November consumer inflation remains well-contained except for the two most lagging sectors of shelter and transportation services

 

 - by New Deal democrat

Let me pick up where I left off yesterday discussing trends in consumer prices.

One thing I have done every month for the last couple of years is to review all the categories for any “hot” numbers showing price increases of 4.0% a year or more. And a propos of yesterday, as of this morning we are now down to 2: shelter and transportation services. There are a couple of areas where inflation has picked up in the last few months; namely new and used car prices and also medical care, but so far they remain behaved on a YoY basis.

Probably most of the analysis you will read today will be about the firming of both the headline and core CPI readings, so for the record both increased 0.3% for the month. On a YoY basis, headline prices are up 2.7%, an increase of 0.3% from their 2.4% low two months ago. Core prices excluding food and energy are up 3.3% YoY:

Now let’s look at CPI for shelter vs. ex-shelter:

Shelter prices increased 0.3% for the month. *Everything* else all together *declined* -0.2%. On a YoY basis, shelter increased a little under 4.8%, its lowest such reading in almost 3 years. All other prices increased 1.6% YoY, the 19th month in a row they have risen less than 2.5%.

In the broadest terms, high inflation remains almost all about shelter.

Within shelter, rents increased 0.3%, while “owners equivalent rent,” the fictitious measure of house prices, increased 0.2%. On a YoY basis, rent increased 4.4% while OER increased 4.9%. YoY OER is at a 2.5 year low, while actual rent YoY is close to a 3 year low:

The decline in apartment rents as shown in the Apartment List National Rent Report, as well as the moderation in house price increeases, have both finally shown up in the official CPI. Additionally, the Philadelphia Fed’s experimental new and all rent indexes, which are designed to lead the CPI for rents, for the last two quarters have been forecasting a decline below 4% YoY, and at the current pace of deceleration, that forecast could come to fruition within the next 2 to 3 months.

Now let’s discuss the other remaining problem child, transportation services. 

As I wrote yesterday, transportation services (mainly insurance and repair costs) lag vehicle prices. In November, vehicle prices increased a strong 0.9%, while transportation services increased less than 0.1%. On a YoY basis, vehicle prices remain *down* -2.2%, while the increase in transportation services costs slowed to 7.1%, which is bad, but still the lowest in nearly 3 years:

Within transportation services, motor vehicle repairs increased 0.2% for the month, and are 5.7% higher YoY:

This comparison has risen in the last several months, but is still within the range of noise. The real problem child is motor vehicle insurance (for which unfortunately FRED does not provide a graph), higher by only 0.1% for the month, but higher 12.7% YoY!

What the above all means is that if we were to take out the two areas that we know lag, shelter and transportation services, consumer inflation would probably be up only something like 1% YoY.

Although I won’t bother with a graph, the former problem children of food away from home and electricity both waned this month, with the former increasing 0.3% for the month and the latter declining -0.4%. On a YoY basis they are now up less than 4%, at 3.6% (nearly a 4 year low) and 3.1% respectively.

But as indicated above, there are several emerging areas where prices are firming.

The first is new and used vehicle prices. While these remain lower YoY, in the past few months the prices for each have risen again. In November new car prices increased 0.7% and used cars 2.0%. Both of these are near or at their highest monthly increases in the past two years:

On a YoY basis, while new car prices are still down -0.7%, used car prices are up 2.0%.

So this sector will bear watching more closely.

The second emerging sector of concern is medical care services, which increased 0.4% for the month, and are up 3.7% YoY:

In the context of the last 10 years, this increase is not unusually high, but they have been in an uptrend for the past two years.

To summarize: while the much-covered headline and core inflation measures firmed, this was nearly all about two lagging sectors: shelter (especially fictitious house rents) and motor vehicle insurance and repairs. Aside from that, prices remain well behaved, although there are several new sectors to watch, namely vehicle and medical service prices.

The case for accelerating inflation is weak

 

 - by New Deal democrat

No economic news again today. Tomorrow we will get the CPI report for November. As to which, I have read a few posts in which the claim is made that inflation, especially core inflation, is picking up again. It certainly could happen, but in my opinion the evidence for such a claim at present is pretty weak.

Let me start with the below graph that arrives from Apollo Investments via Carl Quintanilla:

 

Notice the emphatic arrow at the far right. But then take a look at the actual lines on the graph. Neither the 3, 6, nor YoY averages are moving up. The only basis for the arrow is the one month change, annualized. So in the next graph below I have decomposed the one month changes in core inflation (blue) into shelter (red) and core services less shelter (gold):

At root, the basis for that upward arrow is a one month very low reading for shelter in June, and an increase especially in services less shelter in September and October.

Another graph I came across puts this in good perspective, decomposing the contributions to headline CPI into food and energy, goods, shelter, and services ex-shelter:

Since food and energy aren’t included in core inflation, we can ignore those bars. And goods obviously are not contributing to inflation at all. So what we see is that the decelerating contribution by shelter (blue) has slowed, while the contribution from services ex-shelter (green) has held steady and actually increased a little.

As to shelter, here is the most recent update of house prices vs. owners equivalent rent:

There is simply every reason to believe that OER is going to continue to decelerate, although the YoY comparisons are more challenging.

As to rent of primary residence, here is the latest Apartment LIst National Rent Report:

Rents on new leases are simply not going up. As multi-year leases from 2021 and 2022 continue to roll off, this portion of CPI ought to continue to decelerate as well.

Finally, core services ex-shelter are dominated by transportation costs, in particular motor vehicle insurance and repairs. As I have written in the past, these are if anything even more lagging than OER:

They respond to previous increases in car prices, as the parts used for repairs of those vehicles also increase in price, and insurers respond to those collision and repair claims with increased premiums.

As to which, I saw another piece yesterday suggesting (used) vehicle prices were starting to rise again. Here’s the most updated graph of average hourly wages vs. new and used car prices:

It’s true that car prices are finally stabilizing again, as new vehicle production has ramped up to that prior to COVID, but any sustained surge looks unlikely. Used vehicle prices are somewhat noisy, so the one month increase in October doesn’t yet look like it is terribly significant.

Meanwhile, for what it’s worth, gas prices just made a new 3 year low:

Although by definition that doesn’t fit into core inflation, it’s still very good news for headline inflation.

The bottom line is that, excluding shelter, inflation is about average compared with the decade before the pandemic. Shelter remains the big issue, and there is every reason to believe it will continue to decelerate:

We’ll see tomorrow.

Yellow flags from the November jobs report

 

 - by New Deal democrat

Most of the commentary about Friday’s jobs report for November was positive. By contrast, my summary - in which I averaged the two last reports to take into account the hurricane whipsaw - was much more cautious, as were the takes by a few other commentators I respect, like Ernie Tedeschi.

 

In this post I am going to delve into more detail into why I believe it is now prudent to raise the yellow caution flag about employment.

Let’s start with the totals. For many months I and many others have written that the trend in the Household Survey (red in the graph below) has been frankly recessionary - but is probably skewed to the downside by failing to take into account the surge in new jobs entrants caused by the post-pandemic immigration spike. On a YoY% basis, for the second time in three months, the Household Survey recorded a net *decrease* in jobs.

Meanwhile the Establishment Survey (blue) has been much more positive, showing jobs gains in every single month. As of November, the YoY% growth rate was 1.45%. The below long term graph subtracts 1.45% from the Establishment number and adds 0.4% to the Household number to show both current YoY levels at the zero line: 

Unsurprisingly, with the exception of one month in 1952, any time the YoY change in jobs in the Household Report has been this low, it has been because of a recession. 

What is more concerning is that, with the exception of 1952 and a number of months in the decade before the pandemic, the same has been true of gains of only 1.45% YoY in the Establishment Survey as well. Here’s a close-up of that decade:

YoY employment gains of the current magnitude or less were only measured for one month in 2013, several months near the end of 2017, and during 2019 when contemporaneously I was worried about whether a recession was in the offing.

One important consideration is population growth over this long period of time. A gain of 100,000 jobs in a month now is likely very different than a 100,000 gain back when the US population was half of what it is now.

The next graph corrects for that, subtracting the YoY% gain in the prime working at population from the YoY% in job growth. The result is the net YoY% gain over and above the prime working age population for the period:

Except during the 1970s and 1980s, when women were entering the labor force by the millions, a 0.9% YoY net gain has almost always meant a recession. Even during the 10 years before the pandemic, there were only 4 months during 2018 when the YoY gain was so low.

If that weren’t concerning enough, there is good reason to believe that job gains in the Establishment Survey are going to be revised lower for 2024. That’s because the QCEW, which is not a sample but an actual census of about 95% of all firms, and to which the jobs survey is benchmarked twice a year, has shown a great deal more slowing in the past 18 months. Here’s Prof. Menzie Chinn’s most recent update from Econbrowser:

The QCEW unfortunately is not seasonally adjusted, so the best way to compare that and the 2024 payrolls numbers is YoY. This shows a stark difference.

In June 2023, the QCEW showed a 2.5% job gain. As benchmarked, nonfarm payrolls show a 2.4% gain. But the latest QCEW report through June 2024 shows only a 0.8% YoY job gain, vs. 1.6% for payrolls through that month. If nonfarm payrolls are similarly re-benchmarked, then the *only* month going back 75 years when such a meager gain did not coincide with a recession was one month in 1952.

Further, every month I update the leading components of the jobs report, which mainly are manufacturing and components of construction jobs, as well as goods-producing jobs as a whole. And for the first time during this recovery, goods-producing jobs as a whole have stopped growing over the last two months. Here’s what they look like post-pandemic:

Since July, only 7,000 goods producing jobs have been added, or only a .03% increase. In the past 8 months, only 39,000 goods producing jobs have been added, an increase of .18%. That isn’t necessarily recessionary. As the longer-term graph below shows, there have been similar stalls in 1995, 1999, and 2016 without recessions following:

But on the other hand, outright declines in goods producing jobs have occurred for at least six months, and sometimes over a year, before about 3/4’s of all recessions going back 75 years:

Indeed, even the current 0.7% YoY gain has almost always in the past meant a recession (blue in the graphs below):

The exception is the 10 years before the pandemic:

Further, if we simply continue the trend growth for the last eight months, that would be a 0.27% job gain in goods producing jobs YoY by March 2025, which would be lower than at any point in the 10 years before the pandemic.

But as the graphs just above also show, job growth in services remains robust, at present up 1.57% YoY. While up until 2000 even that would have typically only occurred in recessions, it has been an average rate of growth since throughout the expansions as well. 

Finally, the stalling out in goods-producing jobs has been exclusively a manufacturing story. As the below graph shows, job gains in construction (dark red, right scale) and residential construction (light red, right scale, *8 for scale) continue:

As I have pointed out many times in discussing housing, residential construction jobs have almost always turned down well in advance of recessions. While housing units under construction are down -15% or so, which typically in the past has coincided with layoffs in residential construction, as of now they certainly have not.

In conclusion, there is sufficient cause for concern to raise a yellow caution flag about the trend in employment growth. But there are nowhere near sufficient reasons to hoist a red warning flag.