Re-examing the long leading indicators: the effects of fiscal and commodity price shocks

 

 - by New Deal democrat

Several weeks ago, I wrote that “after 20 years, I think it’s time to examine whether the broad range of long leading indicators hold up.” This was primarily because, while when they have been positive the economy has followed suit 12 to 24 months later, several times they have been negative with no endogenous recession occurring thereafter: once in 2018-19 (COVID being the decisive external factor), and once in 2022-23. Historically they also had a false positive in 1966.

In that post I examined the 4 identified by Prof. Geoffrey Moore in the 1980s (and subequently used by ECRI), which were corporate bonds, corporate profits deflated by labor costs, real money supply, and housing permits; plus common measures of the yield curve, and also real retail sales per capita.

At the end of that post, I made mention of the impact of fiscal, i.e., government spending. In this post I want to take a more detailed look at the two exemplar misses: 1966 and 2022.

Here is what Prof. Moore’s four long leading indicators, plus the yield spread between the 10 year Treasury and the Fed Funds rate looked like in the 1960s, normed to 100 as of December 1965 (I’ve also inverted corporate bond yields, so that an increase shows as a negative, and recalibrated the scale of the yield curve so that an inverted curve shows below value “100”):

As you can see, in 1966 every long leading indicator turned negative with the exception of real money supply, which was flat. This was a very strong recessionary signal. And yet, among other things, neither real GDP nor employment turned down:

Additionally, while real retail sales turned negative YoY, real income less government transfers did not:

Similarly, in 2022, every indicator declined for almost the entire year. Thereafter, several turned neutral, while corporate profits rebounded beginning in 2023:

Again, this was a strong recessionary signal. But real GDP only declined slightly for one quarter at the beginning of 2022, was flat the next, and then recovered, while employment never declined at all:

In 2022-23, both real retail sales and real income less government transfers did briefly decline YoY, but not in sync:

So, what overcame these recessionary signals? It appears that two even more powerful forces were in play.

The first was a positive price shock in the form of declining producer prices. 

To put this in context, here is the long term historical look at the YoY% change in PPI for finished goods (red) vs. CPI (blue):

With the exception of 1970, the onset of every other recession since the end of World War II has featured producer prices increasing faster than consumer prices. How this affects the economy is fairly straightforward: if producer input prices cannot be passed through to consumers, corporate profits will suffer, and cutbacks in hours and employment will begin.

But especially since 2000, there have been times where PPI inflation has equalled or exceeded CPI inflation without any recession. The simple dynamic going on here has been the decline in the labor share of producer income generated:

Now let’s look at 1966. There was a surge in PPI vs. CPI during 1965-66, but thereafter the PPI index abated:

In fact, beginning in September 1966, producer prices declined -1.1% through April 1967, relieving the pressure on employers.

A similar dynamic played out in 2022-23. From July 2022 through December 2023, producer prices declined -4.7%:

Both of these were “positive” price shocks, enabling corporate profits to increase without cutbacks to employment or an ensuing recession.

The second commonality to both episodes was huge government stimulus. Once again, here is the long term historical look, in log scale:

It’s easy to see that the mid-1960s, plus the stimulus payments during the Great Recession and COVID have been the three biggest expansions in government expenditure during this entire 75 year period. 

In the 1960s, from the beginning of 1965 through the end of 1966, even accounting for inflation, there was a 25% increase in government spending per capita:

This was LBJ’s “guns and butter” spending on both the VIetnam War and Great Society domestic programs.

The COVID stimulus was even bigger, with the 2020 stimulus increasing real per capita government spending by over 80% and the 2021 stimulus by almost 70% compared with just before the pandemic:

As a result, in 2021 real spending was 15% higher than before the pandemic, while real income even without the stimulus payments was up about 4%. Although each of these declined at differing periods during 2022 and 2023, employment (gold) never caught up even to its pre-pandemic level until the middle of 2022:

In other words, there was still a huge shortfall in the number of employees needed to fulfill all the consumer spending that had been unleashed by the stimulus. 

Finally, it’s worth noting that we do have the contrary example, of a contraction in federal spending leading to a recession, in the -10% reduction in New Deal spending that took place in 1937 through to be primarily responsible for the deep recession of 1938:

Let’s put this all together: the long leading indicators have been reliable in forecasting continued expansion, but several times have suggested a recession was likely ahead, but none materialized. In each of those cases, however, the endogenous progression of the economic cycle has been overcome by both (1) a positive supply shock in the form of disinflating or even deflating commodity prices; and (2) huge government stimulus programs. 

Because we don’t have enough examples, it’s impossible to know which of these two factors was more important, or whether both were necessary. Additionally, because the former is an exogenous event and the latter is often geopolitical, it is very unlikely that they could be forecast. On the other hand, in both 1966 and 2022 the government stimulus programs were already in place, meaning they can be taken into account in long leading forecasting.

I still plan on doing some further re-examination, so stay tuned.

Weekly Indicators for June 22 - 26 at Seeking Alpha

 

 - by New Deal democrat

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

Unsurprisingly, the most significant high frequency indicator of the week was the 10% YoY increase in consumer spending as measured by Redbook. Despite all of the chaos and own-goals emanating out of Washington, the economy is incredibly resilient - although I continue to worry that nearly the only driving force is what looks like a Bubble in construction of AI mega-scale data centers.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a little lunch money for curating the data for you.

Real personal spending on durable goods rebounds from near recessionary levels, including motor vehicle purchases

 

 - by New Deal democrat

Yesterday we saw a slew of data releases, including durable and core capital goods orders, jobless claims, personal income and spending, and motor vehicle sales. I reported on all but personal spending and motor vehicle sales yesterday. Today let’s take a look at the last two.

Let me start with the same overview graph I used yesterday, showing a pronounced downturn in real income since early last year (blue) vs. a continued increase in spending (red):

As I pointed out, the difference can be explained by the decline in the personal saving rate to an extreme low:

What are consumers spending on? The order in which such spending has typically peaked in past expansions is: first, durable goods; second nondurable goods; and finally, consumer goods. As I have pointed out many times in the past, real spending on services usually continues to increase, or at least not decrease, even through recessions. So this first graph compares real spending on durable goods (red) vs. goods as a whole (gold) vs. services (blue) for the past several years:

Monthly spending on durable goods peaked at the end of 2024 and declined slightly during 2025. In the past several months it has recovered somewhat. By contrast, spending on goods as a whole continued to trend slowly higher, and spending on services has barely slowed at all.

Here is the same data shown YoY:

Durable goods spending, while volatile, has generally trended close to the 0 line in the past eight months. A historical look at YoY spending on durable goods and goods as a whole shows that, with a few exceptions (notably 1966 and 1987), when spending on durable goods is negative for longer than a month, it typically means a recession is either occurring or at least imminent:

Now let’s look at nondurable goods. Compared with durable goods, spending on nondurable goods (orange) has continued to increase throughout the last year:

On a YoY historical basis, real spending on nondurable goods has not turned negative during most recessions, but the YoY increase has slowed sharply:

In other words, sometimes spending on nondurable goods does peak prior to recessions, but sometimes the growth rate just slows down or turns flat, as shown in the two historical graphs below set in log scale:

If the signal from spending on durable goods is close to recessionary, that on nondurable goods suggests continued expansion in the immediate future.

Which brings us to motor vehicle sales, because they are the quintessential consumer durable good. In general, in the past purchases on passenger cars and pickup trucks (blue) have slowed down noisily before recessions, typically by about 10%, while purchases of heavy weight trucks (red) have slowed first and more sharply:

But just as with spending on durable goods, purchases of heavy weight trucks in particular have rebounded in the past few months:

Purchases of passenger vehicles have picked up slightly, but are within the range of noise and are generally trending sideways.

In sum, real personal spending, unlike real personal income, is not giving a clear recession signal, and if anything has rebounded slightly in the past several months, in particular for durable goods. That is also showing up in the purchases of heavy weight trucks, which tracks with the broader rebound in core capital goods spending, and the noisier uptrend in durable goods orders, as well as other manufacturing series like industrial production and the regional Fed indexes, that we have seen over the past six to eight months. Which, to reiterate, likely has very much to do with the building of massive AI data centers.

Real personal income in May was recessionary (again); depleting savings (temporarily?) “saves” the day

 

 - by New Deal democrat

The third item from this morning’s torrent of economic data I want to address is personal income and saving. I’ll update the spending side tomorrow, including an updated look at motor vehicle sales, which were also released this morning.

On a nominal basis, personal income rose 0.7% in May, as did spending. But since prices as measured by the PCE deflator rose 0.3%, in real terms the former rounded to only a 0.2% increase (blue) and the latter a 0.3% increase (red). It is easy to see that the two metrics diverged sharply about a year ago:

Indeed, on a YoY basis, while real spending is up 2.1%, real income is *down* -0.2%:

As indicated above, I’ll withhold further comment on the spending side until tomorrow. But for real incomes to be negative YoY is dismal. As shown in the below graph, for the entire 60 year period between the inception of data and the pandemic, with only one exception (described below), real personal income was *never* negative YoY except during or immediately after the worst recessions:

The sole exception was in 2013, when a temporary Social Security tax withholding holiday that had been put in place for one year in 2012 as a stimulus measure expired. Note, however, that it was also negative in 2022 without a recession having taken place.

Similarly, real income less government transfer payments rose 0.3% for the month (blue, right scale), but is down -0.4% YoY (orange, left scale):

Similarly, before the pandemic except for 2013 and 2022, real income less government transfer payments was only negative during or immediately after recessions:

Similarly to 2012, in 2021 there were large direct one-time stimulus payments to households. Thus the 2022 income numbers suffered in comparison. 

How is it that spending can continue to be so positive, with no recession occurring, despite the actual decline in real inocme? Because consumers have dipped into their savings in a big way. The personal savings rate was 3.0% for the second month in a row:

As shown in the above graph, which subtracts 3 from the saving rate so that the current level shows at the 0 line, aside from 2022 and the 2005-07 period just before the Great Recession, the personal saving rate has never been this low during the entire history of the series.

Tomorrow I’ll dig deeper into the spending side, but for now the takeaway is that the US economy would almost certainly be in a recession except for the consumer spending spree, which is almost certainly in large part funded by stock market gains and the ensuing “wealth effect” which is in turn a byproduct of the AI data center boom - or Bubble.

Manufacturing sector continues to be positive through May

 

 -by New Deal democrat

Per my post earlier this morning, I am going to delay until tomorrow reporting on motor vehicle sales and an in-depth look at personal spending, but let’s look at the second significant data release from this morning: manufacturers’ new durable goods orders for May.

To cut to the chase, this was another good month, at least on a nominal basis, continuing the string of positive, even somewhat Booming reports so far this year. While total orders declined -4.5% for the month - still within the range of noise - core capital goods orders increased 1.6% to another all-time high. And even with the decline, the headline number was only lower than one month ago and one month last year:

Headline orders are up about 25% from their pre-pandemic all-time high in 2018, while core capital goods orders are about 37% higher. And as the below YoY% comparison shows, the rate of increase has been accelerating for core capital goods orders in the past few months:

I need to caution again that these are nominal numbers. But even if I were to adjust for CPI, PPI, or PCE inflation, the three month average of orders would be higher YoY, and core capital goods would still be about 6% higher YoY.

Meanwhile, real manufacturing and trade industries sales were also updated this morning for April, showing a -0.9% decline monthly to the lowest level in four months. But real sales remain about 13% higher than before the pandemic:

On a YoY basis, real sales are up 1.3%:

This is among the poorest showings since the pandemic, eclipsed only by the 2022 manufacturing downturn and several months last year. Further, a historical look shows that before the Millennium, a 1.3% increase in real sales only happened shortly before or during recessions. Since the accession of China to normal trading status, it has been lower in 2002, the industrial recession of 2016, and the 2019 period that had some pre-recessionary characteristics as well:

Keep in mind this is for April, while the durable and capital goods release was for May. Further keep in mind that new orders are a forward-looking, short leading indicator, while real sales are a coincident indicator. In other words, the main import of all the data remains positive for the manufacturing sector.

Jobless claims: seasonality returns, but remains very positive for the economy

 

 - by New Deal democrat

This morning a plethora of economic data was released, including personal spending and income, manuacturers’ new orders, motor vehicle sales, and jobless claims. Since tomorrow sees no significant data releases, I’m going to hold the in-depth look at spending and motor vehicle sales until tomorrow, and update the other releases today.

Let’s start with the typical weekly look at jobless claims, 1/2 of my “quick and dirty” forecasting method. To reiterate, the issue I’ve been looking at is whether post-pandemic seasonality is reappearing, or whether the “regime change” of signficantly lower YoY claims that started last July is intact.

And the apparent answer is: both.

Initial claims declined -12,000 to 215,000, while the four week average rose 750 to 224,250. With the typical one week delay, continuing claims rose 21,000 to 1.821 million:

Excluding the immediately preceding three weeks, this week’s initial claims number is the highest all year except for two week in February and one in April; and the four week average is the highest since last November. This very much looks like the return of post-pandemic residual seasonality.

But on a YoY basis, the very positive comparisons continue, as initial claims are down -8.9%, the four week average down -7.4%, and continuing claims down -7.1%:

This is in line with the excellent YoY comparisons we have seen almost all of this year.

To synthesize, it would appear that while post-pandemic seasonality has reappeared, it is at a lower level that from 2023-2025. Which is very positive for the near term economy.

Finally, let’s do our update of what this might mean for the June unemployment rate when that report is released next week. Unsurprisingly, it continues to show that downward pressure will continue to be exerted on that rate. I would not expect the rate to increase from 4.3%, and there is a very good chance it declines:

The positive news continues.

May new home sales: Another poor month for sales, prices stable, inventory increasing

 

 - by New Deal democrat

To start with the usual: new home sales are very volatile and heavily revised, which is why I pay more attention to single family permits. But they are the most leading of all the housing data; and averaged over three months, much of the noise goes away.

In May, new home sales declined -46,000 annualized to 580,000, just above their 3+ year low set in January:

This likely in part reflects the recent uptick in mortgage rates - but again it is within the range of noise. The three month moving average is virtually unchanged, but at the low level it has been for most of this year so far, which suggests that single family permits (red, right scale), which convey more signal, are likely to hold steady or even decline further from their recent range.

Meanwhile, the median price for a new home - which is not seasonally adjusted, so should be compared YoY - was almost exactly unchanged from one year ago (red, left scale):

The longer term trend over the past three years of slowly declining prices remains intact.

This is largely in accord with existing home sales, where the median price through May was up 1.3% YoY, and the Case Shiller and FHFA repeat home sales prices, which were up 0.7% and 1.7%, respectively. The difference is that home builders can change, and have changed, price points, not just by lowering profit margins, but also by building more densely, or smaller square footages, or fewer amenities - which they have done.

Finally, let’s look at the inventory of new houses for sale. As a refresher, here is the historical view of the leading/lagging relationship between the number of houses sold and houses for sale:

Inventory is generally the last shoe to drop in the housing market before recessions begin. But as I noted last month, there has been an interesting wrinkle this year, as inventory has turned back up:

This is all but unique. Historically a recession will not occur until inventory turns down again. But to reiterate, housing has been recessionary for a year, and yet no recession has occurred. The same has been true for motor vehicle sales. 

In summary: not a good report, it looks like housing is taking another step down. But no upward price pressure, and no indication of broader negative implications for the economy.

Consumer spending has turned red hot - expect no recession in the immediate future

 

 - by New Deal democrat

Well, I was working on one nerdy long-term historical post this morning, when I decided to check the weekly update on consumer spending from Redbook. And, as you’ll see below, that was the end of that! (I may yet follow up this afternoon. We’ll see.)

Last week, Redbook consumer spending was higher by 10.0% YoY! That’s the biggest YoY gain since the end of 2022:

You are simply *NOT* going to have a recession in the immediate future in the face of that kind of increase in consumer spending, especially when even the recent spike in CPI only brought it to a 4.2% YoY increase. I have seen commentary that the big pick-up in consumer spending is due to bigger tax refunds, which may be true given that the recent surge started right after April 15. If that’s the case, I would expect it to subside as the summer goes on.

This plays directly into the “quick and dirty” forecast method I highlighted yesterday: if stock prices are higher YoY (a proxy for the producer side), and jobless claims are not higher by over 10% YoY (a proxy for job security); and also if real retail sales (a proxy for the consumer side) are higher YoY - there has never been a recession, going all the way back to World War 2.

The “quick and dirty” forecasting method has been flawless

 

 - by New Deal democrat

On Friday I wrote about how I have been rethinking the long leading indicators — those that are useful for forecasting the economy 12-24 months out — because while when they are positive, the economy has been as well, but when they have been negative (twice) in the past 15 years, the economy has weakened but not gone into recession. They have functioned more like a “severe weather watch;” i.e., conditions are favorable for development, but by no means more likely than not.

By contrast, the “quick and dirty” short term forecasting system has been flawless.

What is the “quick and dirty” system? Simply look at the stock market and the four week average of initial jobless claims. If the stock market is lower YoY, and the four week moving average of new jobless claims is 10% or more higher YoY, the economy is likely to fall into recession in the next several months. Otherwise, the economy will remain in expansion.

Let’s take a look. The below two graphs track stock prices (gold), the four week average of initial jobless claims (red, inverted and adding 10 so that any YoY change of higher than 10% shows below the zero line); and also adds real retail sales YoY (blue), which has also had a very good long term record; first for the four years before the pandemic:

And here are the five years after the pandemic:

As you can easily see, at no time have both stock prices and the four week average of initial jobless claims been below the zero line together. In 2018, stock prices and real retail sales were negative for only one month, but jobless claims were doing very well. And in mid-2023, the system never quite signaled — stock prices went positive YoY one month before jobless claims turned sufficiently negative. And real retail sales likewise turned positive with stock prices.

Currently all three metrics are solidly positive, signaling economic expansion will continue for at least the next few months.

And what of the pandemic? Here is the close-up of 2020:

The pandemic lockdowns began roughly on March 9. Within several days, the stock market turned negative YoY, and jobless claims also did so by more than 10% on March 21 (in fact, there were such severe layoffs that I’ve had to cut the scale by 100!). By early May the stock market had turned positive again. Real retail sales also turned negative in March, and turned back positive in June.

LIke I said: quick and dirty - and flawless.

Weekly Indicators for June 15 - 19 at Seeking Alpha

 

 - by New Deal democrat

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

There was another air pocket this week in withholding tax payments, and some weakening in mortgage applications, but the overall tone remains positive, despite the ongoing international chaos emanating from Washington.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and help me with my lunch money.

Rethinking the long leading indicators

 - by New Deal democrat

I’ve been writing about the economy, and employing forecasting models, for over 20 years. For the entire duration of the period, there have been portents of DOOOM written about by many others. I have been much more cautious, going on “Recession Watch” only twice since 2008: in 2019 and late 2022. I have never gone on “Recession Warning.” 

Which is broadly concurrent with the economy since then. Since June 2009, the economy has been in recession for only the 2 month period immediately after COVID hit and brought society to a near standstill. For the other 200+ months, it has been expanding.

We’ll never know if, absent COVID, there would have been a recession in 2020, although at the time I believed we were going to narrowly miss it. But in 2022, the broad warning signs were manifest - and yet no recession occurred anyway.

So, after 20 years, I think it’s time to examine whether the broad range of long leading indicators hold up. I make use of the 4 identified by Prof. Geoffrey Moore in the 1980s (and subequently used by ECRI), plus common measures of the yield curve, and also real retail sales per capita.

Let me start with Prof. Moore’s four components [Note: all of the below graphs use YoY% comparisons for easier viewing; although the models generally use the absolute measures]. Here are corporate bonds, corporate profits deflated by labor costs, real money supply, and housing permits, covering the periods of 1960-94, 1995-2026:

Although the data is very noisy, when we look for periods when *all 4* components were at or below 0, the only such times were roughly 1 year before the onset of each recession, plus 1966, as well as the 2019 and 2022 periods. Plus last year, as shown in this close-up

Between December 2024 and May 2025 all four were negative. Again, although we came close last year, no recession has occurred as of June 2026.

Next, let me compare corporate bond yields as above with the 10 year Treasury minus 2 year yield, calculated as the YoY change (thus, for example, if the spread declined form +0.40% to +0.20%, this shows up as a -0.20% change). Here’s the entire period from the mid-1970s to the present:

While both measures are negative before the onset of recessions - frequently reverting to positive immediately beforehand as the Fed lowers interest rates - there are a number of false positives as well, in 1984, 1994, 2016, and very much so in 2022. The message I take away from this is that interest rate changes are probative, but they give too many false positive recession signals. Meanwhile, housing measures, while also probative, focus on too narrow a slice of the economy.

So let’s turn to the broad “real world” long leading indicators, comparing corporate profits and real retail sales per capita. Here’s what they look like from 1953-2000, 2001-2019, and 2020-present:

I’m much more satisfied with this measure. The only times both measures (using a 3 month moving average for real retail sales per capita) have been simultaneously negative has been shortly before recessions have begun, with the false positive of 1966 and one quarter in 2022.

And those two misses have something in common: massive fiscal stimulus. In 1966 LBJ’s “guns and butter” budget poured massive amounts of spending into both military spending and domestic social program spending. In 2021, the COVID stimulus had led to an abrupt 15% increase in retail spending, but with an absolute lower level of employment. Profits boomed, then paused, but clearly could - and did - boom further as businesses amped up production and hired more employees as the COVID supply bottlenecks unspooled.

This is an intellectual work in progress, so there is much more to think about. But preliminarily, my takeaway is that while interest rates and real money supply are important background conditions, that is all they are. The “real world” early indicators from housing, corporate profits, and real consumer spending per capita are necessary for confirmation. And I need to take a more detailed look at fiscal conditions and price level shocks, which often seem to be precipitating elements for recessions.

Preliminary evidence that both business expansion - and widespread inflation - have continued in June

 - by New Deal democrat

 Yesterday, in addition to the retail sales report, general business sales and inventory were reported - but unfortunately only through April. Nominally, sales (red in the graph below) increased 1.2% while inventories increased 0.5%:

Here is the longer term look at total business sales and inventories:

In case it isn’t obvious from the above graph, sales turn both higher and lower before inventories, and the signature of an oncoming recession is sales having turned down while inventories are still increasing. Since sales were up through April - and would be even if we adjusted for inflation using either the PPI or CPI - that confirms that the economy was expanding - 2 months ago.

But the early indications from the New York and Philadelphia Fed manufacturing surveys are that manufacturing activity has continued to expand through June, but inflationary pressures are still elevated as well.

Here are the averages of the two manufacturing indexes for general activity (blue) and new orders (red):

Both showed expansion. To cut down on noise vs. signal, I recommend using the three month average - which for both metrics remained stable at a moderate expansionary pace.

Here are the same averages for prices paid (blue) and received (red):

Both of these continue at more widespread levels than during the pre-pandemic expansion, although not as widespread as during the immediate post-pandemic inflationary period. But perhaps most importantly, both prices paid and received continued to show widespread increases this month, indicating that the inflationary shock from the Iran war has not ended.

More evidence for the re-emergence of residual seasonality in jobless claims, but still very positive

 - by New Deal democrat

 From 2023 through midyear 2025, there was a distinct pattern of unresolved post-pandemic seasonality to jobless claims, which rose in the first half of the year, and then declined in the second half. Beginning at the end of June last year, though, there was a “change of regime in jobless claims numbers,” probably related to the collapse of immigration and/or fear in immigrant communities, resulting in significantly lower claims on a YoY basis. In the last few weeks there have been signs that the post-pandemic seasonality may be reasserting itself, so as I wrote last wek, “it will be interesting to see if the negative YoY comparisons continue, or if they fade away. If the change of regime was a one-time thing, driven mainly by immigrant worker issues, then these good YoY comparisons will fade between now and the end of July.”

To cut to the chase, the good YoY comparisons have not started to fade yet.

On a weekly basis, initial claims declined -4,000 to 226,000, while the four week moving average rose 4,000 to 223,250. With the typical one week delay, continuing claims rose 24,000 to 1.810 million. Here is the look since the beginning of 2023:

The close-up since the beginning of 2025 better shows how there has been a significant increase in claims in the past three weeks, to levels equivalent to those seen last July through December:

So the question is: do claims stabilize here, or start to decline again in July?

As usual, the YoY% comparison is more important for forecasting purposes, and so measured, initial claims were down -7.0%, the four week average down -7.8%, and continuing claims down -6.5%:

These continue to be very positive signs for the economy.

We’re far enough along in the months that we can extend our comparison with the unemployment rate:

Despite the increase in jobless claims in the last few weeks, there is every reason to believe that the unemployment rate, which follows claims with a lag, will decline further in the next several months.