Employment growth is dead in the water; tomorrow we will find out about production and sales

 

 - by New Deal democrat

With no news today, let’s take a look at why two releases tomorrow are especially important.

Let me begin with employment, which is “dead in the water.”  I’ve written before about how manufacturing and construction employment, and now the entire leading sector of goods-producing employment, is down. But today let me point out how narrow the poor situation in services as well. [NOTE: all FRED graphs in today’s post are normed to 100 as of April of this year].

Below is the graph of total employment (blue), total employment excluding health care (red), and services sector employment excluding health care (gold):

Not only is total employment down by more than -100,000 since April excluding healthcare, but even in the services sector (which is everything except goods production), employment in every other job except health care is up by a grand total of 2,000. Total employment in *all* sectors is up only 107,000 - and it’s all healthcare.

Domestic goods production looks shaky as well. Below is total industrial production (blue), manufacturing production (red), mining (gold), and utilities (right scale, narrow, orange):

Since March nearly all forms of production are either virtually flat or down. Only utilities (probably due in great part to AI data mining operations) are significantly higher. Tomorrow we will find out if this continues or not.

If employment is flat, and if production is also close to flat, what has really been keeping the economy growing has been consumer spending. 

One measure I keep track of weekly is Redbook’s consumer spending report, which is nominal and is only reported YoY:

In the past few weeks there have been strong grains of 6.5% YoY or more.

But more importantly, below are real personal spending on services (blue) which almost always grow even during many recessions, real personal spending on goods (gold) which tend to turn down shortly before recessions, and real retail sales (red) which also turn down prior to recessions, and while similar to goods spending are more sensitive to the downside:

Real retail sales are down from their tariff front-running March peak. Tomorrow they will be reported for August. Keeping in mind that consumer inflation was 0.4% last month, unless there has been strong nominal growth, real sales are likely to be negative.

Weekly Indicators for September 8 - 12 at Seeking Alpha

 

 - by New Deal democrat

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

While job growth has almost completely stalled, and inflation shows signs of picking up, both consumer spending and the stock market continue to plow forward at full speed. It’s an odd situation that may be powered almost exclusively by people at the top end of the income distribution.

In any event, clicking over and reading will bring you up to the virtual moment as to the economic data, and reward me with a penny or two for collecting and organizing it for you.

August real average wages and nonsupervisory payrolls: some signs of flagging but no recession signal yet

 

 - by New Deal democrat

Now that we have the consumer inflation number for August, let’s take a look at real wages and income for ordinary workers.

In the jobs report last Friday, we learned that both average hourly earnings and aggregate payrolls for nonsupervisory workers increased 0.4% in August. Yesterday we learned that consumer inflation also rose 0.4%, so unsurprisingly growth in both real average wages and aggregate payrolls rounded to zero.

First, here is the historical pre-pandemic graph of real average hourly wages, both YoY (red, left scale) and in absolute terms (blue, right scale). As you can see, a decline in YoY real wages has been a decent - though far from perfect - antecedent to recessions:

The metric is badly complicated by gyrations in the work force itself. In particular, from the early 1970s through the mid-1990s, with the entry of the huge Baby Boom generation, as well as the majority of women, into the workforce, real wages underwent a generation of depression. Once entry of the last Boomer and woman was digested, real wages started rising again. Even during that period, when wages declined more than trend, it was a warning signal.

Now, here is the post-pandemic record:

Somewhat with fits and starts, real average hourly wages have been rising since June 2022, the inflection point when gas prices fell from $5 to $3/gallon, and the supply chain un-kinked. 

The increase in real average wages stands at +1% YoY, with no significant sign of decoration at this point. 

The much more reliable indicator is that of real aggregate nonsupervisory payrolls. This tells us how much the vast majority of consumers have to spend. When it rolls over, consumers pull back, and a recession almost always begins.

Here is the historical, pre-pandemic record:

This indicator is almost flawless. If real aggregate payrolls are rising (blue line) the economy is not in recession. With one exception (2002-03), shortly after it peaks, a recession has always begun, typically within two months of when the YoY% change crosses the zero line (red).

Post-pandemic, this indicator has held up as well, with several periods of weakness (late 2022, the beginning of 2024) but never crossing the zero line:

Currently YoY growth is at 2%.

Finally, as the below graph, normed to 100 as of this March shows, we appear to have entered our third period of weakness in real aggregate payrolls (thick, red line):

These have risen only 0.3% in the five subsequent months, for an annual rate of 0.7%. Meanwhile real average hourly wages (thin, orange line) have increased 0.4%.

It would be wrong to project either of these forward, since needless to say, they don’t forecast their own future trajectory. What we can say is that, if weak job growth translates to weaker nominal wage growth, and if tariffs and the weaker US$ result in higher inflation, real aggregate payrolls could cross the zero threshold, signaling recession, by early next year.

As consumer inflation shows more signs of re-acceleration, the Fed is being forced to pick its poison

 - by New Deal democrat

The Fed is really facing a no-win situation. Between the recent employment reports, the QCEW, and even this morning’s jobless claims report, the jobs market has clearly been weakening, and may be on the very cusp of contraction, implicating the Fed’s dual mandate to strive for full employment. But this morning’s CPI report shows that reviewed inflation is beginning to percolate through the economy as well. About the only silver lining is that shelter inflation continues to abate, and is almost at its pre-Covid range.

For the record, let’s start with the month over month numbers for headline inflation (blue), core inflation (red), and inflation ex-shelter (gold) for the past two years:

Note that I am no longer including the big inflationary spike of 2021-22. Note that the last three months of both headline and core inflation show no deceleration at all, and are actually closer to their highest monthly readings of the past 24 months. In other words, the deceleration in consumer inflation has stopped.

Here is the YoY% look at the same data:

This now clearly shows an uptrend in non-shelter inflation and a smaller but notable increase in headline inflation, with no deceleration in the past 12 months flat YoY core inflation.

Now let’s look at the silver lining: shelter, as usual comparing the YoY% changes in the repeat home sales indexes, which lead by about 12-18 months (/2.5 for scale), to CPI for shelter (red). YoY home price increases are near or at multi-year lows, and shelter inflation has followed. While shelter CPI increased 0.4% in August, on a YoY basis it is up 3.6%, its lowest level since October of 2021. The below graph includes several years before Covid to show that this is actually at the very top end of its 3.2%-3.6% range during the latter part of the last expansion:

On a monthly basis, actual rent increased 0.3%, while fictitious owners’ rent increased 0.4%. On an YoY they advanced 3.4% and 4.0% respectively, the lowest YoY% increases since the end of 2021:

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

First, new car prices continue to be largely unchanged, down -0.1% for the month and up only 0.7% YoY, while the story for used car prices is completely different, as they  increased 1.0% monthly and are up 6.0% YoY. Still, on a long term basis the two are within their historic relative ranges, as shown in the below long term graph which is normed to their early 1980s prices:

I suspect the rebound in used car prices is because car loan interest rates may be causing a bigger percent of purchasers to go to lower cost used vehicles.

Next, transportation services (mainly car repairs and insurance) lag the prices of new and used cars. Inflation here has returned to below 4.0% YoY this year. But note that inflation in maintenance and repairs has increased from 5.0% to 8.5% YoY in the past three months:

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

Next, recently price increases in medical care services have also re-accelerated, and again this month increased 0.3% for a 4.2% YoY increase:

Finally, gas for utilities and electricity costs have also turned up sharply this year. In August the former increased 2.5% and the latter 1.0%. On a YoY basis, they are up 13.8% and 6.2%, respectively:

At least some of this is probably due to a sharp increase in demand caused by the enormous use of electricity in data-mining plants used for AI. Ordinary residential customers are not going to be thrilled, to say the least.

In sum, August’s consumer inflation report continued the trend of the two previous months, in which I wrote that consumer inflation was in a transitionary period. In August, the transition is further along, with shelter having disinflated to the cusp of its pre-COVID range, while inflation elsewhere has re-accelerated. The Fed is in the unenviable position of having to pick its poison, while there is massive political pressure to print free money for T—-p.

 

Initial claims have a Texas-sized increase

 

 - by New Deal democrat

I’ll post about the CPI later this morning. But unusually, the biggest news of the morning was initial jobless claims, which spiked to 263,000, an increase of 27,000 from the previous week. The four week moving average increased 9,750 to 240,500. Meanwhile, with the typical one week delay, continuing claims were unchanged at 1.939 million:

For comparison, the weekly number was the highest since October of 2021, but note that the four week average was higher just in June, and also in the summer of 2023:

This may well just be a one week outlier. A scan of the State inputs indicates that initial claims in Texas nearly doubled, from 16,600 to 31,900, last week. It’s unclear which employer(s) are the culprits, as there have been a number of articles in the Texas media about increased layoffs in a number of industries in the past month.

As usual, the YoY% changes are more important for forecasting purposes. While the one week number was higher by 14.3%, the four week and monthly averages are much more important. And the four week moving average was only higher by 4.3%. Continuing claims are up by 5.1%:

So take this week’s number with a liberal dose of salt. Still, it is consistent with my view that there were some unresolved seasonal distortions this summer, which would resolve this month. The bottom line is that jobless claims continue to score “neutral,” suggesting a weak but still expanding economy. 

August producer prices largely a reflection of volatile food and energy prices

 

 - by New Deal democrat

Consumer price inflation will be reported tomorrow. In the meantime, this morning producer prices for August were reported. Normally I don’t pay too much attention to producer prices - and I won’t this month, either. But let me put that in some context.

In the past, when producer prices have outstripped consumer prices, that has meant that producers aren’t able to pass on the full amount of price increases to consumers.

Since the summer of 2024, final demand producer price gains have been approximately equal to consumer price gains. If producer prices were to spike even higher, we should expect that to show up in corporate profits within another quarter or two, and possibly even this quarter. And when corporate profits turn down, they think about scaling back hiring, and even layoff off workers.

July’s report suggested that such a spike in producer costs, probably engendered mainly by tariffs, but also by the weakened US$, has begun. This month there was a reversal, but it was largely driven by volatile food and energy prices, as well as an anomalous slight decline in services PPI.

Total final demand producer prices for finished goods increased 0.1% in August. Once food and energy are taken out, they increased 0.3%. Meanwhile producer prices for services declined -0.2%:

On a YoY basis, total PPI for goods are up 1.9%, and core goods ex-food and energy are up 2.8%, while PPI for services is up 2.9%, a deceleration from last winter when they peaked at 4.5%:

Raw commodity prices were unchanged for the month, while headline final demand PPI declined -0.1%. Consumer prices, which will be reported tomorrow, are also shown in red:

On a YoY basis, commodity prices are up 2.7%, the highest since January 2023, while headline final demand is up 2.6%, about par for the course for most of this year, vs. CPI, which was up 2.7% one month ago:

With the continuing upward pressure on commodity prices, in great part due to the relative depreciation of the US$, as well as to tariffs, producer prices later in the process are being squeezed. And their equivalence to CPI suggests profit margins are stagnating as well. 

Tomorrow we will get the more important CPI, and see if producers are continuing to “eat” most of the pressure, or whether it is being passed on to consumers. In the meantime, I expect food and energy prices to remain volatile, so I would pay more attention to the core PPI readings.