The 4 shocks jolting the US economy towards recession

 

 - by New Deal democrat

This week the normal empty period for new data after the monthly jobs report is of course compounded by the government shutdown. There is no noteworthy new private data coming out until Thursday, so don’t be surprised if I play hooky tomorrow.

But today let me follow up on some macro analysis. 

A few months ago I pointed out that, going back 60 years, every US recession has been associated with a shock to the system. In other words, the normal progression of interest rates, building, sales, income, and jobs have caused waxing and waning in sectors of the economy, but haven’t by themselves been enough to cause it to contract. For that, you needed an economy that was vulnerable, and a shock administered to that vulnerable economy.

Sometimes it has been an oil shock (1974, 1979, 1991, and partly 2007). Sometimes it has been an interest rate shock (1969, 1974, 1979, 1981). Sometimes it has been a financial shock (2001, 2008). And of course in 2020, it was the Giant Flaming Meteor of Death a/k/a COVID. I don’t mean to suggest that these recessions have been monocausal, just that a shock to the system has always been a part of the equation.

Going into 2025, the US economy was certainly vulnerable. High interest rates had taken a toll on the housing market. Employment, especially in manufacturing, was waning. The post-COVID spike in vehicle prices, repairs, and insurance, was still making its way through the system.

But this year, at least 4 shocks have been administered to the system, some (likely) transitory, but some more chronic:

1. Tariffs

2. Medical cost increases.

3. The suspension of food stamp benefits.

4. AI-related layoffs.

Let’s briefly discuss each of these in turn.

1. Since “Liberation Day” at the beginning of April, almost $200 Billion in tariffs have been imposed, an increase of over $100 Billion since 2024. In Q3, this was roughly 3x the amount collected before this year, and 6x the amount collected just before the 1st T—-p Administration:

The evidence so far is that in the aggregate companies are bearing about half of the increased burden, and are passing on about half of the burden to customers. In October alone, $60 Billion in tariffs were collected. If customers paid half of that by way of price increases, that amounts to $50 for every man, woman, and child in the US. That may not be a significant burden for affluent households, but for lower income households it is going to have a real impact.

2. Medical cost increases. As part of the Big Bad Billionaire Bust-out Bill, Obamacare subsidies were ended. Since about 90% of all Obamacare enrollees make use of these subsidies, that means that 22 million people are directly affected:

These households are either going to have to pay (in some cases astronomical) increases for the cost of coverage, or drop medical coverage completely. If they pay, that is another shock to the household budget; if they don’t, it affects the coverage, and the profits of insurers and health care providers. The proposed ending of the government shutdown will make this effective immediately.

3. The suspension of food stamp benefits. As has been widely reported this month, about 44 million people in the US make use of food stamps:

To the extent meager household income has to be diverted to buy that food, needless to say it is not available for any other kind of consumption (including payment or rent or utilities). While the ending of the government shutdown should mean the resumption in payments, keep in mind that the proposed continuing resolution only lasts through January. In other words, in 75 days we are right back here, and the successful use of SNAP benefits as a fiscal weapon this time means it will surely be implemented again then.

4. Finally, as I noted on Friday, layoffs as counted by Challenger Gray were at their second highest monthly level since the COVID lockdowns, and the highest October level in a quarter of a century. Many of these were concentrated in tech companies, as live human beings were replaced (or, “replaced”) by AI algorithms:

While this hasn’t shown up in any appreciable increase in new jobless claims, as I noted yesterday the number of continuing claims is close to its highest level in over three years. If this continues, it seems very likely we’ll see it show up in an increase in initial claims as well.

So there you have it: four somewhat independent shocks to the US economic system that individually or collectively might be enough to push it over the edge into a recession. In that regard, let me re-post this graph of the likely combined impacts of tariffs and the Big Bad Billionaire Bust-out Bill on household incomes by percentile:

This only includes the first two of the 4 shocks described above.

Needless to say, the shutdown of official government economic data could hardly have come at a worse time. While we have reasonable proxies for the employment situation, alternative data for income, sales, and spending is spotty. In particular, how has spending on durable goods by companies and consumers held up during this period? Have they cut back, or have stock market gains and the wealth effect so generated more than overbalanced the above described shocks. We simply don’t know. Assuming government data releases resume shortly, I will be particularly focused on that information.

Tabulated state level jobless claims continue neutral trend

 

 - by New Deal democrat

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

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

So tabulated, for the week ending November 2, unadjusted initial claims totaled 216,238 vs. 212,743 in 2024, an increase of 1.6%.  

Last year this week the seasonal multiplier was *1.0388. Applying it gives us an estimated seasonally adjusted number of 225,000.

We can similarly calculate the four week moving average, since the last four weeks of claims were 224,000, 230,000, and 220,000, as well as this week’s 225,000. That gives us an average of 224,750, which is -2,000, or -0.9% lower than the number of 226,7500 one year ago. Of note, this is the last week in which the 2024 comparison will be affected by the hurricanes that temporarily depressed claims for several weeks in October. Excluding that week, the average of the three last weeks this year is slightly higher.

Using the same methodology, unadjusted continuing claims for the week ending October 25 totaled 1,711,947 vs. 1,646,920 last year, an increase of 3.9%.

The seasonal adjustment for the applicable week last year was *1.14152. Applying it gives us an estimate of 1.954 million continuing claims, or -7,000 lower than one week ago. Still, continuing claims during the government shutdown have all been close to their highest levels since 2021, which was 1.968 million this past July. 

For graphic comparison, 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 3 - 7 at Seeking Alpha

 

 - by New Deal democrat

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

This was the week that the 800 pound gorillas of Wall Street reported Q3 earnings, and - to use a World Series type metaphor - hit it out of the park. 

Meanwhile down in gruntland, the amount of goods being moved from ports to markets hit a major air pocket.

More signs of a “K shaped”, or bifurcated economy where Wall Street titans are doing well, fueling upper income spending, while down below there are signs of exhaustion.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy - with data almost entirely unaffected by the government shutdown - and reward me with a penny or two of lunch money for my efforts in collecting and organizing it for you.

October employment situation: stagnant hiring, increased firing, continued wage growth

 

 - by New Deal democrat

On a normal first Friday of the month, I would be crunching the official jobs report data to try to provide not just a coincident report on the jobs market, but also to focus on the leading indicators within that report, such as the manufacturing and construction sectors and also aggregate real payrolls. For the second month in a row, I can’t do that. But what I can do is aggregate some of the most reliable alternate sources for the state of the labor market; and fortunately, there is no big divergence among those: they all point to a stagnant but not meaningfully contracting jobs sector.

Let me start with the number of jobs, and then follow with alternatives to the unemployment rate. And further, let me start with the three best sources: the ISM reports, the regional Fed reports, and ADP.

To begin with, the ISM reports are diffusion indexes. They don’t report the number of gains or losses, but whether more firms than not are hiring vs. firing. Any number below 50 means more firms are letting people go than hiring them, and ss I reported Wednesday, ISM services showed slight contraction, at 48.2. The ISM manufacturing report had previously also shown contraction for October, at 46.0:

Since services account for about 75% of all jobs, the economically weighted number is 47.6 for the month. This would translate to a continued downturn in jobs in the goods producing sector, to a virtual standstill or even small losses in the service-providing sector as well.

The next source is the 5 regional Fed reports from NY, Philly, Richmond VA, Kansas City, and Dallas. These are also diffusion indexes, with the balance point at zero, so a positive number is expansion, a negative one contraction. As I reported last week, here are the numbers from the five manufacturing reports (1st line) and services reports (2nd line):

NY 6.2; Philly 4.6; Richmond -10; Kansas City 1; Dallas 2.0; AVERAGE 0.8

NY -5.2; Philly -0.5; Richmond 0; Kansas City -4; Dallas -5.8; AVERAGE -3.2

Unlike the ISM manufacturing report, the regional Fed reports show slight gains in the manuacturing employment sector; but like the ISM services report, significant contraction in the services employment sector.

Next, as has been widely reported, ADP indicated that 42,000 private sector jobs were added in October. As the below graph by Prof. Jason Furman shows, the average of the last three months is approximately 0:

Bank of America’s internal data also showed further deceleration over the past two months from the last officially reported numbers:

A gain of only 0.5% for the entire last 12 month period suggests no monthly growth at all in either September or October.

Finally, although I have no idea whether this new source is reliable or not, Revelio Labs reported that in October -9,100 jobs were lost:

Weakness was also shown in new job postings by Indeed, which declined further in October. Note that this source has closely matched the job openings data from the JOLTS series:

Another important metric in the monthly jobs report is wages. These are also covered by some of the regional Fed reports as well as ADP.

Here are the manufacturing (1st line) and services (2nd line) diffusion indexes from the regional Fed reports for October:

Manufacturing: NY n/a; Philly n/a; Richmond 15; Kansas City n/a; Dallas 14.2; AVERAGE 14.6

Services: NY 25.9; Philly 38.3; Richmond 17; Kansas City 21; Dallas 10.7; AVERAGE 22.6

The economically weighted average from both indexes is 16.5, indicating that wage increases continue at a strong pace.

ADP similarly reported continued strong wage growth, at 4.5% YoY for job stayers, and 6.7% for job switchers:

Finally, let’s take a look at unemployment measures.

As I often say, jobless claims lead the unemployment rate. Initial jobless claims are noisier but more leading; when combined with continued claims they carry more signal but lead only slightly. Here is what both measures looked like compared with the unemployment rate as of the last official reports:

Since the shutdown, initial claims have varied between 220,000 and 230,000, and on a four week moving average basis have been slightly lower than one year ago, while continuing claims have been in the 1.930 to 1.960 million range, close to the top of their readings in the past three years. This suggests that the unemployment rate would be no lower than, and likely slightly above its range from one year ago, which was 4.1%-4.2%:

This would put this month’s likely unemployment rate at between 4.2% to 4.4%.

Further, as was widely reported yesterday, Challenger Gray indicated that there were 153,000 job cuts in October, the highest for this month in several decades, and with one exception the highest since the pandemic lockdowns:

And Bank of America indicated that unemployment insurance checks directly deposited into its account, while slightly down from September, were 10% higher YoY - an even bigger YoY increase than official continuing claims:

To summarize, the best alternative jobs data we have for October are almost all in accord. There were roughly no job gains at all, +/- about 40,000. Meanwhile wages continued to grow at a relatively fast pace, in accord with the official data from earlier this year. And the unemployment rate was steady to slightly higher compared with earlier.

Long leading indicator Senior Loan Officer Survey for Q3 was neutral to slightly positive

 

 - by New Deal democrat

The Senior Loan Officer Survey is a long leading indicator, telling us about credit conditions that typically turn worse a year or more before the economy turns down, and improve just at the economy is ready to turn up. Fortunately, since it is reported by the Federal Reserve, it is unaffected by the government shutdown.

The one downside is that the information is only reported Quarterly, and with a one a one month lag. So the Q3 update was only reported on Tuesday.

There are two series that have a long enough record to give us a lot of information. The first is whether banks are tightening or loosening standards. Since tightening is shown as an increase, this is one of those series where higher means worse. 

Historically banks are still tightening, but less so as an expansion begins. As it progresses, they ease lending standards; but  become more cautious well in advance of an ensuing recession. In early 2024, the sharp decline in the percentage of banks that were tightening standards indicated an expansion that was well established.

Interestingly, although at no point during this expansion have banks on net eased, this year the relative progression of banks that moving in that direction has stalled:

This is a neutral reading. It does not look like what has historically happened closer in time to a recession; but on the other hand it does not indicate a strengthening expansion.

In the second series, confusingly, higher does mean better. And in Q3, each measure was slightly positive. Further, while the series are very noisy, there was an unmistakable improving trend in 2023-24, which may be plateauing this year:

In any event, the Q3 result indicates business confidence in expansionary plans.

The upshot is that this long leading credit indicator is presently neutral to slightly positive.

ISM services index rebounds, indicating moderate expansion, but with stagflation

 

 - by New Deal democrat

With the shutdown of the official government sources, along with the regional Fed indexes, the ISM manufacturing and services indexes have become especially important. To recap, because of manufacturing’s diminished importance to the general economy, the services index has become significantly more important. For forecasting purposes, I assign a 75% weight to services, and a 25% weight to manufacturing, which is approximately their contribution to the total economy. Because there is some noise in the monthly numbers, I use the three month average of each.

On Monday, we saw that manufacturing continued to contract. The story was quite different in this morning’s services report, as the headline number increased to 52.4 (anything over 50 indicating expansion), while the more leading new orders subindex jumped from 50.4 to 56.2. As a result, the three month average of the headline number continued in modest expansion, at 51.5, while the new orders subindex rose to 54.2, a solidly expansionary reading.

Here is what the two headline numbers, for manufacturing and services, look like:

Since the three month average of the manufacturing index was 48.7, the economically weighted headline number rose to 50.8.

Next, here is the comparative look at the two new orders indexes:

Since the three month average of the manufacturing new orders subindex was 49.4, the economically weighted new orders number also rose to 53.0.

Because of the government shutdown, as I did Monday, I am paying more attention to the prices paid subindex as well. For services that rose to 70.0, the highest reading since the end of 2022, with the three month moving average being 69.5:

The manufacturing prices paid three month average was 58.0, so the economically weighted subindex stands at 66.6.

Finally, the employment numbers are also particularly significant now as well. In services as in manufacturing, these continued to indicate contraction, at 48.2. The three month average for services employment is 47.3:

Since the three month average for manufacturing was 46.0, the economically weighted employment reading is 47.0, indicating contraction.

Once again, the ISM monthly readings for services were in accord with the regional Fed reports. We see modest expansion - indeed a pickup of activity since the summer, and also a pickup in new orders, but a slight decline in employment, with rampant inflation - i.e. stagflation, but a stagflation which is currently still balanced towards expansion.

Since we won’t get a jobs report on Friday, I will offer a more detailed analysis of all the alternative measures of employment on Friday instead.

Tabulated initial and continuing state unemployment claims continue rangebound

 

 - 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 25, unadjusted initial claims totaled 202986 vs. 201.447 in 2024, an increase of 0.9%.  

Last year this week the seasonal multiplier was *1.0822. Applying it gives us an estimated seasonally adjusted number of 220,000.

We can similarly calculate the four week moving average, since the last four weeks of claims were 228,000, 224,000, and 230,000, as well as this week’s 220,000. That gives us an average of 225,500, which is -10,750, or -4.5% 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. These will end within two weeks.

Using the same methodology, unadjusted continuing claims for the week ending October 18 totaled 1,708,221 vs. 1,616,081 last year, an increase of 5.7%.

The seasonal adjustment for the applicable week last year was *1.14784. Applying it gives us an estimate of 1.961 million continuing claims, or 29,000 higher than one week ago. This is still within the range of continuing claims in the past few months, although very close to the high end of that range.

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.

ISM manufacturing confirms regional Feds’ reports: prices up, production improves slightly, employment contracting

 

 - by New Deal democrat



The ISM manufacturing and services reports assume heightened importance this month in view of the continuing federal government shutdown. These two, along with the regional Feds’ manufacturing and services reports, are our best sketch of the economy until the more thorough federal reports resume (hopefully?)

We already have the regional Feds’ reports, which as I concluded last week, showed a little rebound in manufacturing activity, but contraction in services. Prices paid increased at the most widespread clip since the major inflation of 2021-22. Prices received also increased, but not as much, meaning that only part (1/2 is a reasonable guess) of increased prices were passed on to consumers, which is a problem in and of itself. Finally, employment was essentially flat, neither growing nor contracting meaningfully.

With that in mind, let’s turn to today’s ISM manufacturing report. The ISM manufacturing report has been a recognized leading indicator for the past 60+ years, although of diminished importance since the turn of the Millennium and China’s accession to regular trading status. While any number below 50 indicates contraction, the ISM itself indicates that the number must be under 42.8 to signal recession. 

Because of the report’s diminished importance, for forecasting purposes, I use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively. That briefly justified a “recession watch” during the summer, before the strong August rebound mainly in the services sector.

Today’s report continued this year’s string of contractionary readings, declining slightly to 48.7. The more significant news is that the more leading new orders subindex, which had rebounded to 51.4 in August, and then sank back into contraction at 48.9, gained slightly to 49.4. Here is a look at both the total index (blue) and new orders subindex (gray) for the past three years (via Tradingeconomics.com):

Note that both remain slightly better than their low points in 2022-23, which is noteworthy because there was no recession then.

Hare the last six months of both the headline (left column) and new orders (right) numbers:

MAY 48.5. 47.6

JUN. 49.0. 46.4

JUL 48.0.  47.1

AUG 48.7. 51.4

SEP. 49.1. 48.9

OCT  48.7. 49.4 

The current three month average for the total index is 48.8, while new orders improved to 49.9. As has been the case for awhile, this is in accord with the recent regional Fed reports, which as indicated above have shown some mild improvement in the manufacturing production picture.

As I indicated above, for the economy as a whole the weighted index of manufacturing (25%) and non-manufacturing (75%) indexes is more important. In the non-manufacturing report, the average of the last two months for the headline and new orders numbers has been 52.5 and 53.2, respectively. Pending the ISM report on services on Wednesday, the economically weighted headline number is 51.1, and the new orders average is 52.2. These are weakly expansionary. 

Normally in the past I have not reported on prices paid or employment in these ISM indexes, but these are more important now. 

Prices paid (the ISM does not report on prices received downstream) decelerated from 61.9 last month to 58.0 this month, suggesting as with the regional Fed indexes that there is still widespread pricing pressure, but it is getting integrated into companies’ models. Here are both manufacturing (blue) and services (gray) prices from the ISM:

But the low point, as it has been all year in this index, is employment, which did improve, but from 45.3 to 46.0. Here is employment from both the manufacturing (blue) and services (gray) indexes:

In short, the ISM manufacturing report for October largely confirms what we saw with the averages of the regional Fed manufacturing reports: diffuse price increases, improving new orders, very slight improvement in production, and flat to moderately diffuse contracting employment.

The ISM services report was particularly strong in August. That won’t go out of the three month average for another month. But if the services report on Wednesday is contractionary, that would warrant at least a yellow flag caution that a recession may be close. Unfortunately all we have with this data, relatively speaking, is shadows on the wall, so I am reluctant to draw any stronger conclusion. 

Weekly Indicators for October 27 - 31 at Seeking Alpha

 

 - by New Deal democrat

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

With the dearth of monthly federal economic data, the privately sourced data that forms the backbone of the high frequency indicators is even more important.

This week, unsurprisingly, the biggest move was in the yield curve, in response to the Federal Reserve cutting interest rates. But underneath, several coincident series, including the Weekly Economic Index and Federal Tax Withholding, softened to the very threshold of turning neutral from positive.

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 penny or two for my efforts collecting and organizing it for you.

An appreciation of the Angry Bear blog

 

 - by New Deal democrat

Yesterday we were supposed to find out how much the economy grew (*if* it grew) during the 3rd Quarter, via the GDP report. This morning we were supposed to get the very important personal income and spending data for September as well. Neither of these were issued because of the federal government shutdown. While there are some decent substitute reports from other sources that can at least give us a back of the envelope estimate for this important data, they are no substitute for the real thing. We are flying blind, and there has been no urgency on the part of those in control of the Administration, the House, and the Senate, to do anything about it. In fact, if the economy is on the cusp of being in recession, they might prefer it that way.

It is an absolute disgrace that an alleged premier First World country has degenerated in to the governance of a Third World banana republic - and is poised to continue that way for possibly a long while more.

But today I want to pause to give a note of apprecitiaon.

For roughly the past 10 years, much of the material I have posted here has been picked up and cross-posted (with my permission) at the Angry Bear blog. For the past 5 years or so, *all* of my posts have been. Odds are that it gets more views over there than here.

The Angry Bear blog started over 20 years ago; in fact, Bill McBride a/k/a Calculated Risk started out there before he struck out on his own. For most of the time, it was hosted by Dan Crawford, until he passed away several years ago. One of his dying wishes was that the blog would continue, and he handed the reins over to another poster, whose first name in real life is Bill (not sure he would want his full last name posted publicly), who I had the pleasure of meeting over some gourmet pizza last year in Phoenix AZ.

For among other things health reasons Bill has also needed to step back. As a result, as of this weekend Angry Bear goes dark.

Angry Bear is only one of three economic sources I correspond with which have initiated plans to wrap up in the next year, mainly due to retirement. Sad, but as George Harrison sang, All Things Must Pass.

For my part, I am not a spring chicken either, but I have always figured there is another recession (not caused by the Giant Flaming Meteor of Death) out there, and another recovery. And I’ve also figured that, health permitting, I would like to keep at it until I forecast those cycle turns.

But I wanted to take this opportunity to express my appreciation to Bill, his late predecessor Dan Crawford, and everybody else associated with Angry Bear for their efforts. Thank you all.

Weighing Regional Fed Services Surveys, the sketch emerges of an economy on the cusp of stagflationary recession

 

 - by New Deal democrat

As I’ve reiterated several times this month, the two items of information I am paying the most attention to in the absence of official federal economic data are the Regional Fed Banks and the ISM, for both of their manufacturing and services reports. I should add that earlier this week ADP said that it would make its valuable weekly employment reports available to the public with a two week delay for the duration of the shutdown.

Yesterday I wrote about the Regional Fed manufacturing reports. Today I am following up with the service sector reports. The below chart includes, in order, NY, Philadelphia, Richmond, Kansas City, and Texas. Month over month changes are in parentheses, showing momentum (the 2nd derivative), with the absolute diffusion 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:  (-4.2) -19.4; (-9.9) -22.2; (6) -1; (4) -5; (-3.8) -9.4; (1.6) -11.4     

Cap Ex   (-8.1) -6.7; (9.5) 17.5; (4) 1; (7) 14; (-1.5) 5.8; (5.5) 6.3

Prices Paid  (3.2) 66.4; (-3.0) 35.8; (0.6) 5.5; (-3) 35; (-1.4) 23.0; (0.7) 33.2

Prices Rec’d (-5.8) 26.4; (-8.9) 12.9; (0.1) 3.8; (5) 21; (-1.5) 5.8; (-1.6) 13.7  

Wages (-2.3) 25.9; (9.6) 38.3; (0) 17; (11) 21; (-1.2) 10.7; (3.4) 22.6 

Employment (-2.3) -5.2; (-5.5) -0.5; (0) 0; (8) -4; (-2.2) -5.8; (-0.4) -3.2

Most of the trends are the same:

 1. like New Orders in the manufacturing series, Cap Ex is increasing at a reasonable clip.

 2. Inflation in the form of both prices paid for materials, and prices passed on to consumers, is a serious issue, with only some of the increased costs being passed on.

3. While wages continue to increase at a significant clip, employment is dead in the water - actually declining slightly.

4. The one big difference is in the headline business conditions number, which continues to be in significant contraction.

While the forward looking New Orders and Capital Expenditures categories for both manufacturing and services sectors are expansionary, the economically weighted (i.e., 25% manufacturing and 75% services) headline numbers, at -7.8, are negative, as is the employment category, at -2.2.

With the huge caveat that these are diffusion indexes (i.e., number of companies expanding minus contracting for each datapoint), and are much more variable than the much larger official surveys that we are missing, what emerges is a sketch - exmphasizing *sketch* - of an economy that is on the cusp of a stagflationary recession.

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.