October Regional Feds’ summary of the goods producing economy: growth, but with strong inflation and almost nonexistent job growth

 

 - by New Deal democrat

With the shutdown of almost all economic statistics from the federal government, one of the most important remaining sources is the Fed and its regional banks. All 5 of them that publish manufacturing and services reports have now done so. Which means that we have a decent placeholder proxy for important trends in order, production, prices, and employment.

Today I am going to focus on the manufacturing reports. The below chart includes, in order, NY, Philadelphia, Richmond, Kansas City, and Texas. Month over month changes are in parentheses, with the absolute values for October following. The final number is the average change and absolute number for all 5 together.

Regional Fed:     NY.           PHL.           RVA.       KC.    TX.    Avg

Headline:     (19.4) 10.7; (-36.0) -12.8; (13) -4; (2) 6; (0) 5.2; (14) 3.5          

New Orders (23.3) 3.7; (5.8) 18.2; (9) -6; (-1) 1; (0.9) -1.7; (7.6) 3.0 

Prices Paid  (6.3) 52.4; (2.4) 49.2; (-1.4) 5.8; (1) 41; (-10.0) 33.4; (-0.3) 29.0 

Prices Rec’d (5.6) 27.2; (8.0) 26.8; (-1.0) 3.0; (6) 19; (-4.0) 7.7; (2.9) 16.7

Wages* (n/a) n/a; (n/a) n/a; (2) 15; (n/a) n/a; (-1.7) 14.2); (0.2) 14.6

Employment  (7.4) 6.2; (-1.0) 4.6; (5) -10; (-6) 1; (5.4) 2.0; (2.2) 0.8

____

* only 2 of the banks report this information

While the chart is somewhat messy, below are the 3 main trends:

 1. Production and to a lesser extent new orders showed significant upward momentum in October, while prices, wages, and employment showed little change.

 2. But if upward momentum (2nd derivative) has abated, prices both received by the manufacturers, and even more impressively prices paid by them for raw materials increased sharply, indicating continued effects from tariffs and trade issues, some of which, but only some of which, are being passed on to retailers and consumers.

 3. Wages show continued strong growth, but employment is virtually dead in the water, neither expanding nor contraction.

Importantly, remember that the goods producing sector is only roughly 1/4 of the entire US economy. The remaining 3/4’s is picked up by the services surveys.

But because production and orders are significantly positive, this means the goods producing sector of the economy was growing this month, while inflation is an increasingly important issue (which *should* greatly complicate matters for the Fed), and employment is almost not picking up at all.

Repeat home sales show continued deflation (Case Shiller) vs. stabilization (FHFA) (update with current graphs)

 

 - by New Deal democrat

Despite the government shutdown, the FHFA did publish its repeat home sales index this morning. And since the S&P Case Shiller index is from a private entity, that was published as well. Between those two and the NAR’s existing home sales report, we still have pretty good visibility into that 90% of the housing market, although we have to infer what it means for new home sales and construction.

The last several months showed absolute *de*flation in home prices. The message was mixed for this morning’s reports through August, in which the Case Shiller National Index (gray in the graphs below) declined another -0.3% (non-seasonally; on a seasonally adjusted basis they rose 0.2%), but the FHFA purchase only index (blue) rose 0.4% (note: FRED hasn’t updated either series yet, so the below graphs are through last month. When they update, so will I) (now updated with current Case-Shiller information):

On a YoY basis, price gains in the Case Shiller index continued to decelerate, at 1.5%, while the YoY change in the FHFA Index remained at 2.3%. These remain the lowest YoY% increases since 2012 for both indexes excluding 5 months in 2023 for the Case Shiller index:

With the gain this month, the actual *de*flation in the house price indexes from peak has been reduced to -0.1% for the FHFA Index, while the Case Shiller Index is down -0.9%. The peak for the FHFA index (blue in the graphs below) was in March, while that the Case-Shiller Index (gray) was in February:

Because house prices lead the shelter component of the CPI by 12 - 18 months, this also suggests that they will continue to decelerate, at least slowly, over that period. Here is the same graph as above (/2.5 for scale) plus Owners’ Equivalent Rent from the CPI YoY (red):

The last time the Case-Shiller and FHFA Indexes were in this range, excluding the Great Recession, was in the 1990s, during which time Owners Equivalent rent was in the 2.5%-3.5% range (vs. 3.8% as of the most recent CPI report, which was also the lowest reading of that number since autumn of 2021).

When available, I’ve been comparing these numbers to the latest “National Rent Report” from Apartment List, but that has not been released yet for September. On the other hand, via Nick Gerli, a similar metric from RealPage also shows an actual decline in rents in Q3 of this year, and are also negative YoY, likely (he says) driven by a slowdown in job growth and a decline (or outright reversal?) in immigration:

 

For the last two months, my conclusion has been that all phases of the housing market are either at or near their low points (sales, permits, starts), or declining (prices, construction, employment, and new spec units for sale). For over a decade I have said that sales lead prices, and the available information this month indicates that it is still the case, with the housing market is still flat on its back, with stagnant - but not necessarily declining - sales, and continuing declines in prices at least. 

Tabulated state initial and continuing claims continue neutral trend indicating weak expansion

 

 - by New Deal democrat



As I have done since the beginning of the government shutdown, the number of initial and continuing claims can be calculated notwithstanding, because it is based on reporting by the States, plus DC, Puerto Rico, and the Virgin Islands. Then by applying the same adjustment as was used for the same week last year, the seasonally adjusted number can also be estimated closely.

Further, since my forecasting method relies on the YoY% changes, it is almost never an affected by that seasonality. 

So tabulated, for the week ending October 18, unadjusted initial claims totaled 205,375 vs. 203,482 in 2024, an increase of 0.9%.  

Last year this week the seasonal multiplier was *1.1205. Applying it gives us an estimated seasonally adjusted number of 230,000.

We can similarly calculate the four week moving average, since the last four weeks of claims were 224,000, 228,000, 224,000, as well as this week’s 230,000. That gives us an average of 226,500, which is -12,000, or -5.0% lower than the number of 238,500 one year ago, which was the peak week for affects by the hurricanes which struck the Southeast, particularly Florida and North Carolina last autumn.

Using the same methodology, unadjusted continuing claims for the week ending October 11 totaled 1,669,530 vs. 1,627,757 last year, an increase of 2.6%.

The seasonal adjustment for the applicable week last year was *1.15742. Applying it gives us an estimate of 1.932 million continuing claims, or -3,000 lower than one week ago.

To give you a graphic idea of how this data shakes out, here are initial claims (blue), the four week average (red), and continuing claims (gold) all normed to 0 as of this week’s tabulation, compared with their readings in the past two years before the shutdown:

As with the past several weeks, absent hurricane distortions this continues the general neutral trend of initial and continuing claims, higher than one year ago but much less than 10% higher, forecasting a weakly expanding economy for the next several months.

Weekly Indicators for October 20 - 24 at Seeking Alpha

 

 - by New Deal democrat

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

This is a good time for a reminder that very little of the high frequency data has been affected by the federal government shutdown, because almost all of it comes from the Fed or regional Feds, States, and private sources.

That data continues to paint a picture of continued expansion fueled by consumer spending, likely largely coming from stock market gains. At the same time, there are important signs that actual goods producing and transporting sectors are flagging, if not quite negative.

As usual, clicking over and reading will bring you as up to date as to the economy as possible, while rewarding me a little bit for my efforts.

September consumer inflation: re-accelerating trend more established, with shelter (!) being the only silver lining

 

 - by New Deal democrat

Wow, some actual new economic data on which to report - how refreshing!

To be clear, the only reason this was reported is that it was necessary for the calculation of the annual cost of living increases to Social Security checks. Had these been frozen there would have been a “million walker/cane/Medicare scooter march” on Washington.

But let us not be curmudgeonly about it, and dig right in, because there are some significant trends in the data. 

First, both the monthly and annualized data show that inflation bottomed almost exactly on “Liberation Day” when massive tariff increases were announced this past spring; and that renewed inflation is percolatiing through the economy, as shown in the monthly (red, right scale) and YoY (blue, left scale) comparisons:

YoY inflation in September was the highest since January, and before that, June of 2024.

That April of this year marked the low for inflation is shown in even more relief with the changes for headline inflation (blue), core inflation (red), and inflation ex-shelter (gold) since the beginning of 2023:

Not only has headline inflation reversed, but there has been a smaller reversal in core inflation. But the biggest change of trend is that inflation ex-shelter, at 2.7%, was at its highest level since April 2023.

And recall that shelter is a lagging component of inflation. Which means that, paradoxically, although it is still elevated, it is the one important component of inflation that is still decelerating. To begin with, as per usual, the below graph compares the YoY% changes in the repeat home sales indexes, which lead by about 12-18 months (/2.5 for scale), to CPI for shelter (red). YoY home price increases are near or at multi-year lows, and shelter inflation has followed. In September, shelter CPI increased 0.2%, the lowest monthly increase in the past 4 years except for this past June. On a YoY basis it is up slightly less than 3.6%, its lowest level since October of 2021. The below graph includes several years before Covid to show that this is actually at the very top end of its 3.2%-3.6% range during the latter part of the last expansion:

On a monthly basis, actual rent increased 0.2% (the lowest since March 2021), while fictitious owners’ rent increased 0.1%, the lowest such increase since November 2020:

On an YoY basis they advanced 3.4% and 3.8% respectively, the lowest YoY% increases since the end of 2021:

This is the one big silver lining in this month’s report, because we can expect shelter inflation to continue to decelerate for an ongoing number of months.

Let’s take a look at a few other areas of interest.

First, new car prices continue to be largely unchanged, up 0.2% for the month and up only 0.8% YoY. Meanwhile in a reversal from recent months, used car prices declined -0.4%, and their YoY increase decelerated from 6.0% to 5.1%. On an absolute basis, new cars have been up almost exactly 20% from their pre-pandemic range for the past 3 years, while used cars have been up about 30% for the past 20 months:

I suspect that used car prices increased more since the pandemic because car loan interest rates may be causing a bigger percent of purchasers to go to lower cost used vehicles.

Next, transportation services (mainly car repairs and insurance) lag the prices of new and used cars. Inflation here returned to below 4.0% YoY this year, and was up 2.7% YoY in September. While insurance costs have increased only 3.1% in the past year (not shown in the graph below), maintenance and repairs have accelerated in recent months and are up 7.7% YoY:

I suspect this is a direct result of the impact of tariffs.

Next, recently price increases in medical care services have also re-accelerated, and again this month increased 0.3% for a 3.9% YoY increase:

Finally, gas for utilities and electricity costs have also turned up sharply this year. But in September both declined, the former by -1.2% and the latter by -0.5%. Nevertheless, on a YoY basis, they are up 11.7% and 5.1%, respectively:

At least some of this is probably due to a sharp increase in demand caused by the enormous use of electricity in data-mining plants used for AI, much of which is passed on to ordinary residential customers.

In the past few months, I wrote that consumer inflation was in a transitionary period. September’s report, with its definitive re-acceleration only counterbalanced by the important and continuing declaration of shelter inflation, shows that we are further along that path.

home sales, prices, inventory all rangebound

 

 - by New Deal democrat

With the continuing desert of official data, the NAR’s existing home sales report - which normally is of secondary importance - temporarily becomes our best look at the housing market. 

To repeat what I’ve mentioned an number of times in the past, after the Fed began hiking rates in 2022, mortgage rates also rapidly rose from 3% to the 6%-7% range, where they have remained ever since. Since sales follow mortgage interest rates, existing home sales rapidly declined to 4.0 million annualized, and have remained in that range, generally +/-0.20 million for the past 3.5+ years - and they did so again this month:

In September, sales came in at 4.06 Million annualized (blue, right scale), a mere 6,000 annualized above August’s rate. As of our last look one month ago, new home sales (gray, left scale) similarly declined and have similarly stabilized in the 625,000-725,000 annualized range. 

In the past several years I have been looking for the new and existing homes markets to rebalance. Existing home inventory has been removed from the market for over 10 years (likely due in part to absentee rental owners buying increasing chunks of inventory), and really accelerated during the pandemic. This caused an acute shortage of houses for sale, which in turn led to bidding wars among buyers and a spike in prices.

A rebalancing of the market more than anything would require an increase in inventory at least to pre-COVID levels, and a deceleration of price increases, or even outright decreases. Which means that the level of sales themselves was far less important than what the median price for an existing home and inventory are telling us about the ongoing rebalancing of the housing market.

The secular decline in inventory reached a nadir in 2022. This series is not seasonally adjusted, so it must be looked at YoY. In September inventory crept up by 5,000 to 1.550 million, exceeding its 2020 level for the same month by 9,000:

Inventory was typically in the 1.7 million to 1.9 million range before the pandemic, which means that the chronic shortage still exists.

But even more important is what happened, and has continued to happen, with prices. As shown in the below graph, the average price of a new home (gray, left scale, not seasonally adjusted) rose almost 40% between June 2019 and June 2022 before slowly declining about -7% through June 2025. Meanwhile, the average price of an existing home (blue, right scale, not seasonally adjusted) rose about 45% between July 2019 and July 2022 and another 5% through July of this year, as was reported last Monet:

With seasonal adjustments are not made, my rule of thumb is that a peak (or trough) occurs when the YoY% change is less than half of its maximum change in the past 12 months. Here are the comparisons in the past 12 months:

September 2.9%

October 4.0%

November 4.7%

December 6.0%

January 4.8%

February 3.6%

March 2.7%

April 1.8%

May 1.3%

June 2.0%

July 0.2%

August 2.2%

September 2.1%

While YoY price increases have crept up since July, they remain well below their past 12 month peak of 6.0%, so it is fair to conclude that, if we could seasonally adjust, house prices are softer than they were last winter and spring.

With softened prices and increasing inventory on a YoY and even 5 years basis, the rebalancing of the housing market appears well underway. Still, with prices of existing homes up about 50% from their pre-pandemic levels, there is still some distance to go.

Redbook, Philly Fed: a whiff of consumer weakening?

 

 - by New Deal democrat

The government shutdown is continuing. The only significant national economic news will be the NAR’s existing home sales report on Thursday. Additionally, the remaining regional Fed surveys will come at the end of this week or next week.

And, as I am still on vacation, don’t be surprised if I play hooky until then.

In the meantime, there are a couple of nuggets with a whiff of a suggestion that the consumer services sector is weakening.

First, the Philadelphia Fed’s nonmanufacturing report was very week. Here’s a graph of employment (blue), new orders (red), and prices paid (gold):

Services inflation has accelerated this year, while employment has been flat, and shrank a little this month, while the new orders component came in at one of the lowest readings in the survey’s entire 15 year history.

Additionally (via Renaissance Macro), the general outlook and diffusion indexes in the survey also came in at among the lowest readings outside of the pandemic lockdowns and the Tariff backlash earlier this year:

Finally, after a strong September, Redbook’s national retail spending survey came in at a weak +5.1% YoY this week:

Well within the range of weekly readings in the past 18 months for this survey, so of course it could very well just be noise.

But without national economic numbers, this is the best information we have. Once more regional Fed’s report, we’ll have a more reliable average.

Initial claims lower than one year ago, an important positive point for the economy

 

 - by New Deal democrat

As per my introduction the past several weeks, despite the government shutdown we can recreate the initial and continuing claims data, because it is based on reporting by the States, plus DC, Puerto Rico, and the Virgin Islands.

Since my forecasting method relies on the YoY% changes, it is almost never an affected by seasonality. Further, by using the same seasonal adjustment for the equivalent week one year ago, we can arrive at a good estimate of what the weekly changes would be.

Tabulating the 53 jurisdications’ reports, for the week ending October 11, unadjusted initial claims totaled 210,639 vs. 225,245 in 2024, which is -6.5% less. 

Last year this week the seasonal multiplier was *1.0655:

Applying it gives us an estimated seasonally adjusted number of 224,000, a decline of -4,000 from one week ago. 

Similarly, adding it to the three previous weeks of data we arrive at a four week moving average of 222,000, which is -14,750, or -6.2% lower than the number of 236,750 one year ago.

As with last year, there is an important caveat about last year in that these were affected by hurricane related layoffs, particularly in Florida and North Carolina. 

Using the same methodology, unadjusted continuing claims for the week ending September 27, totaled 1,654,456 vs. 1,598,184 last year, or 3.5% higher.

The seasonal adjustment for the applicable week last year was *1.16945. Applying it gives us an estimate of 1.935 million continuing claims, or -3,000 lower than one week ago.

As with one week ago, absent hurricane distortions, this continues the general neutral trend of initial and continuing claims, forecasting a weak but not contracting economy in the next several months.

To give you a graphic idea of how this data shakes out, here are initial claims (blue), the four week average (red), and continuing claims (gold) all normed to 0, compared with their readings in the past two years before the shutdown:

 I will continue to estimate this data for the duration of the shutdown

Weekly Indicators for October 13 - 17 at Seeking Alpha

 

 - by New Deal democrat

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

About 90% of the high frequency data comes from non-Federal government sources and so is unaffected by the shutdown. It continues to signal no particular stress. But there is no denying that the loss of the monthly official data series (for things like housing, productioin, and employment) means that to a great extent we are “flying blind.” 

But clicking over and reading will bring you about as close as possible as being up to the virtual moment on the state of the economy, and will reward me ever so slightly for organizing the data for you.

DOGE layoffs hit, but still no significant change in initial or continuing jobless claims

 

 - by New Deal democrat

We continue our exercise in flying blind (into terrain?) as the government shutdown prevented the release of housing permits, starts, and construction this morning; and the Fed did not have the data necessary to update industrial production and capacity utilization. The only current information we have on the housing sector is that mortgage applications declined for the third straight week (but are still 20% higher than one year ago), and prospective buyer traffic remains paltry.

The States did report their initial and continuing jobless claims, and these were updated by FRED this morning. I’ll have a complete report on Monday, but here are two preliminary comments.

First, claims from the DOGE layoffs in the Federal government are now showing up. Here’s the non-seasonally adjusted number of initial claims from DC, Virginia, and Maryland in the past year:

These have increased about 3,000 in the past several weeks to a new 12 month high in Virginia, and close to those highs in DC and Maryland.

Next, here are the YoY% changes in initial and continuing claims for the 4 biggest States: CA, FL, TX, and NY, which together make up about 1/3rd of the total:

Initial claims are higher by 1.1%, and continuing claims (with the typical one week delay) are higher by 0.6%.

As a preliminary matter, the bottom line is that there has been no significant increase in jobless claims in the past few weeks - a neutral reading suggesting a slow, but still expanding, economy.

Significant positive news in the goods producing sector

 

 - by New Deal democrat

Under normal circumstances, this would be the morning I would slice and dice the first important consumer data for the month: retail sales. With the government shutdown continuing with no end in sight, all we have are several dart-throws. The Chicago Fed’s final Advanced Retail Trade report for September indicated +0.5% nominal growth, and +0.2% in real terms. Meanwhile Morgan Stanley, apparently relying on credit card data, wrote that there was no growth at all.

There is a little more reliable evidence in the goods-producing sector, as both the NY and Philadelphia Feds have issued their monthly manufacturing surveys. In addition, the Department of Transportation did update their Freight Services Index earlier this week.

And the news was modestly good.

Let’s start with the headline numbers. The NY Index (dark blue) came in at +10.7, while the Philadelphia Index (light blue) slid to -12.8. But the averages for the past few months are clearly, if slightly, positive. Meanwhile the Freight Services Index (red, right scale) declined a slight -0.1% for the month, but remains at one of the five highest readings in the past 5 years:

This is significantly positive for the sector.

Additionally, new orders for both regional Fed indexes remained positive, suggesting the good news will continue a couple more months:

And the average of employment for the two Fed regions was also positive, among its best readings of the past 2.5 years:

The big fly in the ointment likely can be directly tied to tariffs, as the prices paid components on both regions continues at levels equivalent to the beginning of 2023. Note that the big surge in cost coincided exactly with the beginning of tariff-palooza:

All of this is no substitute for the more comprehensive data we deserve, but the data is reliable enough to indicate - surprisingly - modest positive momentum in the goods producing sector.

More on stock market indexes’ advance-decline lines: the healthy and the sick

 

 - by New Deal democrat

I am currently on vacation, and as the shutdown continues with no end in sight, the only sources of economic data are from the Fed and its regional banks, the States (unemployment claims and sporadic updates on tax withholding), and private sources. 

In other words, I might play hooky several days a week, so don’t be surprised.

There is one thing worth following up on today. That’s the health of the stock markets. Aside from the fact that the stock market is a short leading indicator, it is particularly important at the moment because of the “wealth effect” on consumers who have watched their paper portfolios increase sharply in value over the past 6 months.

Last week I pointed out that one bellwether for the health of the markets was the advance-decline line; that is, the number of companies in the indexes that are participating in an advance or decline. In particular, I pointed out that the advance-decline line had warned of unhealthy markets in advance of both the 2000-01 dotcom bubble collapse and the Great Recession. 

Well, we’ve had some interesting action over the past week, with the return of China Tariff-palooza and its almost immediate walk back (but not before one or more people with apparent inside information made a killing). And this morning I read that several over-levered players adjacent to the auto industry went bankrupt last month.

So let’s take a look at several different indexes, updated through yesterday.

Last week I showed the S&P 500 advance-decline line. As of yesterday, it continued to be generally neutral, with almost no advance compared with 3 months ago, but no downtrend, and indeed several new highs earlier this month:

But the NYSE a-d line has not nearly been so healthy:

It is no better at present than it was almost 3 months ago, and has been in a clear downtrend since early September.

Even worse is the small cap Russel 2000 a-d line:

It peaked at the end of last year, and although it rebounded after April, it has had a rrenewed decline since a secondary peak in August.

On the other hand, the Nasdaq a-d line continues to be positive:

Like the S&P 500 a-d line,  it made new highs earlier this month, and even the pullback in the last few days did not take it down it its August or September lows.

This confirms my general view of the economy. In the broadest terms, it is pretty unhealthy. But in the specific areas where there has been a Boom (or, maybe, Bubble), it has not cracked at all. I’ll continue to watch to see if that happens; and if it does, my suspicion is, “look out below!”

Tabulations of state level reports indicates 228,000 initial claims, 1.938 million continuing claims last week

 

 - by New Deal democrat

Among the economic data that is not being reported due to the federal government shutdown are initial and continuing jobless claims. Which, as I pointed out last week, is interesting because they were reported during the lengthy 2013 shutdown and for at least part of the 2018-19 shutdown.

But both sets of claims are simply tabulations of all the claims made at the State levels (plus DC, Puerto Rico, and the Virgin Islands), to which a seasonal adjustment is made. This means that we can reconstruct the YoY% changes in the data from the various jurisdictions’ reports; as well as provide a reasonable estimate of what the seasonably adjusted numbers would be.

Tabulating the 53 jurisdications’ reports, for the week ending October 4, unadjusted initial claims totaled 207,794 vs. 236,179 in 2024, which is -12.0% less. 

Last year this week the seasonal multiplier was *1.0966:

Applying it gives us an estimated seasonally adjusted number of 228,000, a 4,000 increase from one week ago. 

Adding it to the three previous weeks of data we arrive at a four week moving average of 225,500, which is 6,750 less than one year ago, or -3.1% lower. 

There is an important caveat about last year in that these were affected by hurricane related layoffs, particularly in Florida and North Carolina. 

Next, continuing claims with the typical one week delay, i.e., for the week ending September 27, totaled 1,683,327 vs. 1,614,324 last year, or 4.3% higher.

The seasonal adjustment for the applicable week last year was *1.510:

Applying it gives us an estimate of 1.938 million continuing claims, or +19,000 higher than one week ago.

Absent hurricane distortions, this continues the general neutral trend of initial and continuing claims, forecasting a weak but not contracting economy in the next several months. I will continue to estimate this data for the duration of the shutdown.

Weekly Indicators for October 6 - 10 at Seeking Alpha

 

 - by New Deal democrat

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

More roiling of the waters in commodities, in between signs of economic weakness and another re-ignition of the China trade wars. Meanwhile the Treasury Department, for no apparent valid reason, but only out of spite, has taken its “Daily Treasury Statement,” which enables us to measure tax withholding and tariff revenues, offline. And not just new updates, but all of the already published data.

As usual, clicking through and reading will bring you up to the virtual moment as to the state of the data, and reward me a little bit for obtaining and organizing it for you.

The “Big Picture” nowcast and forecast

 

 - by New Deal democrat

We are well into our data blackout, as no federal economic data whatsoever was released this week. Even sites that functioned in previous shutdowns, such as the Treasury Department’s “Daily Treasury Statement,” have been taken offline. This is simply not the way a functioning country works.

So let me conclude this week by offering the proverbial “30,000 foot view” of the economy, together with some links and graphs to relevant privately sourced data that is partially filling in some of the gaps.

The Big Picture nowcast and forecast are dominated by two different events.

The nowcast is that the economy is currently sharply bifurcated into an AI-related part and the rest. The AI-related part of the economy is booming. Corporate profits in the 3rd quarter are set to make another record, powered by the “magnificent 7” tech companies (Note: many of the below graphs are sourced from Carl Quintanilla’s excellent Bluesky feed. Several are also due to the extremely helpful “Alternative Data” graph pack from Apollo Investments, see https://www.apolloacademy.com/wp-content/uploads/2025/10/AlternativeData100525.pdf ):

Data centers are still being built at a fast pace, creating more demand for energy, and also (as I wrote yesterday) creating a “wealth effect” that is fueling consumer spending by the upper echelons of owners of stocks, as shown in this graph by B of A:

But the rest of the economy probably began a recession several months ago, with real personal income and jobs stagnant or even having begun to decline. The Bank of America published its proprietary employment indicators for September several days ago, and here are the important graphs:

Employment gains hovering just above 0 and the unemployment rate rising is a classic signal at the beginning of recessions.

There are also reports that bankruptcies have been increasing:

And consumers are falling behind on important installment loans such as for motor vehicles:

At least some of this, by the way, may be due to the resumption of the full requirements of repayment of crippling student loans, which may not be discharged in bankruptcy.

So why aren’t I on “Recession Watch” already? Because the size of the AI Boom is so big that for the moment at least it is more than counterbalancing the malaise in the rest of the economy.

The Big PIcture forecast, generally for the rest of the T—-p Administration, is gloomy. That’s because the entire US fiscal and economic policy is being run as a gargantuan mafia-style “bust-out,” or what Darin Acemoglu and James Robinson called “extractive economies” in their book “Why Nations Fail.” In extractive economies, an elite group of cronies around the ruler uses political and economic power to enrich themselves. Part of this paradigm is the mafia-style shakedown: “got a nice company/product/industry there; be a shame if something happened to it.” 

T—-p’s entire economic “policy” has been built around this. Want to export to the US? Wet my beak. Want your merger to go through? Wet my beak. Want your State’s biggest industry (agriculture, vehicle production, tourism) to stay intact? Wet my beak:

We’re even seeing the government directly invest in the stocks of companies; viz., Intel. Even the $20 Billion bailout of Argentina, unsurprisingly, looks like it was mainly to rescue the investment portfolios of several Billionaire T—-p cronies.

And of course the “Big Beautiful Budget Bill” amounts to a massive upward transfer of wealth that will so explode deficits in the coming decade that it will leave little if any room for stimulative policies to counteract the next downturn.

Extractive economies grow anemically or even contract, because it is simply not worth it to innovate when the ruler and his clique will muscle in.

Exactly how the US economy will degenerate during the next 3 years (or whatever the duration of T—-p’s time in office) is impossible to know or predict. But it is a virtual certainty that it will degenerate. And in the meantime we are flying blind, because the flow of reliable statistical data has also been mainly shut off.

The advance-decline line and the (maybe) AI-fueled consumer spending bubble

 

 - by New Deal democrat

I rarely comment on the financial markets directly, since my focus in on the economy and how it impacts ordinary working and middle class Americans, especially in the near future. But in some cases, the financial markets themselves play an important role in that picture. And this is one of those times.

Specifically, in terms of what is called the “wealth effect.” It means that when people’s wealth increases, even if it only on paper, they tend to spend some of that gain. According to Ned Davis research, it averages about 40% of the amount of the gain.

Well, since the post-“Liberation Day” April bottom, the stock market as measured by the S&P 500 has increased almost 35%. Meaning, for example, that a household that held $100,000 in that index in April has seen it grow by $35,000. A wealthier household that held $1 million, has gained $350,000. And so on.

As I have pointed out a number of times in the past several months, it is strong consumer spending that is keeping the economy going forward, despite recessionary signs elsewhere.

But how robust, or fragile, are those gains? One of the best historical measures I have found to be the “advance-decline line.” This subtracts the number of stocks which have lost value on any given day from the number which have gained. For example, if there are 1000 stocks in a bucket, and 550 have advanced and 450 declined, then the advance-decline line increases by 100. If the advance-decline line shows that the broad mass of stocks are participating in an advance, that is a good sign, because it suggests that many sectors are benefitting. But if it is narrow, or worse even declining, while the market index increases, that means that only a few stocks in a narrow sector or group of sectors are participating, suggesting trouble for the markets, and the economy, ahead.

There are two very good examples of the advance-decline line giving such a signal.

First, here is the late 2006-2007 time frame just before the onset of the Great Recession. The top graphic is the NYSE, the second is the advance-decline line for the S&P, and the bottom is for the S&P 500:

Note that even as stocks broke out to new highs at mid year, and again to their early autumn peak, the advance-decline line retreated in spring, and was even lower by autumn. This told us that the economy was resting on a narrow slice of sectors.

An even more breathtaking example is that of the Dotcom bubble of 1999-2000:

Here the advance-decline lines for the NYSE and S&P 500 declined sharply throughout the latter part of 1999 into 2000, even as the index raced ahead by almost 50%! This was a telltale sign, indicating that outside of the bubble economic prospects were not good at all.

So how has the advance-decline line been behaving this year? Here’s the answer for the S&P 500:

As indicated above, since the bottom in early April, stocks have increased by almost 35%. The advance-decline line participated fully in the springtime advance to mid-year.

But since early July, while the S&P 500 has increased almost another 10%, although it has not declined the advance-decline line has only increased by about 1%.

This is “yellow flag” territory. Slightly more stocks than not have been participating in the advance. But compared with the amount of the advance, it is quite narrow.

I would need the advance-decline line to actually turn down before it would signal a “red flag” for me.

But here is the important thing to keep in mind. If the AI-focused stock market is in a bubble - which is almost impossible to know while you are experiencing it - then whenever it pops, stock valuations are likely to plunge all the way back to their pre-bubble levels (and maybe overcompensate to the downside).

Which in turn brings us to the opposite of the “wealth effect.” Psychologists have estimated that this “negative” wealth effect is about twice as potent as the “positive” one. In layperson’s terms, people *really* hate to lose money. When that happens, they pull in their horns much more dramatically than when they spend some of their paper gains.

The conclusion here is that it doesn’t look like the turn is imminent. But if and when the turn comes, if other economic circumstances are close to what they are now, the contraction could be rather sudden and intense.