Real personal income and spending for October were all good; no special cause for concern yet about inflation

 

 - by New Deal democrat

Let me finish catching up this week with a quick look at personal income and spending, which were reported on Wednesday.

The “big” takeaway I’ve seen elsewhere is that inflation picked up, and maybe will complicate the Fed’s task. But I don’t see where it’s such a big deal. The price index increased 0.2% for the month, mainly on the back of a 0.4% increase for services, while the price index for goods declined -0.1%:

As you can see, while that’s an acceleration from a few months ago, it’s hardly out of line for the past two years. And the YoY% increase to 2.3% was tied with August’s rate for the lowest since the pandemic (blue in the graph below):

As you can see, goods inflation as measured by the index is still somnolent; it is inflation for the services component which remains somewhat “hot” compared with before the pandemic.

The bottom line is, this was only a one month increase. If the trend continues to increase for another month or two, I’ll be more concerned, but for now this could easily just be noise.

Otherwise, the news remained all good. Both real personal income and real personal spending increased for the month, by 0.4% and 0.1% respectively, to new highs:

The personal savings rate also increased slightly to 4.1%, also a positive thing:

The important coincident indicator of real personal income less government transfers also increased:

As did real manufacturing and trade sales for September:

So the bottom line is that all of the important metrics were positive, and I don’t see any cause for concern yet about any sustained pick-up in inflation.

It’s not just corporate profits, the long leading housing sector is also under pressure

 

 - by New Deal democrat

I suspect that both hurricanes as well as mortgage rates somewhat distorted all of the housing reports for October.

Last week with existing home sales I noted that “While sales remained in range, price appreciation increased and the pace of inventory accumulation decreased.“

There was something of a mirror image in yesterday’s reports on both new and repeat home sales. In the case of new homes, sales decreased sharply while inventory increased sharply. And price appreciation accelerated for both new and repeat home sales - but it may be unresolved seasonality at work.

As usual let me start with the important caveat that new home sales data are very noisy and heavily revised. With that out of the way, the next thing to consider is that mortgage rates have risen back close to 7%:

While an increase from 6% to 7% doesn’t seem like much, that increases the necessary monthly payment by about 10%, which is enough to drive many people to the sidelines, and that is what we have seen with purchase mortgage applications, which have fallen back down close to their post-pandemic lows.

In any event, between mortgage rates, hurricanes, and noise, new home sales (blue in the graph below) declined to 610,000 annualized, the lowest rate since November of 2022. The flip side of that was that the inventory of new homes for sale increased sharply to a new post-pandemic high (gold):

The latter is actually “good” news because recessions have in the past happened after not just sales decline, but the inventory of new homes for sale also decline. In other words, probably the anomaly will be reversed in the next month or two.

The median price of an existing home increased 2.5% last month alone, and are up 4.7% YoY, a reversal of the recent trend:

A similar increase occurred in repeat home sales, as on a monthly basis alone prices increased 0.3% in the Case Shiller Index and a whopping 0.7% in the FHFA index. But because there were similar increases last year in October, on a YoY basis the Case Shiller index is only up 3.9%, and the FHFA index up 4.4%, unchanged from a month ago.

Since house prices lead the measure of Owners’ Equivalent Rent in the CPI by 12-18 months, this suggests that the shelter component of the CPI should continue to decline gradually in the months ahead:

Beginning with permits and starts, none of the measures of any kind in the housing market had a good month in October. Construction was down, sales were unchanged (existing homes) or down sharply (new single family homes), and prices were up sharply on a monthly basis. 

Just as I wrote earlier this morning about Q3 corporate profits, this is one period only. Single family new home sales in particular are noisy. But if mortgage rates continue in the 7% range, and the housing market as well as corporate profits turn negative, with manufacturing already having stalled out, the economy is going to be under a lot of pressure as we go through 2025.

[Note: I’ll report on personal income and spending on Friday]

The long leading indicator of corporate profit growth stalled in Q3

 

 - by New Deal democrat

Perhaps the most important economic news released so far this week was this morning’s update on Q3 corporate profits. While it is not a good thing for society for profits to outpace wages and salaries on a sustained basis, it is almost always not a good thing for the economy for profits to decline. That’s because when profits decline, one of the first things management thinks about is not hiring, or even laying off, workers.

And this morning’s news on corporate profits was negative. After tax profits were unchanged even without adjusting for inflation or costs in the third quarter (dark blue below). Since unit labor costs increased 0.8% during the quarter (light blue), after adjusting for labor costs (not shown), corporate profits declined:

Only one quarter of course, and on a YoY basis (not shown), profits increased 9.6% vs. unit labor costs’ increase of 3.8%.

This is in accord with third quarter profits as reported to Wall Street, the latest update of which from last week is shown below:

If corporate profits continue to stall for another quarter, and interest rates (especially mortgage rates) remain elevated, this will put downward pressure on the economy in the quarters ahead in 2025.

Jobless claims continue to signal moderate expansion

 

 - by New Deal democrat

Let me start to update this week’s data with jobless claims.

Initial claims fell another -2,000 to 213,000, the lowest since last May. The four week moving average declined -1,250 to 217,000, also a six month low. With the usual one week lag, continuing claims rose 9,000 to 1.907 million:

As with one week ago, the increase in continuing claims is mainly about lagged effects from the hurricanes in North Carolina.

On the more important YoY basis, initial claims are unchanged. The four week moving average are down -0.2%. Continuing claims were up 5.2%:

None of this suggests any particular weakness.

Looking ahead to next week’s payrolls report, absent the effect of new entrants to the employment market via immigration, the unemployment rate should not increase and should decline in the next few months to 4.0% or less:

Jobless claims continue to paint a picture of at least moderate economic expansion in the near future.

On the Road

 

 - by New Deal democrat

I’m traveling this week, so light posting. 

There was no significant economic news yesterday. I’ll take a look at today’s releases about house prices and new home sales either tonight or tomorrow, Tomorrow there will be a slew of data before Thanksgiving Day. At some point between tomorrow morning and Friday I’ll take a look at jobless claims, personal income and spending, and corporate profits from the 2nd installment of the Q3 GDP report.

In the meantime, best wishes to all readers and hope you enjoy this holiday week.

Weekly Indicators for November 18 - 22 at Seeking Alpha

 

 - by New Deal democrat

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

With the hurricane-induced weakness past, the short term forecast has improved to very positive. At the same time, while a few series have whipsawed the coincident nowcast to a neutral status. Importantly, consumer spending still remains strong.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a little lunch money for the effort involved in collecting and organizing the data for you.