headline has been 51.1 and the new orders component has been 49.8. That means on Thursday the threshold for the August non-manufacturing numbers is 50.2 and 51.6 respectively for the economically weighted average not to forecast recession.

  

If the news for manufacturing seems a little grim, the status of construction spending is better.

In nominal terms, total construction spending declined -0.3% in July, while the more leading residential construction spending declined -0.4%. Here’s the long term picture:

A post-pandemic close-up shows that spending appears to have been topping for the last 4 months:

But the picture looks better once we adjust for the cost of construction materials:

So deflated, total construction spending rose 0.7% for the month and is at its highest level since 2007. Residential construction spending rose 0.2% for the month and is also at its highest level since 2007, except for three months at year-end 2021.

I do not see the US economy falling into recession unless either both construction and manufacturing are in synchronous decline, or else at least one of them contracts very sharply. While manufacturing is on the brink, that is not the case with construction at this point. Basically the picture is of weak, but overall still slightly positive leading sectors of the economy.

For Labor Day: 4 measures of worker wage growth

 

 - by New Deal democrat

On this Labor Day, it is fitting to update the economic state of ordinary workers. There is a variety of economic data series to track both average and median wages:

• The most commonly known measure is that of average hourly pay for nonsupervisory workers, which is part of the monthly jobs report.
• The Bureau of Labor Statistics, which conducts the household employment survey, also reports "usual weekly earnings" for full-time workers each quarter.
• The BLS also measures the Employment Cost Index quarterly.
• The BLS also measures "business sector compensation per hour" quarterly.

Without further ado, here is the update for all four. Average hourly wages are updated through July; the other three are updated through the end of Q2. All series are normed to 100 as of February 2022; the nominal series are deflated by the CPI:

It is important to keep two things in mind. 

First, with the exception of the “Employment Cost Index,” which follows wages on offer for each given type of employment, all are subject to the distortion that arose from the much bigger layoffs of low wage service workers during the pandemic lockdown era than office workers. This boosted the averages, since more high wage workers were employed.

Second, all of the measures suffered from the spike in gas prices from $3 to $5 as Putin threatened, and then invaded Ukraine. After June 2022, as gas prices retreated back down towards $3 again, all of the measures benefitted.

Of the four, only one - the Employment Cost Index - is below its pre-pandemic level, down -1.7%. This is not nearly as negative as it may seem at first blush, since the Boom in job availability meant that many workers switched jobs to higher paying occupations.

That is reflected in the other three indexes. Real average hourly wages are up 3.8%. Real median usual weekly earnings and real hourly compensation are both up 0.3%.

This improvement in real earnings for workers since June 2022 is reflected in the recent increase in consumer confidence about the economy, and is also reflected in the improvement in the “incumbent” political party’s prospects in November.

Happy Labor Day to all.