- by New Deal democrat
In my conclusion last month, I wrote “In the first two months of Q2, total real spending has declined by -0.8%, while services has been basically unchanged. If there is a further decline in June, based on the above discussion that would likely trigger a “recession watch” signal.”
To cut to the chase, June’s report just barely missed giving that signal. If it weren’t for the fact that so much of the weakness is obvious payback for the front-running in March and April, it would be a serious concern. Even so, it’s worth hoisting a yellow flag caution, while unfortunately waiting one more month to see if the weakness persists.
Let’s go to the data. With the exception of the personal saving rate, and one YoY graph, all of the data in the below graphs is normed to 100 as of just before the pandemic.
To begin with, nominally income and spending both rose 0.3%. After accounting for inflation, which also rose 0.3%, real income was flat and real spending rounded to 0.1% higher:
Since real spending on goods rarely turns down, even in recessions, the focus is on goods. In that regard, real spending on both goods and services rose 0.1% in June:
Additionally, there is authority for the fact that spending on durable goods usually cools risk before spending on non-durable goods. In June, the former declined -0.5%, while the latter rose 0.4%:
Real spending on durable goods has declined for three months in a row, and is down -2.5% since March.
In case you haven’t noticed already, a common thread in almost all of the above data is that it has been virtually flat, or worse, since March. As I indicated above, normally that would warrant at least a recession watch; but this year, so far it is consistent with front-running tariffs in March and April, with payback in May and June.
Next, here is the personal savings rate. I follow this because just before and going into recessions it tends to turn up as consumers get more cautious. In June it remained steady at 4.5%, in line with its typical reading this year, although higher than last autumn:
Before I conclude with two final data sets, one way to differentiate between noise and trend is to look at the YoY comparisons.In general while real income and spending do not turn negative YoY until after a recession has started, usually they have declined 50% or more from their YoY peaks within the previous 12 months (e.g. a decline from up 4.0% YoY to being up 2.0% YoY). Bleow are real income (gray), real spending (dark blue), real spending on durables (red), and real spending on services (gold), normed to their YoY high comparisons:
So measured, tow of the above data series are close to that threshold: real spending is down -33.8% from its YoY high, and real spending on services is down -47.3%. Real spending on durable goods has actually crossed the threshold, down -52.8%. Only real income, down -25.7% is nowhere near the threshold.
Finally, let’s take a look at two coincident indicators from this report which the NBER pays close attention to in dating recessions. First, here is real income less government transfers:
This declined -0.2% for the second decline in a row. Since one year ago, this metric was higher by 2.8% YoY, and is now only higher 1.2% YoY, at -55.4% it has also crossed the 50% decline threshold I mentioned above.
Second, here is real manufacturing and trade industries sales, which is delayed one month and so if for May:
This also declined, by -0.3%, also for the second decline in a row, although note that the overall trend since mid-2022 remains higher.
Last month, looking at historical trends I noted that “real spending on services rarely turns down, even during recessions, although usually its growth does declerate below 1% annualized during the quarter just preceding or starting the recession.” Further, where real spending on goods declined -1% YoY or more, about 50% of the time that also signaled recession (vs. slowdown the other 50%). And “If growth in real spending on services was also [i.e., simultaneously] decelerating sharply, even if still positive, it almost always meant recession.”
Real spending on goods is still higher by 2.9% YoY, so we are not near this signal.
Let me put this all together. This was a very weak report, although not negative. If there were not distortions from the front-running of tariffs earlier this year, it would come very close to meriting a “recession watch.” But by next month, the payback from this previous front-running should have largely abated. If there is a rebound, needless to say that will be good. But if the weakness persists, we may cross the threshold. As it is, because of this uncertainty a “yellow flag” caution, ie., pay extra close attention, is merited.
