Housing construction continues to look recessionary

 

 - by New Deal democrat

As we get towards the end of the month, the data from the important leading housing sector begins to be reported. This morning’s report on housing permits, starts, and construction continues the trend that has been in place for several years.

For the month, permits (gold in the graph below) increased 3,000 to 1.397 annualized, while the more noisy starts (blue) increased 58,000 to 1.321 annualized. But both of these are still very close to their post-pandemic lows. But the metric that is the least noisy of all and conveys the most signal, single family starts (red), decreased 33,000 to 866,000 annualized:

In the above graph, I normalized permits and single family permits to 100 as of their post-pandemic peaks. I did the same for starts, but used their peak three month average. Starts are down 23.9% from their peak, permits 27.2%, and single family permits 30.3%. 

Is this sufficient to be recessionary? Here’s the historical pre-pandemic absolute levels of all three of the above metrics:

Downturns similar to current levels were in place at the beginning of most of the recessions in the past 50+ years, although in two cases - 1991 and the Great Recession - they were down 50% or more.

The significant decline in both measures of permits in the past several months is not a function of interest rates. Here’s an update of my graph showing the YoY change in mortgage rates (red) vs. the YoY% change in permits (blue):

Based on interest rates, permits (and subsequently starts) should be about the same as they were a year ago.

This is significant because in historically, the steep declines in permits and starts, generally more than 10% YoY, have persisted right up into recessions:

At present, permits are down -4.4% YoY, single family permits -8.4%, and the noisy starts only -0.4%.

But as I have pointed out many times in the past several years, the best “real” measure of the economic impact of housing is units under construction (red in the graph below). This month they declined another 6,000 to 1.361 annualized, the lowest level in 4 years, and off 20.6% from their peak (graph is normalized to 100 as of just before the pandemic):

As I wrote one month ago, more often than not in the past, by the time units under construction had declined by this much, 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%.

The above graph also shows the final shoes to drop typically before recessions have started, houses for sale (gold) and residential construction employment (blue), in comparison with units under construction. Both of the two are either at or very close to their post-pandemic peaks. Here’s the historical YoY% look at all three measures:

I would expect all three series to turn negative YoY by the time a recession begins. Needless to say, that hasn’t happened yet. But because of the continuing downturn in actual construction, I do expect both of the last two measures to turn down. The only question is how long they can levitate before they do so. Once they do, I would expect their YoY decline to be similar to that already evidenced by housing units under construction - which, as per the above, is already at levels consistent with a recession on the horizon.

Topline monthly increase in retail sales betrays weak underlying trend

 

 - by New Deal democrat

Consumption leads employment, and retail sales are the most timely monthly indicator of consumption. Indeed, population-adjusted real retail sales in the past have tended to turn negative one year or more before a recession has begun.

In June, nominally retail sales rose a strong 0.6%. But because consumer prices rose 0.3%, real retail sales increased 0.3%.

But hold the celebration, because even with this increase real retail sales in June were among the 4 weakest readings in the past 8 months, and are below all of their readings during the 4th Quarter of last year, as well as the front-running of tariffs that was apparent earlier this year:

In other words, the trend is one of the stagnation of growth.

With several exceptions, most notably in 2022-23, in the past 75 years whenever real retail sales turned negative YoY, a recession was about to begin or had just begun. At present real retail sales are higher YoY by 1.2%, so there is no sign of any imminent downturn in the economy:

Even adjusted for population, real retail sales remain higher YoY by 0.6%, which in ordinary times would suggest no recession in the next 12 months:

Of course the whole issue of tariffs makes these not ordinary times.

But to reiterate, consumption leads employment. So here is the updated graph of real retail sales YoY, together with real personal consumption of goods (thin, light blue), compared with nonfarm payrolls (red):

Based on historical experience, real retail sales suggest that YoY jobs growth should continue to decelerate in the coming months to a meager 0.6%. And even restricting ourselves to the past 40 years, such a small increase in employment has only occurred during recessions:

So, to loop this back to my discussion of this morning’s very good initial jobless claims report, if the apparent slowing in consumption as shown by real retail sales continues much longer, I would not expect benign jobless claims reports to last much longer.

Jobless claims: the brightest spot in the entire economy right now

 

 - by New Deal democrat

Probably the brightest spot in the entire economy right now is initial jobless claims. Contrary to the general theme of deceleration which has been the case for several years now, initial claims appear to be breaking trend in the positive direction.

Specifically, initial claims declined -7,000 last week to 221,000, their lowest reading since the end of March. The four week moving average declined -6,250 to 229,500, the lowest since the beginning of May. With the typical one week delay, continuing claims rose 2,000 to 1.956 million:

On the YoY% basis more useful for forecasting, initial claims were down -7.9%, and the four week average down -1.6%, only the 3rd time in the past 10 months that this comparison has been lower, and the biggest YoY decline during that time. Only continuing claims remained higher, by 4.8%:

This tells us that there are very few layoffs, even if those who are laid off are having a more difficult time landing a new job. (More on that in my report on this morning’s retail sales number).

Finally, let’s take our first look at how this month’s jobless claims report so far might affect the unemployment rate in the next couple of months:

Remember that unemployment claims tend to lag initial claims, so even though the last several weeks have been very good, the increase in claims during June is still likely to contraindicate downward pressure on the unemployment rate at least for another month. 

One important caveat: just as the huge surge in immigration in 2021-23 distorted the unemployment rate to the upside, it is likely that immigration has slowed to a trickle this year, plus deportees do not file jobless claims, so there might well be a contrary distortion to the downside in the unemployment rate this year.

June industrial production: a mild coincident positive for the economy

 

 - by New Deal democrat

Industrial production is much less central to the US economic picture than it was before the “China shock,” since so much production moved overseas, meaning US consumers buy much more imported goods than they used to.

Still it is an important if diminished coincident indicator. This morning’s report for June was positive, but less so than appeared on the surface.

Headline industrial production (blue in the graph below) increased 0.3% for the month. It is higher by 0.7% than it was one year ago, and 0.5% higher than it was in September 2022, its former post-pandemic high. Manufacturing production (red) increased 0.1% and is 1.0% higher than one year ago, but -0.1% lower than its post-pandemic high of October 2022:

What’s the difference? As has been the case a number of times in the past year, utilities production (blue in the graph below), and specifically electrical utilities (red):

I strongly suspect this is due to the necessity to generate power for mining crypto - a complete net waste of resources, and a negative for climate.

In any event, this is a coincident positive for the economy.

Producer prices, consumer prices, and tariffs

 

 - by New Deal democrat

Much of the commentary on yesterday’s CPI report suggested that the tariff impacts were apparent. My own analysis was more cautious. That’s simply because we don’t know for sure which items were affected by tariffs, and at this point referring to, e.g., appliances that showed relatively large monthly increases in prices is speculative - not wrong, mind you, simply speculative. The closest to rigorous analysis I read was that goods inflation was more than services inflation, which would make sense because few “services” can be imported.

That issue continued into this morning’s report on June producer prices.

Headline PPI was reported this morning to have been unchanged for June, while that for raw commodities increased 0.6%. Still, as shown by the below, the YoY trend in each is hardly that of accelerating inflation. Final demand PPI was up 2.4% YoY, continuing its cooling trend, while that for commodities was up 1.7%, in line with its trend for the past 12 months:

When we divide final demand into goods and services, the picture becomes a little more complex, in line with the analysis of yesterday’s CPI. Producer prices for services rounded to unchanged, while producer prices for final demand goods increased 0.6%.  Still on a YoY basis, the trend for services continues to decline, up only 2.7%, the lowest since March of last year, while that for goods was up 1.7%, in line with its recent trend:

One piece of data is incontrovertible, however.

Every day the Department of the Treasury updates its website with a “Treasury Statemeent” of moneys incoming and outgoing from the federal government. And one specific line is for “Customs and Certain Excise Taxes.” 

That particular line as of several days ago indicated that about $125 Billion had been received in such taxes this fiscal year, about $50 Billion more than had been received one year ago at this time.

That $50 Billion was paid by importers, who either ate the cost or passed it on to consumers, or some combination of the two. If we simply figure a 50/50 split between the two possible parties bearing the brunt of the tariffs, that averages out to about a $200 increase per household so far this year. That’s money that could have been saved, or spent on other items. Instead it was spent on the increased cost of items bought.

So even if the data from yesterday’s CPI report was ambiguous, the simple necessary fact is that there have already been increased costs at the producer and/or consumer levels from tariffs. We just don’t know exactly where within those reports they exist.

June CPI: an apparent point of transition

 

 - by New Deal democrat

We are at somewhat of an inflection point as to consumer inflation. On the one hand, the post-pandemic inflationary effects continue to fade. But on the other, we are waiting for the effects of Tariff-palooza! 

In June the waning post-pandemic effects continued to dominate, as the only items still rising at a rate in excess of 4% were Owners’ Equivalent Rent, gas and electric utility services, and motor vehicle insurance and repairs, joined by hospital services, meat and tobacco.

Here’s the more detailed look. 

Headline CPI in June rose 0.3%, core CPI rose 0.1%, and ex-shelter CPI was unchanged. On a YoY basis, CPI rose 2.4%, core CPI rose 2.8%, and CPI ex-shelter CPI rose 0.3%. Here is the month over month look at all three:

On a YoY basis, headline CPI was up 2.7%, core CPI up 2.9%, and CPI ex-shelter was up 2.0%:

This graph does suggest that CPI is at an inflection point. While the YoY trend in core inflation appears to be a continuation of slight deceleration (although both it and headline CPI YoY were 0.3% hotter than last month), CPI less shelter shows a slightly increasing trend over the past 9 months - even as it remains under 2.5% as it has for over 2 years. The net effect is that YoY headline inflation appears to have wobbled in the 2.4%-2.8% range over the past year. In other words, overall the post-pandemic disinflationary effects appear to be fading.

Within shelter, actual rent rose 0.2% for the month, and is up 3.8% YoY, while the fictitious Owners’ Equivalent Rent rose 0.3% for the month, and is up 4.2% for the year. Although both YoY metrics declined slightly this month, both rounded to 0.0%. Here’s what both of them look like in comparison with the FHFA house price index:

I do expect the shelter components of CPI to continue to slowly decelerate, following the continued somnolent readings in the FHFA index.

There were only three other significant drivers of inflation last month: transportation services, utility services, and hospital services.

As a reminder, transportation services (mainly maintenance and repair as well as insurance) are even more lagging than OER, since they react to the increased cost of vehicles and parts (note: FRED does not separately break out insurance):

Transportation services as a whole appear close to their pre-pandemic range, while maintenance and repair costs remain slightly elevated.

While the former problems of new car prices have risen only 0.2% in the past 12 months, and used car prices 2.8% (so I won’t even both with the graph), motor vehicle repair prices are still up 5.2% YoY, and motor vehicle insurance is up 6.1%. Even here, both continued to moderate, as on a monthly basis the former were only up 0.2%, and the latter up 0.1%

Hospital services rose 0.7% for the month and are up 4.2% YoY:

This series is somewhat noisy, but the current reading is within the “normal” range for the past 10 years (the 2023-24 YoY increase was due to one big month’s increase in 2023). Whether the jump this month is a harbinger of a future breakout or just noise is completely unknown.

Finally, the only other current problem child is gas and electric utility services, up 0.9% for the month and up 7.5% YoY:

This does appear to be a genuine breakout from its post-pandemic range. Although I won’t bother with the graph, both electricity and gas utility services are participating in the breakout.

Cleaning up a few other odds and ends: energy prices (mainly gasoline) did increase 0.8% for the month, but remained down -0.8% YoY. Tobacco products increased 0.5% for the month, and were up 6.3% YoY, but these have a very small weighting in the index. Perhaps of more interest, meat and poultry prices declined -0.3% for the month, but remain up 5.8% YoY, although down from their 7.8% YoY peak in March:

To summarize, the takeaway for June is that the slow post-pandemic disinflation, led by shelter and motor vehicle prices, appears to be abating, while several other areas - albeit small - of concern have appeared. On the bright side, there do not appear to be any definite signs of negative impacts from tariff-related price increases yet.

Financial and commodity markets since Election Day

 

 - by New Deal democrat

The post-jobs report data drought finally ends tomorrow. Today, let me take the opportunity to update some important trends that have been affected or caused by the T—-p Administration’s “policies.” 

All graphs below showing absolute values have been normed to a value of 100 as of Election Day last November.

First and most notably, since Inauguration Day the US$ has declined more than 10%. Below I show the absolute value of the nominal US$ index (blue, right scale) together with the YoY% changes, going back 60 years (red, left scale):

Here is a graph of the H1 decline in the US$ over that same period:

The decline in the absolute value US$ does not look particularly bad vs. several post-recession declines in the past, and on a YoY% basis it is only down 5%. But as the immediately above graph shows, the 10% H1 decline is among the sharpest in the past 60 years. With the exception of the Reagan Administration’s deliberate devaluation strategy, a YoY decline of over 10% would only be normal in a very weak economy where it is part of pump-priming. Needless to say, if we reach such a YoY decline even before going into a recession, that would be a bad thing.

Commodity prices as measured by the PPI are up 2.3% since the election (blue), but since commodity markets are global, how much, eg., lumber can be bought is affected by the US$’s value vs. other currencies as well, and so adjusted, commodity prices have risen 5.5% (red):

In short, it is more expensive to import most commodities now than it was before the election.

As can be found in the Daily Treasury Statement, tariff income has risen to $28.0 Billion during the month of June:

That’s $336 Billion on an annualized basis, and since it is paid by importers and either eaten by them or wholly or partly passed on to consumers, it is a deadweight loss to the economy, particularly in view of the Billionaire Bust-out Budget Bill just enacted. 

In the past, GOP budget bills have made sure to include some crumbs for medium and lower income earners, in the form of at least a modest tax reduction. Not this time. This time, especially coupled with the impact of the tariffs, a large majority of American households will actually lose income:

This is, needless to say, not a good thing in an economy which is 70% fueled by consumption.

In view of all of the above, the yield on long-dated US Treasury’s has hovered at about 4.4% for the 10 year, but gradually risen to almost 5% for the 30 year bond:

As you can see, both of these are close to 20 year highs. Of course, there is no way to know for sure whether the trend will continue, but it certainly appears as if the bond market is anticipating more inflation, and in the case of foreign holders, a requirement for higher yields to hold US$ denominated assets.

Finally, we come to the contrarian indicator - the US stock market, which made yet another new all-time high last Thursday in the face of T—-p’s latest tariff announcements (blue, right scale):

The market is up over 5% since Election Day. 

But as you can see especially from the YoY% change shown by the red line, the pace of increase has slowed considerably.

Usually it is worthless to try to divine “why” the stock market has made a particular move. But in the case of the rally since April, it is almost certainly an indication of the “TACO trade,” which is to say that market participants are not taking T—-p’s tariff pronouncements seriously, and fully expect him to back off.

Paradoxically, this creates positive feedback for T—-p, which in turn makes it more likely that he will carry through on his tariff threats. Which in turn will likely surprise the market and lead to a sell-off. Which is likely to activate TACO again. Rinse, lather, and repeat.

Although lower taxes are normally good for corporate profits, since as indicated above most American households will sustain a net loss from the combination of the tax bill and increased prices due to tariffs, it is hard to see that being the case this time.

Of course, time will tell. But so far the trends from T—-p have been a declining US$, an increase in commodity prices and inflation expectations, and a (small so far) deadweight loss to the consumer economy. Personally, my bet is that the bond market is right, and the stock market is wrong.