September manufacturing new orders and August construction spending both turn down

 

 - by New Deal democrat

As usual, we begin another month and another quarter with important manufacturing and construction data.

The ISM manufacturing index has a very long and reliable history. Going back almost 75 years, the new orders index has always fallen below 50 within 6 months before a recession, and in three cases did not actually cross the line until the first month of the recession itself - although the recession did not begin until after the total index fell below 50, and in fact usually below 48.

In September the overall index declined to 50.9 - just slightly expansionary - and new orders declined to a new post-pandemic lockdown low of 47.1:

This is consistent with readings right before the onset of the Great Recession, but also with several slowdowns that did not quite turn into recessions.

Construction spending, both in total and residential, declined nominally for the seond and third month in a row, respectively:

Again, this is consistent with a recession, but also a slowdown as in 2018.

Adjusting for inflation using the construction materials special index, total construction spending is down about -17%, and residential construction spending down -8% from their respective peaks at the end of 2020:

Note the more leading residential measure has been flat for nearly a year. 

Because construction spending is the “real” economic activity, as is the metric of “housing units under construction” from last week’s permits and starts release, below is a comparison of the two measures measured YoY:

I mentioned last week that housing units under construction looked like it was peaking right now. Since construction spending seems to be coincident with or slightly leading units under construction, this is more evidence that the real economic activity in the leading housing market is at or just past peak. In other words, maybe not in Q3, but from here on in we should expect housing to subtract from real GDP.

August personal income and spending: major downward revisions overwhelm modestly positive monthly grains

 

 - by New Deal democrat

This morning’s personal income and spending report for August was positive month over month both in nominal and real terms, but the major story was in the revisions.

Personal spending is the essentially the opposite side of the transaction of retail sales. Both have been tracking relatively closely since the end of the stimulus-fueled spring spending spurge of 2021, as shown in the m/m% changes below:

Real personal spending was up +0.1% in August, compared with +0.2% for real sales. 

So far, so good. But as you can see from the above graph, real personal spending has all but stalled since April.  Compared with the average spending in Q2, the first two months of Q3 are only up +0.1% - which while positive is seriously weak.

Real personal income also increased less than +0.1%, rounding down to unchanged. Since May 2021, real spending has increased +2.8%, but real personal income is *down* -2.2%:

This reflects a major downward revision in income for the past year. Here’s last month’s graph, showing real personal income only down -1.0% since May 2021:

With this revision, we just got a big part of the explanation for why consumer confidence (and President Biden’s approval ratings) took such a hit earlier this year.

The same revision seriously affected the personal saving rate, which was unchanged for the month at 3.5% (shown as zero in the graph below for better historical comparison):

As revised, the saving rate has been close to all time lows for most of this year. Only 2005-08 were lower.

Here’s the same graph from one month ago, showing July’s saving rate as 5.0%, generally equivalent to the early 2000s:

But no more!

Usually the personal saving rate declines progressively during expansions, leaving consumers more and more vulnerable to negative shocks. With the revisions to the past year’s data, we are very much in that territory. If there is , e.g., another gas price spike, consumers’ luck will probably run out.

The positive trend in jobless claims continues

 

 - by New Deal democrat

For still another week, initial jobless claims continued their recent downtrend.

Initial claims declined -16,000 to 193,000, a 5 month low. The 4 week average also declined -8,750 to a new 4 month low of 207,000. Continuing claims, which lag somewhat, declined -29,000 to a 2.5 month low of 1,347,000:

The downtrend of the past 2 months is almost certainly a positive side-effect of lower gas prices. According to GasBuddy, gas prices have increased in the past 10 days. If gas prices stabilize, I expect jobless claims to do so as well.

But this is good news and very much at odds with the idea that the US is currently in a recession.

Interest rates, the yield curve, and the Fed chasing a Phantom (lagging) Menace

 

 - by New Deal democrat

There’s a lot going on with interest rates in the past few days.

Mortgage rates have increased above 7%:

This is the highest rate since 2008. Needless to say, if it lasts for any period of time it will further damage the housing market.

The yield curve has almost completely inverted from 3 years out (lower bar on left; upper bar shows a similar curve in April 2000, 11 months before the 2001 recession):

As of this morning, the curve is normally sloped from the 3.12% Fed funds rate up through the 3 year Treasury, which is yielding 4.22% (which, as an aside, is a mighty tasty temptation to buy medium maturity bonds). Beyond that, with the exception of the 20 year Treasury, each maturity of longer duration is yielding progressively less. If this is like almost all recessions in the last half century, the short end of the yield curve will fully invert (i.e., Fed funds through 2 years as well) before the recession actually begins. Although I won’t show the graph, the yield curve *un*-inverted before the last two recessions even began, immediately or shortly after the Fed began to lower rates again.

On the issue of rents, house prices, and owners equivalent rent, Prof. Paul Krugman follows up on the fact that OER is a lagging measure. Today he touts the monthly decline in new rental lease prices as possibly signaling a downturn in inflation:

He’s referring to the “National Rent Index” from Apartment List, which Bill McBride has also been tracking. Because it tracks rents in only new or renewed leases, it picks up increases or decreases more quickly than those indexes that measure all rentals (including those that were renewed, e.g., 9 months ago).

I don’t think the index is quite the signal Paul Krugman does, because it is not seasonally adjusted, and rents typically decrease in the last 4 months of each year:

Here is the cumulative yearly index for each of the past 5 years:

The -0.1% non-seasonally adjusted decrease in September this year is on par with that of 2018, and less of a decline in September 2019 or 2020. For the first half of this year, rents were increasing at a faster, and accelerating, rate compared with 2018 and 2019. Since June have rent changes been comparable with (and not more negative than) those two years.

I thought I would compare Apartment List’s with with the Case Shiller house price index, below:

Note that house prices broke out to the upside YoY beginning in late spring 2020, while apartment rents did not do so until early 2021. There were rent increase moratoriums in place during the pandemic, which may have affected that comparison. Still, it is cautionary that for the limited 5 year comparison time we do have, house price indexes moved first.

Finally, what would the Fed have done if it had used the Case Shiller index instead of owners equivalent rent in its targeted “core inflation” metric?

Via Mike Sherlock, here’s what the “Case Shiller [total, not core] CPI” looks like through last month:

Here’s another way of looking at the data, comparing the monthly % changes in the Case Shiller national house price index (blue), owners equivalent rent (red, right scale), and core CPI (i.e., minus food and energy) (gold, right scale):

Rent + owner’s equivalent rent are 40% of core inflation. Unsurprisingly, core inflation tends to track similarly to OER. But between May 2021 and May 2022, OER only averaged +0.4% monthly, whereas the Case Shiller index increased 1.5% on average monthly. If 40% of core inflation increased at 1.5% monthly instead of 0.4% monthly, core inflation would have on average been +0.4% higher each month for that entire year.

In other words, the Fed would have had a much earlier warning that an upsurge in core inflation was not going to be “transitory.” 

By contrast, during the last 3 months of the period through July that we have house price index data, OER has averaged +0.4%, whereas house prices have increased on average +0.6%. This would have brought core inflation down by -0.1% each month. If we use the last two months, OER is +0.6% and house prices have been unchanged. Core inflation would have been -0.3% lower in June and July.

In fact, if the trend of the last several months continues, by year end OER is going to be higher than house price appreciation on a YoY as well as m/m basis. And while OER has been increasing, house price indexes have been decelerating. 

In other words, if the Fed keeps raising rates, it is most likely chasing a phantom menace, a lagging indicator the leading measures for which will have already peaked and come down sharply.

House price indexes: more evidence of a summer peak

 

 - by New Deal democrat

The Case Shiller and FHFA house price indexes were updated through July (technically, the average of May through July) this morning. Ordinarily I do not pay them too much mind, but this year they are very important in confirming a peak in house prices.

Although the FHFA index is seasonally adjusted, the Case Shiller index is not, so the best way to show them in comparison is YoY. Here are YoY% changes for the last 2 years of each through June (FRED has not yet posted today’s numbers):

Remember, my rule of thumb for non-seasonally adjusted data is that the peak is most likely when the YoY gain declines to only 1/2 of its maximum in the last 12 months. the YoY peak in the Case Shiller index was +20.6% in March and April. The peak for the FHFA index was 19.3% in July 2021. By that standard, although both decelerated to 12 month lows, at +15.8% and 13.9% respectively, neither has actually turned down, although the FHFA index is closer. And since the FHFA has a tendency to turn slightly ahead of the Case Shiller index, this strongly suggests that a sharp deceleration in the Case Shiller index YoY will start within a month or two.

As I said above, however, the FHFA purchase only index *is* seasonally adjusted, and that index, after increasing consistently by 1% or more from June 2020 through May 2022, declined -0.1% in June, and -0.6% in July:

So the seasonally adjusted data in the FHFA Index indicates that prices did peak in May.

New home sales were also reported this morning. I’ll comment briefly on sales below, but let’s stick with prices first. These are also not seasonally adjusted. The median price of a new home YoY increased “only” +8.0% as of August, down from +24.2% in August of last year:

This confirms that new home prices have probably peaked as well.

Additionally, the maximum median YoY% change for existing homes in the past 12 months was last December at 15.8%. As of August the YoY increase was +7.7%, meaning those prices also probably peaked.

Summarizing the four measures of house prices, median prices of both new and existing homes appear to have peaked this summer. The FHFA Index suggests a peak either also happened this summer or is happening imminently. Only the Case Shiller index is probably several months away from peaking. 

Finally as to prices, as I have written many times over the past 9 months, the CPI measure of housing, “owners equivalent rent,” - which is about 1/3rd of the entire index -  lags actual house prices by about a year or more. Here are the YoY% changes of the house price indexes vs. OER (*2 for scale) over the past 20 years:

Through August, YoY% increases in OER have continued to accelerate. Since in the past episodes of significant downturns - 2001-2, 2005-6, and 2019-20, OER peaked about a year after the house price indexes, I suspect we will continue to see acceleration in OER through winter, or at least to the end of this year. 

Further, in several months I expect the YoY increase in the FHFA index to be less than that of OER - which means if the Fed continues to raise rates at that point, it will be chasing a receding phantom.

Turning briefly to new home sales, they increased sharply from July’s 6 year low of 532,000 annualized to 685,000, a 4 month high - but still well below the general pace of the past several years:

This data series is heavily revised, so we will see if the increase survives next month. There is no reason to suspect any change in the overall downward trend.

Gas and oil price update: good news and bad news

 

 -  by New Deal democrat

We’ll get some important house price information tomorrow, but there is no economic news of significance today, so let’s update gas and oil prices.

As indicated in the title, there’s good news and bad news. I’ll start with the bad news first.

According to GasBuddy, gas prices have not declined in over a week:

They have bounced off $3.64/gallon and stabilized at $3.66-7/gallon. Which still is only about $.20 higher than they were back in February.

But here’s the good news, in the form of a screen shot of oil prices this morning:

I have no idea whatsoever why oil prices suddenly declined further, or whether this will last, but as of now, oil prices are only about $3/barrel (or roughly $.06/gallon) higher than they were 1 year ago.

A comparison with the last year in gas prices:

suggests that, if oil prices continue in the $78/barrel range, gas prices will decline to roughly $3.25/gallon in the next several weeks.

Needless to say, if that happens, that is more money in the pockets of consumers to be saved, or spent on other things. It also means both consumer confidence and, politically, approval of President Joe Biden, will also increase - right before the midterm elections.

Weekly Indicators for September 19 - 23 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators column is up at Seeking Alpha.

For the third week in a row, interest rates increased, and gas prices, along with the prices of other commodities, tumbled.

While the decline in gas prices is good, the downturn in other commodity prices is a sign of weakening global demand.

Once the decline in gas prices stops, I suspect the economic skies will darken rather quickly.

In the meantime, clicking over and reading should be educational for you, and will put a couple of Pennie’s in my pocket.

Focusing on the short end of the yield curve

 

 - by New Deal democrat 

When most analysts talk about yield curve inversions, they typically mean a measure of the 10 year bond vs. a shorter maturity like 3 month or 2 years. These certainly have merit - in fact the 10 year minus 2 year inversion has typically had the longest lead time before recessions.

But the NY Fed has written that special attention should be paid to the short end of the yield curve, i.e., 2 years and less. That is the portion of the yield curve that is most responsive to the Fed, and what the trajectory of the economy is likely to be in the next year or two. In general, once the shortest end inverts (i.e., Fed funds and 3 month maturities) vs. 1 and 2 year maturities, the bond market is pricing in a recession within that time period, because it is anticipating that the Fed will have to lower rates in that timeframe.

For example, here is the 2000-2001 timeframe:

In the first half of 2000, 1 and 2 year yields are higher than the very short term yields, but are tightening. By the second half of 2000, yields are completely flat across the range, and then fully inverted. By early 2001, as the Fed along with everyone else smelled that a recession was imminent, Fed rates came down, and only as the recession itself progressed did rates begin to normalize.

Here is 2005-2007:

Note the similar progression, as yield ranges tighten but remain positively sloped in 2004-05, but then flatten in spring 2006 before completely inverting later in the year. In 2007, as the Fed and the market smell a recession approaching, the Fed lowers rates, but the inversion persists.

Now here is the present (note this week’s rate hike to 3.12% is still not shown in the Fed funds line):

Only the 1 vs. 2 year range has inverted. While all rates are rising, the shortest term remain positively sloped.

The yield curve is not perfect. As I have pointed out many times, there were at least 5 recessions between 1933 and 1957, when the Fed first started manipulating the Fed funds rate. In those cases there were no inversions. But at the moment the yield curve is almost alone among all indicators in not straightforwardly forecasting a recession in the next 6-12 months. The yield curve from 1 through 10 years out is completely inverted, and the 10 year is yielding less than the 6 month treasury. But the short end of the yield curve is still normally sloped.

Jobless claims: the positive trend continues

 

 - by New Deal democrat

For yet another week, initial jobless claims continued their reversal from had been in an almost relentless uptrend from spring through early August.

This week initial claims rose -5,000 to 213,000 from a revised 3 month low of 208,000, while the 4 week average declined another -6,000 to a new 3 month low of 216,750. Continuing claims, which lag somewhat, declined 22,000 to 1,379,000:

I have expected continuing claims, which lag slightly, to reverse lower, and they have, from a revised high of 1,437,000 on August 20.

Once again, this is almost certainly a positive side-effect of lower gas prices.

That being said, the long term outlook in next year remains negative; and has only worsened in the last several months, and was not helped at all by yesterday’s Fed rate hike.

August existing home sales: confirmation that house prices have peaked

 

 - by New Deal democrat

Existing home sale by themselves are not that important economically, since there is a mere transfer in ownership, rather than a complete build. But they can help verify turning points, and in this case very importantly as to prices.

But first, sales declined slightly (-2,000) to 4.80 million annualized. This is the lowest seasonally adjusted monthly number since June 2020, is 20% off its post-pandemic peak, and is also the lowest in nearly 6 years excluding the worst of the pandemic months (via Mortgage News Daily; note this morning’s data is not included yet):

But we’ve known that home sales have been declining all this year in the face of Fed rate hikes and their attendant higher mortgage rates.

As I always say, sales lead prices. Since sales turned many months ago, when will prices turn? Remember that in “real,” income adjusted terms, median house prices have been as high as and even slightly higher than they were at the peak of the housing bubble over 15 years ago.

And here, we have important confirming data this month. The NAR does not seasonally adjust its measure of median existing home prices, so YoY is the only way to measure. My rule of thumb for such metrics is that they have peak when their YoY% increase is less than 1/2 of its peak increase in the past 12 months.

In August, the YoY% price increase was 7.7%:

That is less than 1/2 of the 16.5% YoY increase last August. It is also less than 1/2 of the YoY% increases in every month beginning November of last year through May of this year with the exception of March. In other words, existing home prices probably peaked sometime early this summer.

Since non-seasonally adjusted median *new* home prices likely peaked in June, per the same rule of thumb, as shown in the graph below:

this means that prices are declining throughout the entire housing market.

Housing inventory is still tight, however. In August, there were 444,600 new listings and 779,400 total listings. As shown in the below graph, new listings (red) were only slightly below their pre-pandemic August average of 493,400, but total listings were about 650,000 below their pre-pandemic August average of 1,427,600:

New listings have generally been increasing, but they will have to increase a lot more for total listings to return to their pre-pandemic levels.

Housing: permits and average starts decline, while construction remains at peak

 

 - by New Deal democrat

The data on housing construction this month was mixed. While starts rose, their 3 month average, at 1.511 million annualized, was the lowest since September through November 2020. Meanwhile total and single family permits both declined, both to the lowest since June 2020:

This year I’ve also been looking at the record number of housing units that had permits, but had not yet been started. These have been at 50 year highs, and distort the economic signal from permits, because it is construction itself that is the actual economic activity. And here, the evidence is mixed.

From the long term point of view, both housing units permitted but not started and housing under construction continue at record peak levels:

But a shorter term view shows that units not yet started have been flat since March, and housing under construction has increased only 2% since April:

Historically, housing permitted but not yet started has typically peaked only shortly after permits. Housing under construction has peaked with a longer delay:

We appear to be very close to (housing under construction) or even slightly past (housing not yet started) the inflection points for both of these metrics.

For the past two months I have emphasized that “Housing under construction is the ultimate coincident marker of housing economic activity. Once that begins going down, housing’s contribution to the economy is negative in real time.“ We appear to be close to, but not quite at, that point.

With that in mind, here are single family permits (blue, left scale) vs. housing under construction (red, right scale) since the latter statistic started in 1970:

Historically a recession has usually followed within a year of single family housing permits down 25% from their peak, as they are now. In several cases (1969, 2001) the recession had already started. There are several exceptions, notably 1966 and 1984, when either large fiscal stimulus (Vietnam war and Great Society spending) or interest rate reversals occurred. At the moment neither of those are in prospect.

At the same time, with the sole exception of the 2020 pandemic lockdown recession, construction - an even smoother metric than single family permits - has always peaked at least 6 months before the onset of recession, with a median time of 18 months, and as much as 47 months; and has declined at least 6.5%, and as much as 34%, with a median decline of 20% from peak.

So, permits are telling us that we are likely heading for recession, while actual housing under construction is telling us, by no means yet.

Coronavirus dashboard for September 19: no, the pandemic is *not* over

 

 - by New Deal democrat

Contrary to the statement by President Biden last night, the coronavirus pandemic is *not* over.

First, here’s the long term look at infectious particles in wastewater by Biobot, compared with confirmed cases:

Levels of COVID in wastewater continue to be as high as at any point before last winter’s original Omicron onslaught. And confirmed cases are at levels that were moderate - but not terribly low - before Omicron as well.

Hospitalizations have decreased by slightly over 1/3rd, from 46,000 to 30,000, from their peak in June, but are not as low as they were in summer 2020, summer 2021, or this past spring:

Where there is a definite abatement from earlier times during the pandemic is in deaths:

In the past 6 months, deaths have generally averaged between 300 and 500 a day, and are presently a little over 400 This is lower than at any previous point during the pandemic except for June and July 2021.

Deaths among the elderly continue to be about 3/4’s off all deaths from COVID:

But the mortality rate for hospitalizations due to COVID has declined dramatically:

Weekly excess deaths have waned to an extreme minimum:

Together, these statistics suggests that a large share of people who die from COVID are the elderly who were already in poor health with compromised immune and other systems, who likely would have died from other causes in the immediate future.

Although I won’t bother with a graph, it is also true that the likelihood of dying from COVID skews heavily in the direction of those who are either not fully vaccinated, or are entirely unvaccinated.

Meanwhile, the CDC has updated its variant information. A  week ago there appeared to be an anomalous increase in the original BA.2 variant. When we last saw something like that, it turned out that it was really new variants BA.4&5. and for the first time in several months. This has been the case again, as several new variants are making headway:

The two new variants that have appeared in the analysis are BA.2.75.2 and BF.7, also known at BA.5.2.1.7.

BA.2.75.2 is a subvariant of a strain that originally caused an outbreak in India several months ago. BF.7 is one of the many subvariants of BA.5 that have appeared globally. While I haven’t found a lot of analysis of the two in the past several weeks, I did find this:

The below article on the progress of BA.2.75.2 and BF.7 in other countries compared with BA.4.6 in particular states:

GISAID data shows that in many other countries where BA.4.6 has made significant inroads, it quickly faded in the face of another heavily-mutated new Omicron variant, dubbed BA.2.75. It was first sequenced in May in India, where it has spread rapidly.

In countries like Spain, Germany, the U.K., Ireland and Italy where BA.4.6 initially made way against near-uniform dominance by BA.5, BA.2.75 has beat back both of those predecessors and become dominant.

 The article quotes biology Professor Tom Wenseleers of the Catholic University of Leuven, Belgium (author of the above tweet), who stated: 

Omicron BA.4.6 was short-lived: virtually everywhere it will be outcompeted by the fitter BA.2.75 & BF.7 / BA.5.2.1.7 that emerged in the meantime.

In short, the pandemic is by no means over. At the current rate of 400 deaths daily, there will be nearly 150,000 deaths annually from COVID. And at the rate of 300,000 new infections per week, about 1/3rd of all Americans will be infected during the year.

If you go maskless indoors, you are likely to catch COVID sometime soon. Depending on your age, the state of your immune system, and vaccination, your outcome will be better or worse. Yes, the pandemic is gradually transitioning to an endemic disease. But by no means are we there yet.

The Ukraine war spike in energy prices has completely unwound

 

 - by New Deal democrat

I plan on putting up a Coronavirus update later today, because there have been a few significant developments (No, the pandemic is *NOT* over) particularly as they relate to the next few months. Tomorrow and Wednesday, we get our first batch of monthly housing data. In the meantime, today let’s update the situation with energy prices.

And here, the news is unequivocally good. Oil prices, as of this morning, are under $83/barrel. They have remained under $90/barrel for this entire month. Even more importantly, if you follow the dotted line on the below graph all the way to the left, you can see that oil prices now are *lower* than they were before Russia invaded Ukraine:

They are still higher than they were a year ago, when oil was priced at about $70/barrel, but this has been creating, and will continue to create, a second wind for American consumers.

Gas prices, which follow oil prices with a 2 or 3 week delay, are back down to an average of $3.64/gallon, only about 5% higher than they were before the Ukraine invasion:

It is very likely that gas prices will decline to $3.45 or less within the next few weeks, again completely undoing their Ukraine war spike.

Keep in mind, I make no forecast about the future course of oil prices. This is a nowcast only. But the immediate forecast for gas prices is very good.

There’s been a spate of positive coincident economic data in the last month or two, and we can expect this to continue so long as gas prices continue to decline. We only have 12 days left in the 3rd Quarter, and DOOOMers hoping for a third consecutive decline in GDP are probably out of luck.