Manufacturers continue to front-run tariffs, with no weakness in new orders

 - by New Deal democrat

Last week I explored how past episodes of sharp increases in politic uncertainty, and decreases in consumer confidence, had played out in the hard data as to both production and consumption.

The upshot was that consumers tended to react first, with about a one quarter delay, and producers tended to react afterward, once the decline in demand was significant, about 2 to 3 quarters after the downturn in confidence.

One of the two measures I looked at then, manufacturers’ new orders for durable goods, was released this morning for Feburary. Let’s take a look.

Normally I don’t pay much attention to this release, because it is very noisy, and although it is touted as a leading indicator, its record is not clear to say the least. And that was the case this morning as well.

Here is the modern record of durable goods orders (blue), core capital goods orders (red) which tend to be much less noisy, and manufacturing production (gold), all normed to 100 as of just before the pandemic:

While new goods orders were indeed leading in the late 1990s, that was emphatically not the case with regard to the Great Recession, where orders turned down coincident with its onset, and capital goods orders turned down four month *after* its start. Moreover, there is no evidence that they led industrial production in manufacturing, which is a classic coincident indicator. Much of this I suspect has to do with the widespread adoption of “just in time” inventory controls.

Here is the same data post-pandemic:

While there is some variation among the three measures, all essentially trended sideways beginning in 2022 or 2023. Notably, both the less volatile capital goods orders and manufacturing production broke out to new highs beginning in November of last year. That is almost certainly not a coincidence. The outcome of the Presidential election may have led to a surge in euphoria. But very quickly it certainly has led to a desire to front run tariff increases. I strongly suspect it is the latter which explains the sharp increase in January which was maintained in February.

(Anecdotally, one of the large car dealers in my area, who owns about seven different franchises, has been running ads for the last few weeks encouraging potential buyers to “beat the tariffs” and “buy now!”  Which is probably an excellent if inadvertent way to convey to customers that their budgets are about to take a hit.)

The below graph shows the same post-pandemic data in YoY% form. Since new orders are up 3.4% YoY, capital goods orders up 1.4%, and manufacturing production up 0.8%, the graph is normed to 0 for each series:

Now here is the same data historically up until the pandemic:

The current level of YoY change would be very weak at any point before the Great Recession, but if anything above average in the 2010s expansion.

The bottom line is that, in keeping with my examination last week, there is no evidence of weakness in new orders due to increased uncertainty in the monthly data at this point.

Finally, here is this week’s update in Redbook’s YoY measure of consumer spending:

The four week average is 5.8% higher YoY, which is right in line with typical readings over the last 12 months. So, also in keeping with my examination last week, consumer spending is not taking a hit yet either.

The housing market continues its slow rebalancing: new and existing home sales rangebound, price pressures including Case Shiller and FHFA steady

 

 - by New Deal democrat

Since new home sales as well as the repeat sales price indexes were both reported this morning, let’s update the entire housing market all at once, including existing home sales, which I didn’t report on last week.

NEW HOME SALES

As per usual, remember that while new home sales are the most leading of all housing metrics, they are very noisy and heavily revised. February showed a 1.8% increase from an upwardly revised (by 9,000 annualized) January, to 676,000. This is almost exactly in the middle of this metric’s two year range of 611,00 - 741,000. Also as per usual, the below graph compares with with single family permits, which lag slightly but are much less noisy:

Both demonstrate the recent rangebound behavior.

Turning to prices, the bugaboo of heavy revisions reared its ugly head, as last month’s reported $22,000 spike in median prices was almost entirely revised away, and this month declined further:

On a YoY basis, the median price of a new home is down -0.9%:

Finally, the inventory of new houses pulled back very slightly (-2,000) from January’s 15+ year high, but continued their 8% trend YoY gains. This is actually “good” news - for the moment - because as the below long term historical graph shows, recessions have in the past happened after not just sales decline, but the inventory of new homes for sale - which also consistently lag - also decline (as builders pull back):

I would need to see a more robust downturn in housing for sale that breaks the YoY trend before I would become concerned.

EXISTING HOME SALES

Existing home sales have been in a tight range for the past 2 years, of a piece with mortgage rates generally between 6% and 7%. That continued in February, as sales clocked in near the top end of that range, at 4.26 million annualized:

There was relief when it came to price appreciation, which is not seasonally adjusted and so can only be usefully compared YoY. After a jump to 6.0% in December, the median price gain declined YoY to 4.8% in January and now 3.6% in February, the lowest since Septebmer’s equal YoY% gain:

Meanwhile inventory continued its slow climb from its COVID lows, as total inventory in February was 1.24 million units, a 17% increase YoY, and the highest February total since 2019. Nevertheless, the longer term declining trend in inventory that predates COVID by over five years is still in place:

REPEAT SALES PRICES

The unwelcome news in repeat home sales that I noted last month continued this month.

On a seasonally adjusted basis, in the three month average through January, according to the Case-Shiller national index (light blue in the graphs below) on a seasonally adjusted basis prices rose 0.6%, and the somewhat more leading FHFA purchase only index (dark blue) rose 0.2%. Both of these continue the trend of re-acceleration we have seen in house prices in the second half of 2024 [Note: FRED hasn’t updated the FHFA data yet]:

Both indexes also continued to accelerate on a YoY basis, as the Case Shiller index by 0.2% to a 4.1% gain, and the FHFA index by +0.1% to a 4.8% YoY increase:

Because house prices lead the measure of shelter inflation in the CPI, specifically Owners Equivalent Rent by 12-18 months, the acceleration in sales prices is likely to lead to an even slower deceleration in the official CPI measure of shelter, although I continue to believe that OER will trend gradually towards roughly a 3.5% YoY increase in the months ahead, particularly as the most leading rental index, the Fed’s experimental all new rental index, indicated a median YoY *decrease* in new apartment rents of -2.4%, with all rents including existing rentals coming in at +3.2% as of Q4 of last year:

Here is the updated calculation of the house prices vs. the YoY% change in Owners Equivalent rent:

CONCLUSION

My theme from the past few months has been looking for a rebalancing of the new vs. existing homes market. For that to happen we need price increases to abate in existing homes, and prices to remain flat or still declining in new homes. Since sales lead prices, and are best viewed in a YoY% comparison, the below graph shows sales (/1.5 for scale) and median prices of new homes (red) in that format, together with the YoY% change in the FHFA repeat sales index (gold):

Last month I was concerned that there was renewed inflation rather than rebalancing. With this month’s new data as well as the revisions to last month’s new home prices, it appears that the rebalancing story is back on track, with continued slow price declines in new homes and abating price increases in existing homes. Meanwhile the increases in inventory in both should result in further release of pricing pressures. 

Nevertheless, we continue to have problems with mortgage rates that continue near levels last seen 15 years ago, and a longer term sharp decline in the number of existing homes for sale. This needs to be resolved to address the issue of housing unaffordability.

A “quick and dirty” update: the employment is historically very weak

 

 - by New Deal democrat

There’s no significant economic reports today, and even most of the high frequency indicators won’t start coming in for the week until tomorrow, so let me go a little more in depth in what the “quick and dirty” forecasting model suggests.

To repeat, this is a simple model consisting of the YoY% change in the stock market and the (negative) YoY% change in new jobless claims. Since the latter doesn’t signal recession until at very least it is 10% higher (worse) than the year before, I add 10 to the YoY% result.

Here’s the update through Friday:

Both signals are weak (+8.3% for the stock market and +2.8% for initial claims), but neither are signaling a recession.

For comparison, here is what they looked like for the five years before the pandemic:

At no point did it signal recession during those years.

To better show how it looked in comparison with the present situation, below I’ve subtracted -8.3% to stocks, and -2.8% to jobless claims, so that they show at the 0 line:

Stocks were much more volatile, and weaker than they are presently for much of that period, while jobless claims were only as weak as they are now for several weeks in September 2017 and December 2019.

FRED is no longer allowed to display stock prices from more than 10 years ago, but here is the long term historical record of the YoY% change in jobless claims normed to the current -7.2% level:

You can see that to be reliably recessionary, jobless claims must be worse than the are now. But on the other hand, there were only about a dozen occasions in the 50+ years before the pandemic where jobless claims were as weak as they are now without there being a recession. Again, this reinforces that the labor situation, while not recessionary, is weak.

Although it isn’t part of the quick and dirty forecast, nonfarm payrolls are one of the quintessential coincident indicators. While I won’t bother with the graph, on a YoY% basis they have grown 1.3% as of February. Adjusted for the census estimate of population growth, they are up only 0.6%.

And here is the long term historical graph of nonfarm payrolls for the 70 years before the pandemic, subtracting -1.3% and -0.6% respectively from the YoY values so that they show at the 0 line:

Aside from four occasions: briefly during the Korean War, once in the early 1960s, once in the mid 1990s, and during 2019, employment has never been weaker outside of recessions or shortly before.

Here is a close up showing the situation in 2019:

Back then I was writing that it was touch and go whether we would tip into recession or not.

the bottom line is that the employment side of the equation is very weak, and it won’t take much - say, the actual widespread implementation of retaliatory tariff barriers - to tip it onto the recessionary side. 

Weekly Indicators for March 17 - 21 at Seeking Alpha

 

 - by New Deal democrat

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

The biggest change this week, as I wrote yesterday, was the sharp decline in two of the regions Feds’ new orders indexes. But, also as indicated, consumper spending remains strong - at least so far.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the colony, and reward me with a penny or two for my effort in collecting and collating the data.

Regional new orders deteriorate; sales still lead inventories

 

 - by New Deal democrat

No significant new economic news today, so let me follow up on Wednesday’s post about production and sales.

The high frequency indicator I follow on the manufacturing side is the new orders components of the manufacturing indexes published each month by five of the regional Feds. As I wrote Wednesday, these had flipped from contraction into relatively strong expansion at year’s end.

With the reports this week by the New York and Philadelphia Feds, the situation has reversed. Here is their current status:

• Empire State  https://www.newyorkfed.org/survey/empire/empiresurvey_overview.html down -26.3 to -14.9
• Philly down -14.9 to +8.7
• Richmond up +4 to 0
• Kansas City down -1 to -7
• Dallas down -11.2 to -3.5
• Month-over-month rolling average: down -8 from +5 to -3

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. The ISM report for February already showed new orders retreating into contraction, so this suggests a further retreat next month. The three remaining regional Feds will report over the next 10 days.

On Wednesday I also reiterated that production typically responded to changes in sales, rather than anticipating them, pointing out that sales typically turn higher or lower before inventories do.

Since we had the report for retail sales earlier this week, here is the update of retail sales (dark blue, thick line) and total business sales (light blue, thin) vs. retail inventories (dark red, thick line) and total inventories (light red, thin) through February:

The leading/lagging relationship is easier to see on a YoY% basis:

In 2022 and 2023, the YoY change in inventories lagged sales by roughly 6 months.  The relative bigger incrrease in retail inventories in late 2024 may be an exception to the rule, but is likely just noise, especially since total business inventories did not confirm that big increase.

One thing that has distinguished slowdowns in growth from actual recessions in the past several decades has been how quickly businesses can adjust their inventories to a decline in sales. The “just in time” system allowed for quicker responses. To the extent the current situation is driven by tariff and other policy uncertainties, businesses may not be able to be so nimble.

Jobless claims suggest continued sluggish growth

 

 - by New Deal democrat

Let’s take our weekly look at initial claims, the first indicator that should show stress in any rising unemployment scenario.

Last week initial jobless claims rose 2,000 to 223,000, and the four week average rose 750 to 227,000. With the typical one week delay, continuing claims rose 33,000 to 1.892 million:

On the more important YoY basis for forecasting purposes, initial claims were up 5.2%, the four week average was up 7.2%, and continuing claims were up 5.4%:

These are all neutral readings, indicating continued slow growth in the economy.

Finally, since initial claims have a very long history of leading the unemployment rate, here is our update of that:

With initial and initial+continuing claims both up roughly 5% YoY, that suggests that in the next few months the unemployment rate should tend towards a reading of 4.1%, which is last year’s 3.8%*1.05, and was also the unemployment rate in February. So for the moment, there is no additional upward pressure on unemployment.

Policy uncertainty, business investment, and consumer spending

 

 - by New Deal democrat

There’s no significant new economic news today, so let’s take a look at something of a topic du jour.

In case you haven’t seen it elsewhere, “economic policy uncertainty” has spiked to a level never seen before aside from the moment the pandemic hit and caused lockdowns in March 2020:

This has been seen as increasing the odds of a recession, perhaps immediately.

So I decided to explore two facets of this possibility:

(1) is there any evidence of any immediate downturn in hard business or consumer data?

(2) in prior episodes of major spikes in such uncertainty, have business investment and/or consumer spending responded immediately, with a delay, or has there been no correlation?

As to the first aspect, as you know I track high frequency data and report on it each week. Although I don’t have a graph to show you, in terms of business investment I do track the new orders components of the five monthly regional Fed manufacturing surveys.

After languishing for most of two years, at the end of December the average was -5, indicating slight contraction. At the end of January the average had risen to +6 on the back of particularly strong NY and Philly regional reports, and at the end of February it had only changed -1 to +5. So far only the NY Fed has updated for March, but it has shown a significant decline of -26.3, which has taken the average of the index to -1, i.e., generally neither expanding nor declining. This is too weak a reed to cite for any significant change of direction. At very least the other regional Feds’ reports will have to come in before it can be suggested with any probity that business investment has begun to decline.

As for consumer behavior, every week Redbook updates same store spending. Here i do have a graph, and here is what it looks like for the past three years:

As of last week, spending was up 5.7% YoY. For the last four weeks, it has averaged 6.1%. In short, there is no discernible wavering in consumer spending as of the latest data.

Now let’s look at past history.

To track the response of business investment, I looked at manufacturers’ new orders, both in total (red in the graphs below) and for durable goods (gold), compared with policy uncertainty (inverted, /10 for scale). First is the long term historical view. It is averaged quarterly because the month to month variation is far too noisy to see any pattern:

There is no discernible pattern when the changes are very minor. But when we look on a YoY basis quarterly, you can see that significant changes in policy uncertainty lead new orders for goods by an average of 2 to 3 quarters. The effect is far less noisy as to total orders than it is for durable goods orders. This is not to say, by the way, that the former *causes* the latter. It is simply to say that, whatever the reason for the former, changes in the latter do appear to occur, but with a significant lag.

Now here is a monthly close-up post pandemic:

You can see that policy uncertainty went from very good readings to neutral as of the beginning of 2022. New orders followed with roughly a twelve month lag. As of the most recent data for new orders as of January, there has been no significant change.

Next let’s look at the same comparison, using real retail sales (red) and real personal spending on goods (g0ld) as our proxies for the consumer. Again the historical look is quarterly to cut down on noise:

The consumer response appears much more coincidental to episodes giving rise to more uncertainty, lagging on average only one quarter and sometimes not at all.

Now here is the post-pandemic view:

There has been no discernible reaction so far.

Finally, below is a graph of policy uncertainty compared with *both* manufacturers total new orders (gold) as well as real retail sales (red):

This makes it easier to see that usually (but not always!) the consumer reaction has come first, before the reaction by manufacturers. This is of a piece with the idea that sales lead production and inventories (something I have shown in the past), as manufacturers react to increased or decreased demand, rather than anticipating it.

This time could always be different. In particular, the motor vehicle industry has been heavily integrated across national lines in North America. The turning off of that spigot may very well have immediate and dramatic effects. But I think the takeaway here is to continue to keep an eye on the high frequency investment and spending data, with the expectation that the consumer spending data is likely to show a significant repsonse first.

Two cheers for a great February industrial production report! With a gigantic *

 

 - by New Deal democrat

Two cheers for the very good industrial production report for Feburary! Total production increased 0.7%, and manufacturing production increased 0.9% to the highest level in over two years:

But the biggest news is that the headline number wasn’t just the best since the pandemic: it was the highest number of all time since the index was first reported over 100 years ago:

The reason total production did even better than manufacturing was all about utilities, which in January and February were 5% higher than any previous month ever:

So why only two cheers and not three? 

Industrial production is a coincident indicator. It was the King of Coincident Indicators, but has faded in importance since the turn of the Millennium, as other sectors of the economy have become more important.

And the best leading indicator for industrial production is new orders. I track this weekly via the Regional Fed reports, which showed marked increases in the past several months, and even more significantly via the ISM manufacturing index, the most recent graph of which, showing new orders in gold, is below:

New orders spiked in December and January to the best levels in nearly three years, but then fell back into contraction in February.

And there is a very likely reason for that: front-running tariffs. If I expect input costs to increase sharply due to the imposition of tariffs, I am going to complete as much production ahead of time as I can.

We won’t know for at least another month whether that has indeed been the case. But it is a gigantic *, and a reason for withholding the final, third, cheer.

February housing construction rangebound, but at recessionary or near-recessionary levels

 

 - by New Deal democrat

As usual, the month’s important housing data starts out with construction. 

For a quick refresher, I follow this because housing typically leads the rest of the economy by a year or more. After the very leading, but very noisy and heavily revised new home sales (which will be reported next week), permits turn first. Single family permits in particular are the least noisy of all the housing indicators. Next, with a month or two delay, come starts, which are also much noisier and work best as a three month average. Among the most important data, next - with a significant delay - comes housing units under construction, which is the actual total economic activity. Finally - again frequently with another significant delay - comes employment in housing construction, which is part of the monthly employment report. And mortgage rates lead all of the above.

Last month I noted that new home sales have been rangebound for the last two years, which suggested that permits would likely continue to be the same. And in February they were, as permits declined a slight -17,000 on an annualized basis to 1.456 million. Single family permits (red, right scale below) declined only -2,000 to 992,000. Starts (light blue) on the other hand rose 156,000 annualized to 1.501 million. Their three month average rose to 1.459 million, the highest in exactly 12 months:

It is possible, as with so much other post-pandemic data, that there is some unresolved seasonality, because as you can see the December-February period was also the 12 month peak for starts one year ago. Most likely we are seeing a noisy recapitulation of the slight improvement in permits since last summer, but still as with single family home sales, within a narrow range.

In the past 18 months, I have paid much more attention to housing units under construction (gold in the graph below), the “real” measure of economic activity in housing. Throughout late 2022 and all of 2023, it levitated at near record levels. It then precipitously declined, and as of February it is down -14.8% from its peak:

For the last number of months, I have suggested that this number would likely stabilize soon. It took longer than I thought, and with a deeper decline than I thought, but it appears that since November it has indeed stabilized at a level of roughly -15% below peak.

This is significant for recession forecasting purposes. Below I show units under construction YoY (red, left scale) and in absolute terms (blue, right scale):

On the one hand, on a YoY basis units under construction have never declined so strongly without a recession occurring in the near future. But the typical decline from peak has been much more than -15%, often being -35% or more, although recessions have occurred with only a-10% or so decline.

The last shoe I would expect to drop significantly before a recession is the number of jobs in homebuilding (blue in the graph below):

Like units under construction before them, housing employment has levitated for the past year, even rising to ever new levels. As you can see from the last 1980s, sometimes this has persisted for several years before the downturn. I am not expecting it to persist for much longer now. A -10% or so downturn in this type of employment has typically been the recession onset marker.

Finally, here is an updated graph of the YoY change in mortgage rates (*10 for scale, inverted), together with the YoY% change in total (light red) and single family (dark red) permits:

Mortgage rates dipped from 7% to 6.2% in late summer, shown as the nearly 10% improvement (blue) in the graph above. So far permits are nearly unchanged YoY. Some at least temporary improvement in their YoY comparisons seems likely, but since mortgage rates have recently risen back close to 7%, permits and starts are more likely generally to continue in their recent range.

The conclusion: this month’s housing construction report showed more of the same rangebound data. That’s “good” in that it is not worsening, but we can expect employment to finally follow the rest of the data down sometime soon. That would confirm that the housing sector is recessionary.