Weekly Indicators for July 28 - August 1 at Seeking Alpha

 

 - by New Deal democrat

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

In the middle of writing the post yesterday afternoon, the news broke that T—-p had fired Erika McEntarfer, the Commissioner of the BLS, for the crime of publishing jobs data that he did not like. For the moment, she has been replaced by her deputy, a civil servant. But even so, going forward data from the BLS is going to have to be treated as suspect. For reliable economic data, this is a “Reichstag fire” moment.

Fortunately, as first became important about 10 years ago when a government shutdown temporarily stopped the production of most Federal data, almost all of the data contained in these “Weekly Indicator” posts comes from other sources — some private, some ultimately from the States, and some from the Fed and its regional banks. None of these are going to be immune to political pressure either, but they are going to be increasingly important as a check on the official data.

Interestingly, as of now they diverge somewhat sharply from the very downbeat monthly data we have seen from a number of reports, and in particular the personal income and spending report Thursday, and the jobs report Friday. Much of this is due to the continued optimism evident in the stock market, a derivative of which is the cashing in of stock options which is helping buoy withholding tax payments; and the lack of layoffs evident in the weekly jobless claims data. But additionally there is no evidence yet of consumers pulling back on spending.

In any event, clicking over and reading will as usual bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two for collecting and collating it for you.

A note on ISM manufacturing and construction spending

 

 - by New Deal democrat

I don’t have time to write a complete report on the ISM manufacturing index for July, and the construction spending report for June, both of which were reported this morning, so I will do that Monday when the ISM services report also comes out.

In the meantime, here is this bullet point summary.

Both reports were negative.

The headline ISM number, 48.0 and the new orders number, 47.0, were contractionary. Additionally, the three month average for both the headline and new orders portions declined further into contraction.

Both the headline and residential components of nominal construction spending declined. In the case of residential spending, it was the 11th decline in the past 12 months. Even without taking inflation into account, residential construction spending is down -7.1% from that peak. 

If the ISM services numbers on Monday are weak enough, that will almost certainly be enough for me to go on “recession watch.”

July jobs report: especially with revisions, an awful report that screams near-recession

 

 - by New Deal democrat

Let me cut right to the chase in this first sentence: the only reason this employment report was not recessionary is that it did not have a negative number. Aside from that, it was either  flat to awful almost across the board.



Put another way, even before the utter chaos of the new Administration in Washington, my focus had been on whether the economy would have a “soft” or “hard” landing, i.e., recession. This report, especially with the revisions to the last two months, virtually screams “Hard Landing!!!”

Below is my in depth synopsis.

HEADLINES:

• 73,000 jobs added. Private sector jobs increased 83,000. Government jobs declined -10,000. The three month average declined sharply to +32,000, well below the breakeven point necessary with any kind of population growth.
• Within government jobs, Federal jobs declined -12,000, while State jobs increased 5,000 and local jobs declined -3,000.
• The pattern of downward revisions to previous months went thermonuclear this month. May was revised downward by -144,000 to only +19,000, and June by -133,000 to only +14,000, for a net decline of -258,000. 
• The alternate, and more volatile measure in the household report, declined by -260,000 jobs. On a YoY basis, this series increased 1,887,000 jobs, or an average of 157,000 monthly.
• The U3 unemployment rate rose 0.1% to 4.2%. Despite this, the real time “Sahm rule”indicator is only at +0.1%, meaning it has not been triggered.
• The U6 underemployment rate rose 0.2% to 7.9%, down -0.1% from its 3+year high in February.
• Further out on the spectrum, those who are not in the labor force but want a job now rose by 145,,000 to 6.175 million, its highest level since July 2021.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. This month they were sharply negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was unchanged at 41.0 hours, but remains down -0.6 hours from its 2021 peak of 41.6 hours.

• Manufacturing jobs decreased by -11,000, the third decline in a row. This series declined sharply in the second half of 2024 before stabilizing earlier this year. It is now at a 3+ year low.
• Truck driving, which had briefly rebounded, declined another -3,600.
• Construction jobs rose 2,000.
• Residential construction jobs, which are even more leading, declined -1,400. Further, with revisions this is the 4th decline in a row for this important series.
• Goods producing jobs as a whole declined -13,000. With revisions, this is now the third decline in a row, which is very important because these jobs typically decline before any recession occurs. Further, on a YoY% basis, these jobs are now negative by -0.1%. Only three times in the past 70+ years - 1952, 1967, and 1984 - has this series been negative YoY without it being during or shortly before a recession. 

• Temporary jobs, which have declined by over -650,000 since late 2022, declined again this month, by -4,400, close to their post-pandemic low set last October.
• the number of people unemployed for 5 weeks or fewer rose 58,000 to 2,299,000, vs. its 12 month high of 2,465,000 last August.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.08, or +0.3%, to $31.34, for a YoY gain of just under +3.9%, its lowest YoY% gain in 4 years. Nevertheless, this continues to be well above the 2.7% YoY inflation rate as of last month.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers rose 0.3%, and is up 1.1% YoY, about average for the past three years.

• The index of aggregate payrolls for non-managerial workers rose 0.6%, rebounding sharply from last month’s initially reported -0.2%, which has been revised to +0.1%. It is now up 5.0% YoY. 

Other significant data:

• Professional and business employment declined another -14,000. These tend to be well-paying jobs. This is the third decline in a row, and is the lowest since its May 2023 peak except for October 2024. It remains lower YoY by -0.3%, which in the past 80+ years - until now - has almost *always* meant recession. This is vs. last spring when it was down -0.9% YoY.
• The employment population ratio declined -0.1% to 59.6%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate also declined -0.1% to 62.2%, vs. 63.4% in February 2020.

SUMMARY

This was a horrible report. About the only “good” thing to say about it was that the headline number was not actually negative.

There were a few rays of light. Wages and payrolls continued to rise at a good pace, and in particular it is all but certain that real aggregate nonsupervisory payrolls made another new all-time high last month, which is an excellent short leading indicator for continued economic growth. And total construction jobs rose slightly, although that was in the more lagging public sector.

But aside from the aforementioned aggregate payrolls, and the manufacturing workweek which was steady, all of other, important leading indicators in the report declined. Perhaps most importantly, residential construction jobs appear to have at long last decisively turned down. This is typically one of the last shoes to drop in that sector before a recession begins. And more broadly, goods producing jobs as a whole - again, with revisions - also appear to have made a significant downward turn.

In the previous two months, the only reason the unemployment and underemployment rates did not go up was that the labor force participation declined significantly. This month their luck ran out as, even with another LFPR decline, both unemployment and underemployment went up. And once again, further out on the spectrum, those not in the labor force but who want a job increased to the highest level in 4 years.

Last month I concluded that “Indeed, if construction jobs had turned down, this report would probably have merited going on ‘recession watch.’ We’re not quite there, but we’re not far away either.” Yesterday I wrote that real personal income and spending merited a “yellow flag” and would have warranted a “recession watch” but for the tariff front-running issue. With this morning’s report, we are now a hair’s breadth away from “recesion watch.” The only reason not to hoist a red flag now is that I still want to see the ISM manufacturing and services reports for July.

June personal income and spending: very weak as payback for front-running continues, meriting a yellow flag

 

 - 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.

The bottom line in Q2 GDP; front-running, payback, and contrasting long leading indicators

 

 - by New Deal democrat

Today’s GDP report for Q2 was pretty much as we expected, i.e., payback from the front-running of import tariffs in Q1. But as usual, my main focus is on the two long leading components.

The headline was a 3.0% annualized increase in real GDP, rebounding from the -0.5% decrease in Q1 (blue in the graph below). But “core” GDP, i.e., real final sales to domestic purchasers, tells a somewhat different story, decelerating from 1.9% annualized in Q1 to 1.2% in Q2 (red):

In fact “core” GDP growth, while positive, was the lowest since the end of 2022. But again, we know that consumers accelerated some purchases into Q1 that they otherwise would have done in Q2 or even later, so this deceleration is also somewhat misleading.

Now let’s look at the impact of tariffs. Producers and wholesalers in the US ran up their inventories in Q1 in anticipation of the increased tariffs, meaning there was likely to be payback in Q2. And there was (blue in the graph below), as inventories declined -5.8% on an annualized basis. Which unsurprisingly is in accord with the fact that after rising in Q1, imports fell -8.8% (red). If there was a surprise at all, it was that exports declined in Q2 as well, by -4.4% annualized, after increasing 1.0% in Q1 (gold):

So the headline takeaway for me is slowing growth in Q2 with a decline in exports (which of course is not supposed to happen in the Tariffistas’ utopia).

Now let’s look at the two long leading components of GDP.

First, in accord with the recessionary housing data that I have been writing about each month, both nominal (blue) and real (red) private residential investment in Q2 declined, by -3.2% and -4.6% annualized, respectively:

Note that this is the second quarterly decline in a row in real terms.

Here is the longer term view, showing that housing tends to turn down more than a year before th economy as a whole:

If housing was negative, proprietors’ income (blue), which is a proxy for corporate profits (red) (which won’t be reported for another month) was positive, increasing 3.4% annualized on a nominal basis. Even after taking into account the GDP deflator, which increased at a 2.0% annualized rate, business income was positive.:

This is of a piece with what has been reported on Wall Street for Q2 so far.

Even without the complicating picture from tariffs, the background long leading indicators remain mixed, with elevated but rangebound interest rates and term spreads, increasing real money supply, and mixed real consumer spending on goods, in addition to the negative housing impacts but continuing positive profits.

I anticipate the combined impact of tariffs and the recent tax bill to negatively impact the economy as a whole, as higher prices for consumers and cutbacks in benefits more than counterbalance the tax giveaways to the wealthy. But the Q2 GDP report shows no significant effects on the bottom line yet.

Yesterday’s JOLTS report still = soft landing

 

 - by Neew Deal democrat

Yesterday’s JOLTS survey for June continued to be consistent with a “soft landing” scenario. This is good news, particularly on a relative basis, since the actions of the new Administration, especially on trade, have exacerbated the fear that this might transform into a “hard” landing, a/k/a a recession.

As a quick refresher, this survey decomposes the employment market into openings, hires, quits, and layoffs. And here are job openings, hires, and quits all normed to 100 as of just before the pandemic:

All of these declined on a monthly basis, but except for quits, were not much changed from one year ago. Openings are “soft” data and have generally trended higher going all the way back to the turn of the Millennium. They have remained above their pre-pandemic levels, and this month declined -275,000 to 7.437 million, vs. XXX million one year ago. HIres declined -261,000 to 5.204 million, vs. XXX million one year ago. Finally, voluntary quits declined -128,000 to 3.142 million, vs. XXX million one year ago. As indicated above, this is the only series significantly lower, by -4.3%, than one year ago.

Now let’s look at several components are slight leading indicators for jobless claims, unemployment and wage growth.

Recently one item of concern has been layoffs and discharges, which generally have averaged higher since last July. In June, they declined by -7,000 to 1.604 million, towards the lower range of readings in the past 2+ years:

This generally according with both the increase in the unemployment rate in 2023-24, as well as its plateauing this year (red, right scale), as well as the recent trends in new and continuing jobless claims (not shown), which after a YoY increase earlier this year, improved in the last month.

Finally, the quits rate (left scale) typically leads the YoY% change in average hourly wages for nonsupervisory workers (red, right scale):

In June the quits rate remained steady at 2.0%, about average for the past 12 months. The downshift that occurred late last year has finally been reflected in average hourly wages in the past several months. But the latest data suggests that nominal wage growth will not decelerate much further. 

As I noted at the outset, the JOLTS reports have been consistent with the “soft landing” scenario remaining intact through June. But as I indicated on Monday, if there is “payback” for the anomalous seasonally adjusted big increase in education hiring in June, on Friday we will find out if that trend holds.

Repeat home sales and leading apartment rent indexes both point to lower shelter inflation ahead

 

 - by New Deal democrat

This morning’s repeat home sales reports from the FHFA and S&P Case Shiller were not good news for sellers - but very good news for future consumer inflation readings.

On a seasonally adjusted basis, in the three month average through May, the Case-Shiller national index (light blue in the graphs below) declined -0.3%, while the FHFA purchase index declined -0.2%. In the case of the FHFA index, this was the second decline in a row; in the Case-Shiller Index, the third. This is on par with the declines we last saw in the summer of 2023 (note: as per usual, FRED hasn’t updated the FHFA information yet):

Put another way, there has been actual *de*flation in the house price indexes since February, by -0.5% in the FHFA Index and -1.0% in the Case Shiller Index.

On a YoY basis, price gains in both indexes not only continued to decelerate, at 2.7% for the Case Shiller index, and 3.0% for the FHFA index; but these were the lowest YoY% increases since 2012 for both indexes excluding 6 months in 2023 for the Case Shiller index:

As I indicated at the outset, while this may be bad news for home sellers, it is excellent news for the shelter component of CPI in the future, because house prices lead the measure of shelter inflation in the CPI, specifically Owners Equivalent Rent by 12-18 months. To wit, here is the same graph as above (/2.5 for scale) plus Owners’ Equivalent Rent from the CPI YoY (red):

In the past several months, I wrote that the last time the Case-Shiller and FHFA Indexes were in this range YoY (2019), Owners Equivalent rent gradually declined in the 12-24 months thereafter to the +2% YoY level (courtesy in part of COVID). With this month’s decline, we are past that: the most apposite period is the first half of the 1990s, when CPI for owners’ equivalent rent was in the 2.5%-3.5% range:

Before I conclude, let me also highlight that last Thursday the experimental New and All Tenant Rent Indexes were updated for Q2 by the BLS, and it showed new rents falling off a cliff, with a YoY likely range of between -1.5% and -17.1, and a median of -9.3%. Here’s a graph of this metric compared with the CPI for rents (advanced 9 months):

The range for *all* rents was between 2.4% and 3.2%, with a median of 2.8% YoY. This compares with 3.8% for rents in the latest CPI report.

While this is a huge range of error, the trend it forecasts is unmistakeable. 

Similarly, the latest “National Rent Report” from Apartment List from the end of June continued to show YoY decreases, specifically of -0.7%. I won’t bother with the graph since it hasn’t been updated yet for this month.

Both last Thrusday’s new rents report and this morning’s repeat home sales reports are excellent news on the inflation front. If it weren’t for tariffs, this would forecast almost the complete obliteration of the post-pandemic consumer inflation spike.

What I’m watching this week: real spending on goods, payrolls, and corporate profits

 

 - by New Deal democrat

Once again there is no significant economic news on a Monday, so let’s take a look at the important data I am especially interested in later this week.

Consumption leads employment, and since consumption is about 70% of the US economy, any downturn in consumption is important, as it directly affects two of the coincident series that the NBER uses to date recessions.

And since spending on services tends to rise right through recessions, the critical datapoint is real consumer spending on goods, which will be updated for June on Thursday. Below are the YoY% changes in real spending on services (dark blue) vs. real retail sales (light blue), which covers about 50% of the same territory. On a YoY basis as of the last report real retail sales was up 1% and real spending on goods up 3%; the below graph norms those to the zero line:

Now let’s look at the same series, identically normed to 0, since the 1990s:

Real spending has typically been this tepid YoY going in to recessions, but also during slowdowns, such as 1994, 2002, and 2019.

After strong monthly gains due to March and April front-running of tariffs, consumers pulled back in May. I will be watching to see if the pullback continues or even intensifies, or whether there is a rebound.

Since consumption leads employment, what happens with real spending on goods also has ramifications for job growth. The below graph includes both of these YoY, again normed to zero as of their most recent readings (slightly above 1% for employment):

And here is the historical look. Pay particular attention to employment:

In the 30 years before the pandemic, YoY employment growth was never as low as it is now outside of recessions except during the severe “jobless recovery” of 2002. 

Last month only 74,000 private sector jobs were added. Seasonally adjusted, education jobs shot up 63,000. The rest of government added 10,000. It is likely that some or all of the seasonal adjustment for eduction is going to be given back this month, so I am watching to see if there is a surprise low payroll number, especially given the recent relatively anemic level of goods spending by consumers.

In fact, it is likely that real payroll growth has been even weaker. The Quarterly Census of Employment, covering over 95% of all jobs, indicated that payrolls grew only 0.8% through the end of last year. The Business Dynamics Survey seasonally adjusts this data for about 75% of all employment, and will be released for Q4 of last year this coming Thursday. 

Finally, we’ll get our first look at Q2 GDP this Wednesday. I’ll be paying extra attention to proprietors’ income, the proxy for corporate profits, which won’t be reported until next month’s revision. This is because historically corporate profits have led the stock market, which has risen sharply higher since its April lows. Although I won’t show the graph, the S&P 500 is higher YoY by over 15% as of last week. Typically at or about the onset of recessions the market goes lower YoY.

At the end of May, S&P 500 profits were expected to be over -1% lower in Q2 than Q1, which was signficantly lower than Q4 of last year:

Typically companies beat the last earnings estimates, and that has been the case so far this quarter as well, as with just over 1/3rd of all companies reporting, Q2 profits are supposed to end up being slightly higher than Q1 profits:

Corporate profits as reported in GDP are a good check on those estimates. So I will be paying particular attention to whether proprietors’ income continued to grow in Q2, or whether it foreshadows problems for “real” corporate profits.

As I noted a few weeks ago, in the past 50+ years it has typically taken some kind of “shock” to the system to derail the US consumer economy, whether the pandemic, or a sudden spike in gas prices, or the collapse of the housing market leading to the collapse of financial institutions caught up in the mania. At present we have a potential double-shock in the form of tariff increases not seen in the past 90 years, and the shock to the food industry (both agricultural and butchering) caused by the widespread deportations of their workers, and the fear of many thousands of others that showing up to work may lead to their deportation as well - causing crops to rot in the fields, and slaughterhouses to grind to a halt.

Will it start to hit the most important economic data? That’s what I’ll be watching for the rest of this week.