PPI and CPI preview: why Paul Krugman’s “Goldilocks” economy is likely to prove “transitory”

 - by New Deal democrat

Sorry for the lack of posting yesterday. Every now and then, real life intrudes and, well, yesterday was one of those days.

All of the economic data this week is going to be crammed into tomorrow through Friday. 

Most importantly for present purposes, I am very interested in dissecting both the producer and consumer price reports.

To give some background, I have taken the position that what has been, indeed, “very different” this time is that the very big - close to 10% - YoY decline in commodity prices has not been due to demand destruction, but rather to the unclogging of the post-pandemic supply pipeline.

Two graphs showed up yesterday in support of that proposition. First, Mike Konczai of the Roosevelt Institute decomposed sectors of the GDP to see whether each showed price declines, and if so, whether there was more or less demand. Less demand would mean demand destruction. More supply would mean an increase in quantity supplied. And here’s the result:

Particularly when it comes to goods, he wrote that 2/3’s of sectors showed increased demand. In short, the main driver of price declines was increased supply, not demand destruction.

Kevin Drum picked up on that with the below graph comparing the 3 month average of core inflation with the Goldman Sachs supply chain pressure index:

As he points out, inflation was already high before the 2021 stimulus ever took effect. And as supply chain pressure turned negative (below 0), the rate of inflation declined. 

This is simply very persuasive evidence that a great deal of the improvement in the economy in the past year has been the sharp disinflation due to the end of supply chain pressures (except possibly in the motor vehicle sector, which is its own story).

To return to the inflation reports, I am most interested in whether the producer price report tells us that the big decline in commodity prices is over. There have only been two increases in commodity prices in the past 12 months:

I suspect we’ll get #3 tomorrow. If producer prices have stopped declining, then the tailwind I have described above has ebbed, and maybe ended.

As to consumer prices, I am most interested in the relative weights of decelerating shelter increases (which as I have written many times are well-forecasted by the more current home price indexes and new rent indexes) vs. increasing gas prices (/10 for scale in the graph below):

I suspect that the increase in gas prices is going to outweigh the deceleration in fictitious shelter inflation. If so, that will mean that there is an actual slight increase in a headwind in consumer prices. Put that together with the fact that the effect of most of the Fed’s interest rate hikes have not been fully manifested in the economy yet, and the “immaculate disinflation” or “Goldilocks” economy as described by Paul Krugman in this morning’s NY Times is going to prove to be very, ahem, transitory.

Weekly Indicators for September 4 - 8 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The tug of war between the headwind of high interest rates and the tailwind of low commodity and consumer inflation continues.

As usual, clicking over and reading will bring you right up to the present on the data and bring me a smal $$$ reward for my efforts.

Coronavirus update: the virus is back; everyone should return to their prior precautions and get boosted this fall

 

 - by New Deal democrat

At the beginning of this year, I indicated that I anticipated only writing about Covid if something significant was happening.  It is, so let’s look at the data.

Almost all State and Federal testing data is gone, but we do have a very good source in Biobot’s waste monitoring. Here’s the long term view (truncated to eliminate the huge original Omicron spike):

The number of particles per milliliter has nearly quadrupled since late June, from 165 to 618. In the past, this has equated to roughly 125,000-150,000 new cases per day.

All 4 Census regions of the country are affected:

Through one week ago, daily new hospitalizations - which in the past lagged infections by about a week or so - have nearly tripled, from 6,300 to 17,400, the highest level in almost 6 months, and only about 5,000 below last autumn:

And weekly deaths, which in the past has lagged several weeks behind hospitalizations, have also increased from below 500 to over 600:

It is very important to note that the last reliable deaths data (blue in the graph above) is from a full month ago. We already know that the following two weeks (gray) had higher death tolls, but we don’t know by how much. If deaths quadruple as cases have, then we will probably find out by Halloween that by the end of September there were about 2,000 deaths per week, which is back in the range of much of the earlier part of the pandemic.

Why has the wave that started this summer persisted? It does not appear because any of the new subvariants, particularly EG.5 and BA.2.86, are particularly virulent. Indeed, indications are that the next round of boosters, which were tailored to XBB, are highly effective against these variants as well. Rather, as explained in the linked CNN article, tests have indicated that “The people with the highest neutralizing antibodies were those who had recently recovered from an XBB infection.”

In other words, very few people have had new booster shots within the past 6 months, and we know that resistance from mRNA boosters wanes after 4-6 months. The very fact that there were so few new infections in the spring and early summer means that many more people have less resistance now.

The bottom line is, everyone should be going back to their Covid safety precautions, like wearing masks in indoor public places, and everyone eligible should sign up for the new booster this autumn.

Despite 6+ month low in initial claims, yellow caution flag remains

 

 - by New Deal democrat

Last week the initial claims numbers justified restarting the yellow caution flag. This week initial jobless claims declined -13,000 to a 6+ month low of 216,000. The 4 week moving average declined -8,500 to 229,250. With a one week lag, continuing claims declined 40,000 to 1.679 million:

Since last year ago at this time also saw a steep decline, it is possible that there is some unresolved post-pandemic seasonality in these numbers.

The YoY% changes were +9.6% for the weekly number, +11.3% for the more important 4 week moving average, and +27.6% for continuing claims:

Additionally, and most importantly of all, the monthly average for August was up +13.1%:

Recall that in the nearly 60 year history of claims, 2 consecutive months of YoY% increases in excess of 12.5% have more often than not meant that a recession is close to beginning. Between the monthly YoY increase, and the +10.3% increase YoY in the 4 week average, there is enough to justify a yellow flag caution - although if we continue to get numbers like this week’s 216,000, that won’t last long.

Scenes from the August employment report - and a warning

 

 - by New Deal democrat

The weekly lull after last Friday’s employment report will end tomorrow. In the meantime, let’s take a deeper dive into a few important trends in that report.

First, the unemployment rate rose 0.3% to 3.8% - which is totally not surprising at all.

As I wrote last Thursday, initial jobless claims have a nearly flawless 60+ year record for forecasting the trend in the unemployment rate. Here’s the supporting graph:

The red line (the unemployment rate measured YoY) follows the blue line (initial jobless claims) almost like clockwork.

Here’s the past two years of the same graph:

Initial jobless claims turned higher YoY in March. The unemployment rate has followed. With jobless claims up about 10% YoY, an increase from 3.5% to 3.8% or 3.9% (i.e., 1.1*3.5%) was right in line with the forecast.

Although it would take several months of a 4.0% or higher unemployment rate to trigger the Sahm recession Rule, one similar unemployment rate-based metric has been triggered, which compares the short term monthly average of the unemployment rate with its 12 month average. If both are rising, and the former turns higher than the latter, in the past 50 years that has *always* signaled a recession, with *zero* false positives or false negatives:

Meanwhile, the deceleration in monthly jobs gains, on average about -20,000 per month, has continued for 2 years now:

If this trend continues, we will get actual job losses in about 9 to 12 months.

In general, goods employment turns south before a recession begins, while services employment only follows later, and may never turn negative YoY. I track a variety of leading jobs sectors in my monthly blurb. Here’s what total goods employment (red) looks like compared with a number of other leading sectors, all normed to 100 as of August:

You can see that several - temporary jobs, residential construction, and trucking - have already turned down. Manufacturing jobs are flat. Only total construction jobs are still rising strongly. 

Finally, as I’ve frequently noted, real aggregate payrolls are an excellent coincident recession indicator. When working and middle class households earn less money in real terms, they have always cut back spending, and this marks the onset of recessions. Here’s the long term comparison of total payrolls YoY (blue) vs. CPI YoY (red):

There are no false negatives, and only one arguable false positive (2002, a near miss) in the past 60+ years.

Here is a close-up on the last four years:

The YoY% change in wage gains is a long lagging indicator, starting up only after unemployment and underemployment decline, and also after the rate of job openings (red in the graph below) increases:

With job openings continuing to decline, the YoY% of wage gains (a component of aggregate payrolls) is likely to continue decelerating. But, as a number of writers including myself have pointed out in the past several months, gas prices have resumed increasing (spiking over $90/barrel yesterday):

making it more likely that the CPI YoY will increase.

Decelerating wage gains and increasing CPI means it is more likely that real aggregate payrolls will turn negative in the coming months, signaling recession.

And what should be of special concern is that a US recession in 2024 that causes Biden to lose and Trump to return to power is just about the #1 foreign policy priority of both Russia and Saudi Arabia, both of which have announced curtailment of their oil output in the past several weeks.

Vehicle sales and residential and manufacturing plant construction continue to outweigh general manufacturing downturn

 

 -  by New Deal democrat

No important economic news today, but on Friday in addition to the employment report we did get our typical 1st of the month snapshot of manufacturing, vehicle sales, and construction, so let’s look at each.

The ISM manufacturing index has had an excellent record going all the way back to the 1940s, but it has one drawback which is that it is a diffusion index, so if 90% of manufacturing is in slight decline, but 10% is going gangbusters, it will not accurately reflect the overall situation.

And that exception is probably the case now.

For the past year, the new orders subindex has been below 50, indicating contraction. The overall index joined several months later. Last month in August, they were both still in contraction, although slightly “less worse” than in July:

The readings all this year and even at the end of last year frankly indicated recession. And yet, here we are, with no recession.

The reason why can probably be found in the next two graphs, which are light vehicle sales (blue) vs. heavy truck sales (red, right scale), which report was also released on Friday.. First, here’s the historical look:

These have always turned down in advance of recessions. In particular, heavy truck sales have turned down generally well in advance, and with much less noise. 

Here is the current look:

Light vehicle sales have not turned down at all. Heavy truck sales have declined from their peak in the past two months, but are still above any other month during this expansion up until May of this year. I would need heavy truck sales to turn below 500,000 annualized (.500 on the right scale in the graph) before I would consider the downturn true signal.

Further support for why the general downturn in manufacturing has not manifested in a recession comes from the construction spending report for July which was also released on Friday.

Construction spending on manufacturing plants, subsidized by last year’s Inflation Reduction Act, has stabilized, but at a level 50% above any previous amount before 12 months ago:

Both total construction spending and spending on construction of residences also increased nominally, the former to yet another all-time high, the latter continuing its rebound from last winter:

Deflated by the cost of construction materials, residential construction spending still rose, to about the mid-point of its post-pandemic average:

Until we see the vehicle manufacturing and residential construction sectors roll over, we almost certainly are not looking at any economic downturn.

Weekly Indicators for August 28 - September 1 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The long leading indicators continue to forecast that a hard landing is out there, while the short leading indicators - aided by a sharp increase in consumer spending in the past few weeks - say it isn’t close to being here, at least not yet,

As usual, clicking over and reading will bring you up to the virtual moment as to the condition of the economy, and also bring me a little lunch money.

August jobs report: deceleration shows up in spades

 

 - by New Deal democrat

My focus remains on whether jobs growth continues to decelerate, particularly manufacturing and residential construction jobs, but also total construction and goods production jobs as a whole; as well as watching for the increase in jobless claims to translate into a higher unemployment rate (a leading relationship that it has had for over 50 years).

And, with help from some significant downward revisions, further deceleration did indeed turn up in spades during August.

Here’s my in depth synopsis.

HEADLINES:

• 187,000 jobs added. This would be the lowest since January 2021, except for revisions to the prior two months, making June the lowest at 105,000 followed by July at 157,000.
• Private sector jobs increased 179,000. Government jobs increased by 8,000
• June was revised lower by -80,000 and July by -30,000, for a total of -110,000. The three month moving average decreased to 175,000, the lowest since the pandemic lockdowns except for January 2021.
• The alternate, and more volatile measure in the household report rose by 222,000 jobs. The YoY% gain in this report is +1.8%.
• The U3 unemployment rate rose -0.3% to 3.8%, the highest since February 2022 . The civilian labor force, the denominator in the figure, rose sharply (by 736,000), and the numerator, the number of unemployed, also rose sharply (by -514,000).
• U6 underemployment rate rose 0.4% back to 7.1%, the highest since May 2022. 
• Further out on the spectrum, those who are not in the labor force but want a job now rose 133,000 to 5.370 million, vs. its post-pandemic low of 4.925 million set this past March.

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.  These were mixed:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, was unchanged at 40.1, equal to its lows earlier this year and down -0.6 hours from its February 2022 peak of 40.7 hours.

• Manufacturing jobs rose by 16,000.
• Within that sector, motor vehicle manufacturing jobs declined -100. 
• Construction jobs increased by 22,000.
• Residential construction jobs, which are even more leading, rose by 2,400. It nevertheless continues to appear likely that January was the peak for this sector.
• Goods jobs as a whole rose 36,000. These should decline before any recession occurs. They remain up 1.6% YoY, which remains a very good pace compared with most of the last 40 years.

• Temporary jobs, which have generally been declining late last year, declined further, by -19,000, and are down 242,000 since their peak in March 2022.
• the number of people unemployed for 5 weeks or less rose 217,000 to 2,221,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.06, or +0.2%, to $29.00, a YoY gain of +4.5%, and the lowest since June 2021.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers increased 0.3%, and is up 1.2% YoY, a slight uptick from last month’s 1.1%, which was the lowest since March 2021.

•  the index of aggregate payrolls for non-managerial workers rose 0.6%, and increased 5.8% YoY, 0.2% slightly lower than last month, and the lowest since March 2021. Nevertheless this is significantly above the inflation rate, meaning average working class families have more buying power.

Other significant data:

• Leisure and hospitality jobs, which were the most hard-hit during the pandemic, rose 40,000, -290,000, or -1.7% below their pre-pandemic peak.
• Within the leisure and hospitality sector, food and drink establishments rose 14,900, but remain -32,400, or -0.3% below their pre-pandemic peak.
• Professional and business employment rose 19,000. These tend to be well-paying jobs, But this series has been decelerating, and is currently up 1.4% YoY, its lowest YoY gain since March 2021.
• The employment population ratio was unchanged at 60.4%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate rose 0.2% to 62.8%, vs. 63.4% in February 2020.

SUMMARY

This was a weak report on both is Establshment and Household sections. I should emphasize that revisions to prior data significantly affected some of the numbers, but detailed discussion of those is a topic for another day.

Perhaps most significantly, the weakness that has been forecast for the last 5 months in the initial jobless claims data finally showed up in the unemployment and underemployment rates, both at their highest levels since the early part of last year. I should add that the level is *not* recessionary, as to fulfill the Sahm Rule it would have to be at least 4.0% for several months. 

But the headline jobs number as well as the revisions were weak and weaker - although I hasten to add that a three month average gain of 175,000 jobs is perfectly decent on an absolute scale. 

On the other hand, there were some definite bright spots, including the continued solid gains in aggregate pay for nonsupervisory workers even after inflation is taken into account, as well as gains in manufacturing and construction jobs. Last month I wrote that it looked like it would take about 9 months at the current pace of deceleration before goods producing jobs rolled over. This month there were outsized gains, but that estimate still looks good. This is significant because employment broadly in goods production typically turns down before a recession begins.

So, in sum: significant further weakness, but not at all recessionary, and on an absolute scale quite decent.

Real personal spending (driven by vehicles?) spikes, income stalls, saving tanks, and inflation edges back up

 

 - by New Deal democrat



As I have repeated for the past several months, in the current economy the personal spending and income report is just as important as the jobs report. That’s because, despite the downturn in manufacturing production and many parts of the housing market, consumer spending especially on services has continued to power the economy forward.

Today’s report contained more good news on spending, but not such good news on income, saving, sales, or inflation.

Nominally personal income rose 0.2%, and personal spending rose a strong 0.8% (that was already telegraphed by the strong July retail sales report). But since the deflator increased 0.2% as well, real income was flat, while real spending rose 0.6%. This is shown In the below graph in which both real personal income (red) and spending (blue) are normed to 100 as of the onset of the pandemic:

Real income is up 3.8% since just before the pandemic, while real spending has zoomed 9.3%.

One of the 4 important coincident measures for the NBER, real personal income less government transfer receipts, also rose 0.2% to another new high:

Although I won’t bother with a graph, this is a 1.4% increase YoY.

On the spending side, here’s how goods vs. services spending compare. I show this because real spending on goods has in the past declined months in advance of recessions, while real spending on services has frequently powered right through:

Real spending on goods rose 0.9% for the month, while real spending on services rose 0.4%. The former is up a whopping 18.3% compared with just before the pandemic, while service spending is up 5.3% since then. On a YoY basis, real spending on goods has been rising and is now up 3.3% while real spending on services is up 2.9%:

Although I won’t show the long term graph, a 2.8% YoY increase in real spending on services remains historically very strong. 

Real spending on goods can be decomposed further into durable (blue) vs. non-durable (red) goods, showing that the bigger increase continues to be in durable goods:

My suspicion has been that the loosening of supply chain disruptions in motor vehicle production, and increased sales in the same, is what has been reflected in the big increase in durable goods consumer spending; and that suspicion once again seems vindicated.

With no increase in real income, but a big increase in real spending, the personal saving rate - income that isn’t spent - declined a very sharp -0.8% for the month to 3.5%, although it is still higher than its 2.7% level at its low water mark last June. The below graph subtracts 3.5% for a long term comparison:

With the exception of several months last year, and the 2005-07 lows, the personal saving rate is at its lowest level ever. This is leaving consumers quite vulnerable.

That’s important because consumers tend to get cautious and save more in the advance of a recession. That occurred in the last year, but it has completely reversed in the past two months. I am doubtful this will be sustained, but we’ll see.

Additionally, the personal consumption deflator gets used in the calculation of real manufacturing and trade sales, which is another important coincident indicator monitored by the NBER. These were unchanged in June, and are still -0.7% below their recent January 2023 peak, as well as their higher January 2022 peak:

Finally, the deceleration in the personal consumption deflator, which started with the peak in gas and commodity prices generally in June 2022, may have ended. YoY this deflator increased to 3.3% in July from 3.0% in June. The “core” deflator also increased from 4.1% to 4.2%:

Last month I summed up by writing that “If that tailwind [of YoY decelerating prices] is ending - and I suspect it is - what happens next?” This month provided more confirmation of that suspicion. I suspect the Fed will not be happy with these increases. If they respond by further raising rates, then without the tailwind of declining commodity prices the “soft landing” could come to a rather abrupt end, depending on how quickly the clogged housing and vehicle markets roll over.

YoY initial claims restart the yellow caution flag, suggest unemployment will rise towards 4.0%

 

 - by New Deal democrat

I’ll post on personal income and spending a little later.

But first, initial jobless claims declined -4,000 to 228,000 last week. The more important 4 week average increased 250 to 237,500. With a one week delay, continuing claims increased 28,000 to 1.725 million:

For forecasting purposes, the YoY% change is more important. There, initial claims are up 10.6%, while the 4 week average is up 13.0%. Continuing claims are up 28.4% YoY:

Note that YoY comparisons in the coming couple of months will be very challenging, as they will be against the lowest of all the post-pandemic numbers.

Finally, here is the monthly average of claims (blue, left scale) which is up 13.0% YoY, vs. the YoY change in the unemployment rate (red, right scale). Remember that the former has a long history of leading the latter with a lag of a few months:

In summer and autumn of last year the unemployment rate averaged 3.6%. Initial claims suggest that unemployment will rise towards 4.0% in the coming months. This is not quite enough to trigger the Sahm Rule, which requires an average YoY increase of 0.5%, but on the other hand that initial claims are up more than 12.5% YoY crosses the threshold restarting the yellow caution flag. A full two months of such numbers are required for a recession warning.

July JOLTS report: is the game of reverse musical chairs in employment ending?

 

 - by New Deal democrat

For the past 18 months, I’ve likened the job market to a game of reverse musical chairs, where there are more chairs put out by potential employers than there are job applicants willing to fill them. Also for many months, I have noted the gradual deceleration in that game. July’s JOLTS report not only continued that trend we’ve seen for the past 15 months of a jobs market slowly returning towards a convergence of the number of players and chairs, but in terms of actual hires and quits, the convergence has happened.

Below are job openings (blue), hires (red), and quits (gold), all normed to 1 as of the average of their last 3 months before the pandemic hit:

In July actual hires were -3.4% below that average. Quits were only 0.6% above that average. In other words, in terms of hires and quits, the number of each in July was almost identical to the number in the period of December 2019 through February 2020.

Only job openings remained significantly higher, to wit, 26.8% higher than their 3 month average just before the pandemic hit. But since their post pandemic high in 2021 was 72.7% higher, almost 2/3rd’s of the surge in openings has abated. And since I have always been a little skeptical of the veracity of the official openings numbers (e.g., how many are permanent, or simply fishing for applicants) the situation may have attenuated more than that.

The number of layoffs and discharges (blue below) also remains significantly tighter than before the pandemic, at -18.2% below their level for the 3 month pre-pandemic average (vs. -30.2% lower at their post-pandemic trough in June 2021). Since there is a tendency for the trend in layoffs and discharges to slightly lead new unemployment claims (red, right scale), those are shown relative to their pre-pandemic 3 month average as well:

Finally, I came across a blurb on Seeking Alpha that stated that the quits rate (blue in the graph below) was a good leading indicator for the pace of wage gains (red, right scale). I checked it out, and it did check out:

This makes sense, since I’ve described the YoY% change in wages as a long-lagging indicator, that only bottoms after the unemployment rate turns down after recessions, and indeed only when the U-6 underemployment rate declines to the 8%-9% area. And indeed it is suggesting that nonsupervisory wage gains will decelerate to about 3.8%-4% in the coming six months.

 one of these statistics move in a straight line, so it would be a mistake to project this report’s relatively big moves forward. But the trend clearly remains in place. While the same is true for the unemployment rate and number of jobs gained each month in that report, I expect this same continued deceleration trend to continue in the August report this Friday. 

Frozen homeowners mean record low inventory, meaning existing home prices have stopped declining

 

 - by New Deal democrat

Before discussing this morning’s reports on existing home prices, let’s start with a look at new listings and total active listings of housing inventory, which are very instructive:

This information is not seasonally adjusted, and obviously follows a seasonal pattern. The important thing to notice is that since late last year, new listings have collapsed to levels even lower than conquerable months just before and during the onset of the pandemic. Basically, mortgage rate increases have frozen existing homeowners in place.

And with the extreme shortage of inventory, prices have not corrected (vs. new house prices, which have declined over 15% from their peak).

In June, the FHFA (red) reported that existing house prices increased 0.3%, the 10th seasonally adjusted increase in a row:

YoY prices are 3.1% higher as measured by that index. The Case Shiller index (blue) is not seasonally adjusted, but YoY prices are down less than -0.1%:

As I have frequently pointed out, house prices typically have led Owners’ Equivalent Rent in the CPI (black above) by 12 or more months. Here is the close-up of the last 4 years:

As I forecast many months ago, OER was going to start decelerating, perhaps sharply, on a YoY basis, following house prices. It took OER somewhat longer (about 24 months vs. 18 months for house prices) to go from pandemic trough to post-pandemic peak, so now the question is, will there be a similar delay? If so, then OER is not going to decline below 3% until about autumn of next year. Keeping in mind that inflation ex-shelter is only about 1% YoY even now, will the Fed insist that OER do so before lowering interest rates?

Fed rate hikes in the face of declining commodity prices: an analysis of 4 precedents

 

 - by New Deal democrat

We live in interest-ing commodity times. Over the weekend, my latest piece at Seeking Alpha highlighted the strong contrary pulls of higher interest rates and lower commodity prices. While not unique, as we’ll see below, the disconnect is the most severe in 100 years.

So let’s start with a comparison of the YoY change in interest rates (blue) vs. the YoY% change in commodity prices (red) for the past 65 years:

Typically interest rates and commodity prices move more or less in tandem, as the Fed chases increased inflation with higher rates on the way up, and lowers rates as demand destruction causes commodity prices to decline. But in addition to the present, there have been several exceptions, where the Fed increased interest rates even as commodity prices declined: 1959, 1981, 2006, and to some extent 2015. Probably unsurprisingly, the first three instances were just before recessions, two of them among the most severe during that period. In 2015, the Fed did not raise rates, but was unable to lower them due to already being at the zero lower bound; and also, no recession occurred.

Let’s now look at some real world correlates during those 4 instances.

Below are two sets of graphs for each period. The first compares YoY real retail sales (blue), YoY real personal spending on goods (light blue green), and YoY industrial production. The second breaks out YoY real personal spending on services (black).

Here is the period including 1960 through 1982:

Aside from the usual note that real retail sales leads industrial production, all three series decline sharply to and ultimately below “0” YoY as or shortly after the 1960 and 1982 recessions began. Real spending on services, as is so often the case, never turned negative during the recessions, but did decelerate sharply just as they began.

Here is 2001-2019:

In 2006, only real retail sales turned negative YoY. Both industrial production and real spending on goods held up until several months into the Great Recession. By contrast, in 2015, only production declined. Consumer spending measured both ways continued to sail along. Spending on services, which had declined into 2014, actually *increased* sharply during 2015.

Now here is the post-pandemic situation:

Much like the 3 recessionary periods between 1960 and 2007, both measures of consumer spending on goods have declined, although after a decline last year, this year consumer spending on goods measured both ways has been improving. Meanwhile, real spending on services has held steady at roughly +2.5% YoY, which if you compare with the previous graph, is still stronger than at almost any time between 2000 and 2020.

It is the large YoY% gain in spending on services which is most reminiscent of 2015’s “no recession” vs. the three prior periods of increased interest rates in the face of declining commodity prices. As in those three periods, it was when real spending on services sharply decelerated that the recessions actually began.

 Finally, below I show the YoY change in the interest rates charged for auto loans (dotted lines) vs. mortgage rates (gold) since 1985:

As you can see, these are the sharpest increases in nearly 40 years. Despite the fact that multi-family housing construction and vehicle sales currently seem to be levitating, I have to think these increased rates will soon enough have a big effect. The question then becomes whether consumers simply continue to spend on services, or whether those too are ultimately affected. We’ll get an update on that for July on Thursday.