February JOLTS report: “soft landing” so far, but indications of further weakness ahead

 

- by New Deal democrat

 Along with all the other reports, yesterday the JOLTS survey was updated for February. This survey decomposes the employment market into openings, hires, quits, and layoffs, and so gives a more granular view. The question over the past year has been whether they best describe a “soft landing,” or “hard” one ending in recession.

Additionally, several components are slight leading indicators for jobless claims, unemployment and wage growth.

In February the news was mainly good, as most categories stabilized.

First, here are openings, hires, and quits all normed to 100 as of just before the pandemic:

Openings, which are “soft” data and have generally uptrended going all the way back to the turn of the Millennium, remain above their pre-pandemic levels, but this is not terribly significant. Both hires and quits fell below their pre-pandemic levels at the beginning of last year. But the far right end of the graph suggests stabilization, which is even more apparent when we zoom in on the past 12 months:

Openings are virtually unchanged from their level 10 months ago. Hires have been very stable since last July, and Quits have been stable since August. In fact on a 3 month average basis, both Hires and Openings have remained within a 1% range.

This is good news. It says “soft landing” (barring political own-goals in Washington like massive tariff wars, of course).

One item of concern in the report was layoffs and discharges, which increased to their highest level in almost two years excluding last September:

This is of a piece with the uptick in new jobless claims (red, right scale) we have seen in February and March, which in turn suggests there may be some upward pressure on the unemployment rate in the coming months.

Finally, here is the update on the quits rate (right scale) vs. the YoY% change in average hourly wages for nonsupervisory workers (red, left scale):

While the quits rate has been stable since last August, it did downshift from earlier in 2024. Average hourly wages have not yet reflected that downshift, but the likelihood is that they will follow, down to a YoY growth rate of about 3.6%-3.7% in the coming months.

To sum up, the coincident reporting in the JOLTS data indicates “soft landing” so far, while the short leading components suggest weaker employment data in the next few months.

February construction spending: nominal vs. real makes all the difference

 

 - by New Deal democrat

Since the turn of the Millennium, a downturn in manufacturing has not been enough to tip the economy into recession. There must also be a decline in construction as well.

This morning’s construction spending report for February painted a substantially different picture depending on whether the data was looked at nominally or in real inflation adjusted terms.

Nominally total construction spending (blue in the graph below) rose 0.7% in the month to yet another new all-time record; while residential spending (red, right scale) rose a sharp 1.3%, close to a 12 month high:

But when we deflate by the cost of construction materials, the picture is not so rosy:

So adjusted, total spending actually declined -0.1%, and residential spending rose 0.4%. 

The picture for the leading residential sector is that spending has been trending sideways (much like permits, starts, and sales) for the past year, while total construction is slowing. In fact in real terms it has not advanced in four months.

Finally, the boom in manufacturing construction has also ended:

The overall picture for the entire goods producing sector of the US economy from this morning’s ISM and construction spending reports is that both manufacturing and construction are almost right at the juncture between expansion and contraction.

Heavy truck sales warrant a yellow caution flag

 

 - by New Deal democrat

After this morning’s contractionary ISM manufacturing report, it occurred to me to look at heavy truck sales to see if they confirmed the downturn. They did, but like the manufacturing index, 

While passenger vehicle sales are very noisy, heavy truck sales convey far more signal than noise, and usually turn down before car and light truck sales, as shown in the below historical graph (averaged quarterly for ease of viewing):

Here is the updated graph since the pandemic, monthly through the latest report from earlier this week for February:

Heavy truck sales were 438,000 annualized, the lowest monthly number since January 2022. The three month average, which does away with most of the noise, was 461,000 annualized, the lowest three months since spring of 2022.

When the three month average of heavy truck sales is down more than -10% from its peak, that has more often than not been a leading indicator of recessions within a year. But note the false positives in 1996, 2016, and 2022, so I am not at the point yet where I am sufficiently confident to say that they warrant a “recession watch,” just a yellow flag caution.

Typically auto and light truck sales have also declined before the onset of recessions, although as noted above they are much noisier. As late as December those made a 3+ year high. I would be looking for the three month average of those to fall below 15 million annualized as a confirmatory signal.

ISM manufacturing index returns to contraction as the front-running of tariffs has ended

 

 - by New Deal democrat

[Note: I’ll report separately on construction spending, also released this morning]

Although manufacturing is of diminishing importance to the economy, (it was in deep contraction both in 2015-16 and again in 2022 without any recession), the ISM manufacturing index remains an important indicator with a 75+ year history of accurately describing that sector and forecasting it over the short term. 

Any number below 50 indicates contraction. The ISM indicates that the number must be 42.5 or less to signal recession. I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.

In the last few months, as most businesses likely figured that the new Administration would be laying more tariffs, it appears there was a rush to get their new orders in asap. That was confirmed by this morning’s report for March, in which the headline index declined -1.3 to 49.0, the lowest since November, and new orders declined -3.4 to 45.2, the lowest level since last June.

Here is a look at both the total index and new orders subindex since the Great Recession:

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

OCT 46.5. 47.1

NOV  48.4. 50.4

DEC 49.2. 52.1

JAN 50.9  55.1

FEB  50.3  48.6

MAR 49.0. 45.2

The current three month average for the total index is 50.1, and for the new orders subindex 49.6. While the headline number is similar to those of last summer and autumn, as noted above the new orders component is the lowest since last June. 

Last month I wrote that “The surge and then retreat in new orders in particular certainly looks like front-running potential tariffs.” This month’s further decline makes that look like almost a certainty. And the uncertainty about the level and extent of looming tariffs undoubtedly is also having an effect on new orders as well.

For the economy as a whole, the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. Since In February the ISM services index came in at 53.5, and the more leading new orders subindex at 52.2, and the three month weighted average of each was 53.4 and 52.6 respectively, it would take a very steep decline in that index to signal recession now.

In summary, as of now the combined indexes continue to suggest that the economy is growing, albeit slowly. The non-manufacturing index for March will be reported on Thursday.

Why I am not concerned by the February increase in core PCE inflation

 

 - by New Deal democrat

The deluge of new monthly data starts tomorrow. Today there’s no significant data, so let me follow up on a point from Friday’s personal income and spending report.

I never look to see what others are saying before I finish my own analysis, because I want to be as unbiased as possible. After that I may check other analyses, and usually they aren’t too different (except for the perma-DOOOMers, who always gotta perma-DOOOM).

Friday was different, because almost everybody else who looked at the personal income and spending report focused on a perceived renewed inflationary pulse. So let me explain in a couple of graphs why I arrived at a different perspective.

A good example of the concern in other quarters was this take by Harvard Econ Prof. Jason Furman:

Core PCE inflation came in a little above the already high expectations in Feb. The pattern is the opposite of what you want to see--the shorter the window the higher the annualized rate (and still high at 12 months):

1 month: 4.5% 3 months: 3.6% 6 months: 3.1% 12 months: 2.8%

And he supplied in support the following graph:

The three month change in particular looks very worrisome.

But notice something else in the graph. Specifically, notice that there was a similar - even bigger - spike in the 3 month average at the beginning of 2024. And in fact there were lots of inflationary concerns expressed back then as well.

And then they completely faded away in the spring and summer.

The reason is apparent when we look at the monthly readings starting back in October 2023, shown in the below graph for both headline (light blue) and core (dark blue) PCE inflation:

There was a big spike in the monthly readings from January through April of last year. Then it simply stopped.

Which has the following effect on the YoY% numbers:

At its low point in the past year, YoY core PCE inflation was 2.63%. As of Friday it was 2.79%. In other words, an increase of all of 0.16%.

So what we have is a repeat of the monthly spike we saw 12 months ago, that has had a very small effect on the YoY comparisons. And is very much in line with the likely unresolved seasonality we have seen in a number of indicators since COVID, including weekly jobless claims and personal spending.

If the monthly number don’t back off in a month or two, and the YoY comparisons get significantly higher than they were 12 months ago, I’ll be convinced that there is a real problem. Unless and until that happens, I am somewhat skeptical.

Arctic sea ice makes new record low annual max

 

 - by New Deal democrat

On Sunday I occasionally post about topics of interest unrelated to economics. So today, let’s take note of a significant milestone in global warming.

Specifically, the arctic has just had its lowest peak ever for sea ice in modern history, at 14.33 million square kilometers. The next closest were 2017, at 14.41 million; 2018, at 14.47 million; 2016, at 14.51 million; and 2015, at 14.52 million. Here’s what the peaks look like graphically, including every year since the turn of the MIllennium:

Interestingly, this year was the third latest peak in the past 25 years, bucking the mild trend of earlier and earlier peaks over time.

Here is what the past several months have looked like in comparison with the four previous record low years noted above, as well as the historical trend:

Although at its peak, this year was higher than previous years on the same date, the peak was nevertheless lower than the peaks of the earlier years, each of which occurred earlier.

Finally, as you can see from the first chart, there has been a sharp decline in the week since this year’s peak, and it is now at an all-time low for this date as well. Here is a close-up of this year vs. the two closest runner-ups, 2006 and 2017:

I am frankly surprised that this page has not been taken down, which is one reason I wanted to make a record of the data here.

Weekly Indicators for March 24 - 28 at Seeking Alpha

 

 - by New Deal democrat

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

The most important news in high frequency data was that we now have 4 of 5 reports from regional Feds for March, and all four showed a decline from last month, and 3 showed absolute contraction.

Meanwhile, consumer spending continues to hold up.

As usual, clicking over and reading will bring you up to the virtual moment as to the economic situation, and reward me with a penny or two for my efforts.

Real income, spending, saving, and sales continue to be expansionary

 

 - by New Deal democrat

Real income and spending are two of the most important indicators of the well-being of the consumer. With the general weakening of the economy, I have been looking to see if in particular real spending on goods would sputter. Signs were mixed in February.

Let’s start with the monthly look, followed by the overall look and real personal income and spending since the onset of the pandemic. In February, the PCE price index rose 0.3%. So while nominal income rose 0.8%, in real terms it rounded to up 0.5%. Nominally spending was up 0.4%, but in real terms only up 0.1%. Further, both income and spending were revised downward for January, by -0.2% and -0.1% respectively:

As you can see, in the past year real income has risen significantly, but spending has stalled in the past several months. Since the onset of the pandemic, real income is up 12.0%, while real spending is up 14.7%:

Somewhat concerning ly, real spending is down from December, and only up 0.1% since November. This is important, because as I always say, consumption leads employment.

Further, historically it is real consumption of goods (blue in the two graphs below) which declines before recessions. Real consumption of services (gold) not infrequently has continued to increase right through all but the worst downturns. And real consumption of goods in the last several months has turned down:

While real consumption of goods increased 0.7% in February, that only partially reversed the -2.1% decline in January, while real consumption of services declined -0.1% for the month. More importantly, real consumption of goods is down -0.3% since November (right scale), and even services (left scale) are unchanged since December:

But to put that in context, here is the 50 year historical YoY record in real spending on goods up until the Great Recession:

In each case, there was sharp deterioration YoY close to or even below 0 before the onset of recessions.

Now here is the post-pandemic record:

There is no YoY retrenchment whatsoever here, despite the stalling in the past several months.

Next let’s look at the personal savings rate. As expansions continue, consumers tend to get more and more extended, and then retrench just before or at the onset of recessions. Below is the historical record from 1983 into the Great Recession, showing both the savings rate (blue) and the YoY change in the rate (red):

You can see that the savings rate went down, and then increased as consumers retrenched, both during and partly causing the recessions, which is reflected in an increase in the YoY rate.

Here is the post-pandemic record through the present:

In the past several months, there has been a significant increase in the savings rate, but I have been concerned that it reflects unresolved seasonality around the Holiday season. And that seems to be confirmed by the fact that the YoY change continues to be slightly lower, indicating no significant consumer caution as of yet.

Finally, there are two important coincident indicators used by the NBER to help date recessions that get updated with this data.

First, here is real personal income less government transfer payments:

This increased another 0.1% in the month for another new record, up 9.1% since just before the pandemic.

Second, here are real manufacturing and trade sales, a more comprehensive measure of sales than just retail sales, as usual delayed by one month:

These decreased a sharp -1.2% for the month. They are now lower than any month since last August except for October. But because these are for January, they may reflect the unresolved seasonality we saw last month in real income and spending, a point reinforced by a similar drop one year ago in January. 

To reinforce that point, here is the historical 50 year record up until the Great Recession:

Real manufacturing and trade sales usually (but not always) decelerate sharply on a YoY basis in the months before a recession. 

Here is the YoY post-pandemic record:

There is no sign of a significant YoY deceleration at this point outside of the range of noise.

To sum up: real income and spending continue their expansionary trends. In particular, while several of the data points have stalled out in the last 3 months, this may mainly reflect unresolved Holiday seasonality. There has been no significant deterioration in real spending on goods that shows up in any YoY fashion. Real manufacturing and trade sales display a similar pattern. Despite the “soft” data on consumer confidence, when it comes to savings consumers appear to be confident enough to get a little further out over their skis.  In other words, real income, saving, spending, and sales continue to be expansionary.

Long leading indicators update: corporate profits in Q4 2024

 

 - by New Deal democrat

Corporate profits are a long leading indicator, as they typically turn down at least one year before the onset of a recession.

Unfortunately, they are typically reported with a lag, and Q4 corporate profits aren’t reported officially until the final update of the relevant GDP report. Which means that they weren’t reported for Q4 last year until today. That’s why I use the proxy of proprietors’ income, which is almost as leading, 

With that caveat out of the way, Q4 corporate profits (dark blue in the graph below) increased 6.7% q/q on an unadjusted basis. Adjusted for unit labor costs (the “official” way to measure them as a leading indicator)(light blue), they increased 5.8%. This is in line with the increase in proprietors’ income (red), previously reported:

Note that, as usual, proprietors’ income also forecast an increase. This is also in line with what S&P 500 companies have been reporting to Wall Street, which I update weekly as part of that report:

The bottom line is that corporate profits have increased consistently since Q1 2023. Absent external factors (like the imposition of widespread tariffs!), they are forecasting no recession in 2025.

Jobless claims continue higher YoY, but not recessionary

 

 - by New Deal democrat

This week’s look at initial jobless claims includes seasonal revisions made to the data for the last five years. Fortunately, they appear to be very minor. So let’s take our typical look.

On a weekly basis, initial claims declined -1,000 to 224,000, and the four week moving average declined -4,750 to 224,000. Continuing claims, with the typical one week delay, declined -25,000 to 1.856 million:

As usual, the YoY% change is more important for forecasting purposes. So measured, initial claims increased 4.7%, and the four week moving average was up 5.2%. Continuing claims were also up 3.0%:

This is the trend we have seen since late last summer, with claims higher YoY, but not by enough to suggest and economic downturn, only some weakness.

Finally, anticipating next week’s jobs report, here is our weekly look at the YoY% change in initial, and initial plus continuing claims, averaged monthly, vs. the unemployment rate:

The YoY% increase in jobless claims suggests about a 5% increase in the unemployment rate. Since this is a percent of a percent measurement, the math is 3.8% * 1.05 = ~4.1%, which is exactly the unemployment rate last month. In other words, jobless claims are suggesting no upward or downward pressure on unemployment in the next few months.

Manufacturers continue to front-run tariffs, with no weakness in new orders

 - by New Deal democrat

Last week I explored how past episodes of sharp increases in politic uncertainty, and decreases in consumer confidence, had played out in the hard data as to both production and consumption.

The upshot was that consumers tended to react first, with about a one quarter delay, and producers tended to react afterward, once the decline in demand was significant, about 2 to 3 quarters after the downturn in confidence.

One of the two measures I looked at then, manufacturers’ new orders for durable goods, was released this morning for Feburary. Let’s take a look.

Normally I don’t pay much attention to this release, because it is very noisy, and although it is touted as a leading indicator, its record is not clear to say the least. And that was the case this morning as well.

Here is the modern record of durable goods orders (blue), core capital goods orders (red) which tend to be much less noisy, and manufacturing production (gold), all normed to 100 as of just before the pandemic:

While new goods orders were indeed leading in the late 1990s, that was emphatically not the case with regard to the Great Recession, where orders turned down coincident with its onset, and capital goods orders turned down four month *after* its start. Moreover, there is no evidence that they led industrial production in manufacturing, which is a classic coincident indicator. Much of this I suspect has to do with the widespread adoption of “just in time” inventory controls.

Here is the same data post-pandemic:

While there is some variation among the three measures, all essentially trended sideways beginning in 2022 or 2023. Notably, both the less volatile capital goods orders and manufacturing production broke out to new highs beginning in November of last year. That is almost certainly not a coincidence. The outcome of the Presidential election may have led to a surge in euphoria. But very quickly it certainly has led to a desire to front run tariff increases. I strongly suspect it is the latter which explains the sharp increase in January which was maintained in February.

(Anecdotally, one of the large car dealers in my area, who owns about seven different franchises, has been running ads for the last few weeks encouraging potential buyers to “beat the tariffs” and “buy now!”  Which is probably an excellent if inadvertent way to convey to customers that their budgets are about to take a hit.)

The below graph shows the same post-pandemic data in YoY% form. Since new orders are up 3.4% YoY, capital goods orders up 1.4%, and manufacturing production up 0.8%, the graph is normed to 0 for each series:

Now here is the same data historically up until the pandemic:

The current level of YoY change would be very weak at any point before the Great Recession, but if anything above average in the 2010s expansion.

The bottom line is that, in keeping with my examination last week, there is no evidence of weakness in new orders due to increased uncertainty in the monthly data at this point.

Finally, here is this week’s update in Redbook’s YoY measure of consumer spending:

The four week average is 5.8% higher YoY, which is right in line with typical readings over the last 12 months. So, also in keeping with my examination last week, consumer spending is not taking a hit yet either.

The housing market continues its slow rebalancing: new and existing home sales rangebound, price pressures including Case Shiller and FHFA steady

 

 - by New Deal democrat

Since new home sales as well as the repeat sales price indexes were both reported this morning, let’s update the entire housing market all at once, including existing home sales, which I didn’t report on last week.

NEW HOME SALES

As per usual, remember that while new home sales are the most leading of all housing metrics, they are very noisy and heavily revised. February showed a 1.8% increase from an upwardly revised (by 9,000 annualized) January, to 676,000. This is almost exactly in the middle of this metric’s two year range of 611,00 - 741,000. Also as per usual, the below graph compares with with single family permits, which lag slightly but are much less noisy:

Both demonstrate the recent rangebound behavior.

Turning to prices, the bugaboo of heavy revisions reared its ugly head, as last month’s reported $22,000 spike in median prices was almost entirely revised away, and this month declined further:

On a YoY basis, the median price of a new home is down -0.9%:

Finally, the inventory of new houses pulled back very slightly (-2,000) from January’s 15+ year high, but continued their 8% trend YoY gains. This is actually “good” news - for the moment - because as the below long term historical graph shows, recessions have in the past happened after not just sales decline, but the inventory of new homes for sale - which also consistently lag - also decline (as builders pull back):

I would need to see a more robust downturn in housing for sale that breaks the YoY trend before I would become concerned.

EXISTING HOME SALES

Existing home sales have been in a tight range for the past 2 years, of a piece with mortgage rates generally between 6% and 7%. That continued in February, as sales clocked in near the top end of that range, at 4.26 million annualized:

There was relief when it came to price appreciation, which is not seasonally adjusted and so can only be usefully compared YoY. After a jump to 6.0% in December, the median price gain declined YoY to 4.8% in January and now 3.6% in February, the lowest since Septebmer’s equal YoY% gain:

Meanwhile inventory continued its slow climb from its COVID lows, as total inventory in February was 1.24 million units, a 17% increase YoY, and the highest February total since 2019. Nevertheless, the longer term declining trend in inventory that predates COVID by over five years is still in place:

REPEAT SALES PRICES

The unwelcome news in repeat home sales that I noted last month continued this month.

On a seasonally adjusted basis, in the three month average through January, according to the Case-Shiller national index (light blue in the graphs below) on a seasonally adjusted basis prices rose 0.6%, and the somewhat more leading FHFA purchase only index (dark blue) rose 0.2%. Both of these continue the trend of re-acceleration we have seen in house prices in the second half of 2024 [Note: FRED hasn’t updated the FHFA data yet]:

Both indexes also continued to accelerate on a YoY basis, as the Case Shiller index by 0.2% to a 4.1% gain, and the FHFA index by +0.1% to a 4.8% YoY increase:

Because house prices lead the measure of shelter inflation in the CPI, specifically Owners Equivalent Rent by 12-18 months, the acceleration in sales prices is likely to lead to an even slower deceleration in the official CPI measure of shelter, although I continue to believe that OER will trend gradually towards roughly a 3.5% YoY increase in the months ahead, particularly as the most leading rental index, the Fed’s experimental all new rental index, indicated a median YoY *decrease* in new apartment rents of -2.4%, with all rents including existing rentals coming in at +3.2% as of Q4 of last year:

Here is the updated calculation of the house prices vs. the YoY% change in Owners Equivalent rent:

CONCLUSION

My theme from the past few months has been looking for a rebalancing of the new vs. existing homes market. For that to happen we need price increases to abate in existing homes, and prices to remain flat or still declining in new homes. Since sales lead prices, and are best viewed in a YoY% comparison, the below graph shows sales (/1.5 for scale) and median prices of new homes (red) in that format, together with the YoY% change in the FHFA repeat sales index (gold):

Last month I was concerned that there was renewed inflation rather than rebalancing. With this month’s new data as well as the revisions to last month’s new home prices, it appears that the rebalancing story is back on track, with continued slow price declines in new homes and abating price increases in existing homes. Meanwhile the increases in inventory in both should result in further release of pricing pressures. 

Nevertheless, we continue to have problems with mortgage rates that continue near levels last seen 15 years ago, and a longer term sharp decline in the number of existing homes for sale. This needs to be resolved to address the issue of housing unaffordability.