Monthly retail sales sharply higher in November, but flagging YoY real sales spell further trouble

 

 - by New Deal democrat

Real retail sales, one of my favorite broad-economy indicators, was updated through November this morning, making only one month stale. This, along with real personal spending, is one of the two most important indicators which have been missing, as we know the jobs and real income have been stagnant, but in terms of important expansion vs. recession metrics, what of sales and purchases?

Let me cut to the chase: in terms of nominal spending, it confirmed the strength we have seen in the weekly Redbook and daily restaurant reservations reports beginning in November. Specifically, in nominal terms retail sales rose 0.6% in November after -0.1% downward revisions for both September and October. In real, inflation adjusted terms, however, the story is different.

Real retail sales are more problematic, in part because there was no number for October, and November’s reading was marred by the shutdown kludge, particularly for shelter. With those important caveats noted, in November real retail sales were higher by 0.3% compared with September, and up 0.6% YoY. The below graph, through September, shows YoY real retail sales (blue) and the similar measure of real spending on goods (gold ), with the most recent reading of each subtracted so that it =0:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QtjV&height=490 

If you believe, as I do, that the shutdown shelter kludge removed about 0.2% from consumer inflation, that becomes a tiny 0.4% increase YoY, the smallest such gain since October 2024. Also, recall that real personal spending has not been updated yet beyond September.

Going back 75 years, a decline in YoY real retail sales has almost always meant a recession (but both the exception in 2023!). Neither they nor real personal spending on goods are negative as of their last readings,, but real retail sales have decelerated sharply since their YoY peaks in early spring. Should the trend continue, they could be negative YoY in their December or January reports.

Finally, because consumption leads employment, here is the update of YoY real sales (/2 for scale) together with employment (red), updated through the December jobs report:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1Qtl9&height=490 

[Note that, since I can’t show the November real retail sales “dot,” you’ll just have keep in mind that there was further YoY deceleration] This sharp deceleration in YoY growth in consumption forecast the slide in employment, and suggests that the jobs reports in the next several months will get no better.

October new home sales: also pre-recessionary, also with signs of possible “green shoots”

 

 - by New Deal democrat

New home sales were updated for the second time since the shutdown, with data only through October - i.e., stale. The silver lining is that this is a long leading indicator, so it remains of value.

Normally I save inventory for last, but in view of the importance of new homes for sale (red in the linked graph below) in providing housing’s final pre-recession signal, here is that number compared with new houses sold (blue, right scale):

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqLi&height=490 

For sale inventory was unchanged month over month, and only up 1.7% YoY. As I wrote yesterday, once that has gone negative YoY, it has typically signaled the imminence of a recession. In that regard, if inventory simply has remains unchanged through December, it will have turned negative YoY.

The silver lining is that, like housing permits, actual single family home sales turned higher in September and October, down only -0.1% monthly in the latter month, but higher by 1.8% YoY suggesting that lower mortgage rates may be laying the groundwork for a recovery. As per usual, I caution that this series is very noisy and heavily revised.

Finally, as I typically note, prices follow sales with a lag, and that continued to be true as the median price for a new home was down -8.0% YoY:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqNo&height=490 

Note that this series is not seasonally adjusted; hence the focus on the YoY change.

In short, much like housing permits, starts, and units under construction, this stale data looks very pre-recessionary, but also with some signs of “green shoots” thereafter.

December consumer inflation: a return to pre-shutdown trends and still affected by the shutdown shelter kludge

 

 - by New Deal democrat

We finally got our first “regular” CPI report since September this morning. Caution is still warranted, however, because the October-November kludge is still present in the base from which December’s monthly change was calculated. But the bottom line is that the series’ all reverted to their pre-shutdown trend, with the headline number up 0.3% and core inflation up 0.2%, but also with the shelter kludge still affecting the headline YoY comparisons of 2.7% and 2.6% respectively. 

As per my usual practice for the past several years, let’s start with the YoY numbers for headline inflation (blue), core inflation (red), and inflation ex shelter (gold), which was only up 2.4%:

  https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqD9&height=490 

The good news is that CPI less shelter decreased -0.2% in December,  and CPI ex shelter was the lowest since July, suggestion significant *disinflation.* Notably the previous 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, was clearly broken by the shutdown kludge. If shelter had increased its previous 0.3% monthly during those two months, both headline and core consumer inflation would be over 3%. 

Nevertheless, shelter inflation has decelerated YoY per the latest measure, down to a 3.2% increase, with rent up 2.9% and Owner’s Equivalent Rent up 3.2%, the lowest increase since September 2021 except for last month’s kludge:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqFx&height=490 

As usual let’s compare that with 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, each at roughly 1.5%, and shelter inflation has followed. The graph linked to below includes several years before Covid to show that this is well within its 3.2%-3.6% range during the latter part of the last expansion:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqGv&height=490 

Needless to say, this is not only good news, but because of the leading/lagging relationship, we can expect further deceleration in the shelter component of inflation during this year.

Another bright spot is that gas prices declined -0.5% for the month, resulting in a -3.4% YoY decline, which is welcome news to consumers:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqH9&height=490 

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

First, new car prices continue to be largely unchanged, flat for the month and up only 0.3% YoY, while used car prices reversed their shutdown increase, declining -1.1% in December and up only 1.6% YoY. The graph linked to below shows the post-pandemic trend by norming both series to 100 as of just before the pandemic:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqHX&height=490 

Every month I check the detailed breakout for “problem children,” I.e., sectors that have increased in price by 4% or more YoY. This month included several minor irritants including non-alcoholic beverages and tobacco, as well as fuel oil. Another recent problem child for inflation has been transportation services, mainly vehicle parts and repairs as well as insurance. Of these, only repairs and maintenance are still problematic, as while declining -1.3% for the month, they remain higher YoY by 5.4%:

 : https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqIA&height=490 

Finally, electricity prices have also become a significant problem, likely a side effect of the building of massive data centers for AI generation. These declined -0.1% in December, but on a YoY basis are up 6.7%, the highest increase since 2008 except for the shutdown kludge and the immediate post-pandemic inflation:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QqJ6&height=490 

As I wrote last month, this has already created a backlash, and I expect that backlash to intensify.

In summary, on a monthly basis December consumer inflation was relatively tame, with shelter cost increases slowly abating and only a few other problem children. I would continue to treat both headline and core YOY numbers with extra caution, since they both remain affected by the situation with shutdown shelter kludge. More likely YoY inflation is roughly steady in the 3% range, above the Fed’s target and with employment growth dead in the water.

September and October housing construction consistent with government shutdown recession, but also the possibility of “green shoots”

 

 - by New Deal democrat

On Friday housing permits, starts, and units under construction were finally reported for the first time in four months, since September’s report for August. The bad news is that the report only updated through October, so we are still two months behind. The very qualified good news is that, since housing is a long leading indicator, even with this lag the report still gives us insight into where the economy is likely to go in the next eight months.

 

When I last updated this information in September, I wrote that “a puzzling relationship this year has been that the housing data has been classically recessionary for a number of months, and yet the economy has not rolled over.” That May no longer be true, in that the government shutdown may have caused at least a brief economic contraction, but we won’t know that - even even if it was probable - until real sales and consumption are updated for last autumn later this month.

So let’s start by reiterating the basics: mortgage rates lead sales, which in turn lead prices, which in turn lead inventory.

Mortgage rates have fluctuated in a range between just over 6% to 7.6% in the past 3+ years (red, left scale in the graph linked to below), and housing permits have similar been rangebound between 1.330 and 1.620 million annualized (blue, right scale) over that same period:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1Qnx7&height=490 

In the past several months, interest rates have been near the bottom of their range, and permits responded in September and October by increasing from their August post-pandemic low. 

In more detail, total permits increased 82,000 to 1.412 million during that two month period. Single family permits, which convey the clearer signal, increased 18,000 to 876,000. Meanwhile the much noisier and slightly lagging housing starts declined -45,000 to 1.246 million units, their lowest number since the pandemic:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QnyD&height=490 

The decline in starts is unsurprising, since permits made their post-pandemic low in August, and as stated above, starts tend to follow within several months.

Even with these gains, permits and starts remain in territory below their peaks sufficient to be consistent with a recession. On the other hand, all three measures are down less than -10% YoY, where in the past it has taken a more severe decline of greater than -10% to be consistent with with a recession:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1Qnzj&height=490 

Let’s turn next to the number of housing units under construction. As I have written many times in the past several years, it is the best “real” measure of the economic impact of housing (blue in the graphs below). In September and October they remained almost exactly unchanged from their post-pandemic low in August, up only 2,000 units, but still down -23% from their peak:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QnzF&height=490 

The above graph shows how they have followed single family permits (red), as expected. More often than not in the past by the time a decline in units under construction had declined by as much as they did in August - and September and October - a recession had already begun. The only two exceptions were the late 1980s, where the pre-recession decline was -28.2%, and 2007, where the pre-recession decline was -25.6%. 

Now let’s update housing units under construction with the typical final shoes to drop before recessions, houses for sale (gold) and residential construction employment (red), in comparison with units under construction, all normed to 100 as of their respective post-pandemic peaks. Both the number of employees in residential construction and new one family homes for sale peaked in March and have declined almost uniformly since:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QnB4&height=490 

On a YoY basis, with the exception of 1974 and the COVID recession, houses for sale and (once available) employment in residential construction had turned down YoY before the recessions had begun:

 https://fred.stlouisfed.org/graph/fredgraph.png?g=1QnBp&height=490 

 

As of their last update for August, houses for sale were still higher by 4.0% YoY, but as of last Friday’s employment report for December, residential construction employment is now down -0.1%. 

In September I concluded that August’s report was “very much recessionary, although in some YoY comparisons, I would expect further damage before the actual onset of one. But that could easily occur within the next four to six months.” Indeed, per my last paragraph above, to the extent available, some of that has already happened. Additionally, as I pointed out several weeks ago, employment, industrial production, and real manufacturing and trade sales, as of their last reports, were all below their respective spring and summer peaks. On the other hand, the fact that permits did rebound for two months and units under construction did not decline further argues for the possibility of a bottom in the housing market and the proverbial “green shoots.”

The big missing piece remains real personal spending, and we won’t know anything about that even for autumn until later this month.

Weekly Indicators for January 5 - 9 at Seeking Alpha

 - by New Deal democrat

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

If anything, the trends over the last few months to a year appear to be becoming more amplified. Measures of consumer spending YoY have been increasing even further, while the global measure of wages to support that spending, as measured by withholding taxes should payments, are relatively speaking languishing. This suggests that the spending is being supported by (paper) asset appreciation, I.e., stock prices.

Clicking over and reading will provide you with the full up to the minute story, and reward me with a little $$$ in my wallet.

December jobs report: ringing the alarm bells for imminent recession* (*with caveats)

 

 - by New Deal democrat

[Note: Housing permits, starts, and units under construction were also updated this morning for September and October. I will post my remarks on this report on Monday; but in summary I can say it remained recessionary, with some possible “green shoots” that may indicate a bottom.]

This morning’s jobs report for December was the most important single datapoint we have received since the end of the government shutdown two months ago - and to cut to the chase it was in all respects except the headlines recessionary. 

Below is my in depth synopsis. 

HEADLINES:

• 50,000 jobs gained in total.
•  Private sector jobs increased 37,000, and government jobs added 13,000
• October was revised downward by -68,000 and November by -8,000, for a total of -76,000. 
• The alternate, and more volatile measure in the household report, rose by 232,000 jobs (Important note: this does not take into account the annual population revisions which as usual were added at all once this month).
• The U3 unemployment rate declined -0.1% to 4.5%.
• The U6 underemployment rate declined -0.3% to 8.4%.
• Further out on the spectrum, those who are not in the labor force but want a job now rose 69,000 since September to 6.208 million, aside from August the highest level since September 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. For the last two months they were mainly negative; this month all but one was negative or unchanged:

• The average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, declined -0.1 hour to 41.2 hours, down -0.4 hours from its 2021 peak of 41.6 hours.

• Manufacturing jobs decreased by -8,000, the eighth decline in a row. It is now at a 3.5+ year low.
• Truck driving was unchanged.
• Construction jobs declined -11,000.
• Residential construction jobs, which are even more leading, declined -4,200.
• Goods producing jobs as a whole declined -21,000, the sixth declinine in the last eight months. 

• Temporary jobs, which have declined by over -650,000 since late 2022, declined again by -5,700, a new post-pandemic low.
• The number of people unemployed for 5 weeks or fewer declined -253,000 to 2,289,000 (note that this might also be influenced by the annual Household Survey revisions.

Wages of non-managerial workers 

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased 0.1%, with a YoY gain of +3.6%, the lowest reading but for one month in 2021 since the pandemic, although it remains above the current YoY inflation rate.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers was increased 0.1%, and is up only 0.7% YoY. With the exception of 1967 and one month in 1994, in the last 60 years before the pandemic such a low YoY increase always took place in or just before a recession.

• The index of aggregate payrolls for non-managerial workers also rose 0.1%, and is up 4.2% YoY.

Other significant data:

• Professional and business employment declined -9,000 in October. These tend to be well-paying jobs. This is the sixth decline in seven months, and is the lowest number in over 3 years. It is also lower YoY by -0.4%, which in the past 80+ years - until now - has almost *always* meant recession.
• The employment population ratio increased 0.1% to 59.7%.
• The Labor Force Participation Rate declind -0.1% to 62.4% from September through November, vs. 63.4% in February 2020.

SUMMARY

Last month I concluded that the combined October and November report showed “a jobs market is either a hairs-breadth above contraction, or actually in contraction.” This month showed a contracting jobs market in all important metrics except the headlines (which, for the record, were positive).

But all of the important leading metrics, except for the noisiest one (short term layoffs) were negative, or in one case (trucking jobs) unchanged. All the other important goods-producing sectors - manufacturing, construction (including residential construction), and temporary jobs - declined, as did the goods-producing sector as a whole. In the Household Survey, those who want a job but aren’t in the labor force increased. And it is a near certainty that once we have the inflation data we will find out that real aggregate nonsupervisory payrolls declined. Indeed, without the callbacks to government jobs, when we count just private sector jobs, there was only an increase of 37,000.

Let me be clear: the jobs market is being entirely held up by service providing jobs, which tend to rise even in the earliest stages of recessions.

This is a jobs report which is ringing the alarms for imminent recession. The caveats are, as above, how well services spending holds up (we’ll finally get an updated personal consumption report in a couple of weeks), and whether this downturn was a temporary one influenced by the record length autumn government shutdown.