Real average wages and real aggregate payrolls for December 2022

 - by New Deal democrat

Now that we know December consumer inflation, we can see how the American working/middle class is “really” doing.

Nominally, average wages for nonsupervisory workers increased 0.2%, while prices deflated by -0.1%, meaning that “real” average wages increased 0.3% for the month:

While this only returns them to April’s level, and -2.2% below their December 2020 interim peak, they are also 1.5% higher than their pre-pandemic levels, and more importantly 1.3% above their recent June 2022 lows. Essentially all of the volatility in 2022 can be laid at the feet of the huge increase, then huge decrease, in gas prices.

Aggregate real payrolls tell us how much, in full, nonsupervisory workers are earning in “real” terms. As I noted again the other day, in the past whenever YoY inflation has been higher than YoY aggregate payrolls, a recession has either just started or was about to start:

With the addition of December consumer prices, here’s what that graph looks like for the past year and a half:

Since September, YoY aggregate payrolls and YoY consumer inflation have decelerated almost in lockstep, with payrolls growing faster than inflation by 1.0% +/-0.1%. In December it was just below 1.0%.

This is consistent with a very slow expansion.

I don’t have any special tools for divining how the net difference between the two will play out over the coming months, but I do suspect that the big decline in gas prices has ended, for seasonal reasons if for nothing else. If over the next 6 months till July 4 gas prices rise seasonally more in keeping with years’ past, let’s say to $3.75/gallon, that will probably give us a monthly inflation rate of about +0.3%. Here’s what that would look like in comparison with the past year and a half:

Between January and June of 2022, consumer prices rose on average just shy of +0.9%/month. A decrease of -0.6%/month to +0.3% would give us YoY CPI of about 3% at mid-year. It’s a decent possibility that aggregate payrolls remain above that number by then, which would mean we probably skirt a recession.

We’ll see.

Jobless claims start out 2023 where they left off in 2022 - as positive

 - by New Deal democrat

It took a little while for FRED to post this data today, but with that reason for a delay . . . 

Initial jobless claims started off 2023 where they left off in 2022, with another good print. Initial claims declined -1,000 to 205,000, while the more important 4 week average declined -1,750 to 212,500. Continuing claims also declined, down -63,000 to 1.634 million:

Let me just add a small caution that we are in the time when Holiday season adds the most distortions even to seasonally adjusted data.

For purposes of recession watching, we want to know if claims are higher YoY, the first sign of weakness. And the answer is, they are not:

Initial jobless claims at this point are the last man standing among positive, or at least neutral, significant short leading indicators. And so they remain.

Consumer inflation remains dominated by gas prices (good) and shelter (bad)

 - by New Deal democrat

Declining gas prices continue to do wondrous things for the economy. In December they declined from roughly $3.50 to $3.10/gallon. Meanwhile the phantom menace of Owners’ Equivalent Rent continues to drag “core” inflation higher. Details below.

Total inflation: -0.1%m/m , +6.4% YoY (12 month+ low), +0.9% since June, 1.8% annual rate

Core +0.3%, +5.7% (12 month low), +2.2% since June, 4.4% annual rate 

Energy -4.5%, +7.0%, -15.1% since June (right scale on graph below)

All items less energy: +0.3%, +6.4%, +2.5% since June, +5.1% annual rate

Note importantly that for all of the ballyhoo about how inflation has plunged since June, ex-energy (gold in the graph above) it has barely budged at all. 

Food +0.3%m/m, +10.4% YoY (vs. Aug 2022 +11.4% 40 year high) 

New vehicles -0.1%m/m, +5.9% YoY (in real terms adjusted for wages up 7% since April 2020 vs. September +8.4% peak)

Used vehicles -2.5%, -8.8% (in real terms adjusted for wages up +22% since April 2020 vs. Jan 2022 +45% peak)

Shelter +0.8%m/m (25 year m/m high), +7.5% YoY (40 year YoY high)  

As I’ve been shouting from the rooftops since November 2021, the fictitious “Owners’ Equivalent Rent” has been dragging this metric - and core inflation with it - higher. As shown in the updated graph above, OER lags actual house prices (red) by 12 months or more. House prices are now decisively on their way down, with YoY comparisons plunging. But CPI for shelter is likely to increase for several months more at least before it turns.

Although I claim no special divining abilities, I suspect that oil prices have bottomed for the while, and so the virtuous decline in gas prices that has followed is at an end:

In short, I do not expect the string of excellent CPI reports to continue.

So I am expecting “core” CPI to continue at an elevated rate for some months to come. So far, despite paying lip service to the fact that OER is a badly lagging way to influence monetary policy, the Fed seems inclined to continue lashing the economy with interest rate increases, albeit at a slower pace.

An in-depth look at production and sales: evidence of peaking in both

 - by New Deal democrat

Yesterday I took an in-depth look at employment. Today let’s take a look at two other important coincident indicators that are looked at by the NBER for guidance as to whether or not the economy is expanding or in recession: production and sales.

As I’ve mentioned several times in the past month, as of the latest readings it looks like industrial production (blue), and its manufacturing component (red) as well, are either on the verge of turning down, or may have already peaked:

Yesterday I noted that several leading indicators for this, the ISM manufacturing index and its new orders component, and also the manufacturing work week, had already turned down to recessionary levels. It would be unusual if production did not follow.

With regard to sales, the picture is more complicated.

The NBER has indicated it looks to real manufacturing and trade sales for guidance. Here’s what it looks like for the past year:

Like GDP, it turned down during late winter and spring (coincident to gas prices going from $3.40 to $5/gallon), and recovered nicely since then (coincident to gas prices going back down to $3/gallon).

The “real” part means the nominal data is deflated, but unfortunately I’ve been unable to find information as to the method used for the deflator. Also, note that it is reported with a 2 month+ lag; the latest data is for October.

Even so, on a YoY basis through October real sales are up just 1%. In the past that weak a YoY comparison has almost always occurred shortly before or shortly after a recession has begun (but see 2002 and 2016):

Also, we do have real retail sales through November, which have been flat to down for a year:

That leaves the manufacturers and wholesalers components of real sales. Here’s what they, along with retail sales, look like nominally for the 20+ years up until the pandemic (in log terms; manufacturing on right scale):

And here is what they look like since:

Note that both manufacturers and wholesalers sales turned down even in nominal terms before the onset of the 2001 and pandemic recessions. In all cases wholesalers sales turned down in tandem with or slightly after manufacturers sales. Retail sales have been their own animal, and have been much less volatile.

Next, here are nominal manufacturers sales since the pandemic started, normed to 100 as of December 2021, compared with wages (red) and commodity inputs (gold):

It’s pretty easy to see that commodity deflation since June explains the rebound in “real” manufacturers sales.

Now let’s turn to wholesalers, showing their nominal sales, also normed to 100 as of December 2021, compared with wages and final demand producer prices:

Even nominally, wholesaler sales peaked in June. Producer prices have been generally flat since then, and wages higher, strongly suggesting that “real” wholesaler sales have declined more significantly in the past few months.

Finally, here is yesterday’s data comparing wholesalers’ sales (blue) and inventories (red):

In the aggregate, it has always been the case that inventories only turn after sales. As of yesterday, as noted above even nominal sales are down, while inventories are increasing. This is the marker of the onset of a recession.

In summary, two of the three components of sales - retail and wholesale - appear to have turned down. The final component - manufacturing - shows plenty of weakness when it comes to production. The issue will be whether manufacturing’s commodity inputs have continued to decline in price, or whether that too has reversed. If so, real manufacturing and trade sales may already have peaked, although we won’t find out until the data is reported in late February or March.

Scenes from the December jobs report: more deceleration

 - by New Deal democrat

The only significant economic data this week will be released on Thursday, with both CPI and jobless claims. In the meantime, let’s take a closer look at the jobs data we got last Friday. As indicated in the title of this post, the theme was “deceleration.”

First, here is the long term YoY look at total employment (blue), employment in goods-producing industries (red), and service providing (gold):

Notice that goods-producing jobs are much more volatile; they decline first, while until the Great Recession, service providing jobs barely declined at all YoY even during recessions.

Here is the close-up of the same since mid-2021:

Service jobs came roaring back as things like restaurants reopened in 2021, while goods-producing jobs increased sharply as well during the Boom. Since spring 2022, there has been a consistent deceleration of YoY growth across the board (but still positive!), to levels that prior to the pandemic would have been consistered excellent.

Now let’s take a look at the leading sectors.

Manufacturers add and subtract working hours before they hire or lay off workers. So it’s no surprise that the manufacturing work week (red, YoY) is one of the 10 components of the Index of Leading Indicators. The number of manufacturing employees (blue) follows:

Notice again that the YoY growth in manufacturing employment now would be considered excellent at any time prior to the pandemic; while the decline in hours in the past has always been consistent with the onset of a recession.

But a look at the monthly change shows a break in the past several months, as employment gains are much lower than previously during the pandemic recovery:

This is consistent with last week’s ISM manufacturing report for December, which showed both the total index and the new orders subindex consistent with the onset of recessions in the past:

And here’s a look at manufacturing hours, employment, and industrial production (gold), all normed to their recent peaks:

While employment is still growing slowly, production possibly peaked in October. It would not be a surprise if the employment gains in November and December were revised away.

Next, construction jobs (blue), and residential jobs in particular (gold) are also leading sectors. It is probably unsurprising that these have continued to grow, as housing units actually under construction (red) have continued to increase (due to the previous difficulty in obtaining construction materials like lumber):

This is one of the definite bright spots in the economy. I do suspect it will roll over shortly, and perhaps fall off a cliff once the backlog is gone.

Temporary help jobs are also a leading jobs sector. They have already rolled over at a pace consistent in the past with the onset of recessions:

On a weekly basis I track the ASA’s Staffing Index, which has weakened considerably since last Labor Day:

This index started in mid-2006. Here is what it looked like in 2007-08:

There have been instances since then of flat or even somewhat negative YoY growth in Staffing without a recession occurring; but the current reading of the index is consistent with a stalling economy, and consistent with the recent downturn in the monthly jobs report.

Next, as I have often pointed out, initial jobless claims (blue) lead the unemployment rate (red) by several months. Here’s the long term YoY view:

And here is the close up since mid-year 2021:

These are not at recessionary levels, but have definitely decelerated. I am currently watching to see if the 4 week average of initial claims moves higher YoY.

Finally, real aggregate payrolls turning negative YoY has been a very good indication of the onset of a recession. Here is the long term look at that, decomposed into nominal YoY payrolls vs. YoY inflation (so the recession signal is red line above blue line):

And here is the close up since mid-year 2021:

Both lines are decelerating, with CPI particularly assisted by the big decline in gas prices since June. As noted at the outset of this post, we’ll get December CPI on Thursday. I expect another good number, as gas prices declined sharply last month. If and when the decline in gas prices ends (quite possibly this month), the comparison is going to become much more challenging.

In which I quibble with Prof. Alan Blinder about the main reason for the decline in inflation since June

 

 - by New Deal democrat

Alan S. Blinder is getting traction for an opinion piece published in the WSJ concerning the big decline in inflation since June. He acknowledges that“ energy inflation played a meaningful role” but that “the rest of the stunning drop in inflation in 2022 [is] due …  What did change dramatically was the supply bottlenecks. Major contributors to inflation in 2021 and the first half of 2022, they are now mostly behind us.”

While I agree that supply bottlenecks are “mostly behind us,” the phrase “the rest of” in his analysis appears to be doing some heavy lifting.

Here is a graph of total CPI (blue), CPI less food and energy (gold), CPI for food (gray), and CPI for energy (red):

In the 6 months through June, total inflation increased at an 11.1% rate, core inflation at 6.9%, food 12.6%, and energy 58.8%. At an annualized rate, in the past 5 months total inflation has been 2.4%, core 4.6%, food 9.3%, and energy -28.4%.

Put another way, since June annualized total inflation has gone down from 11.1% to 2.4% (a 78% decline), core inflation from 6.9% to 4.6% (a 33% decline), food from 12.6% to 9.3%, and energy from 58.8% to -28.4%. 

An even better way to look at this is to compare total inflation (blue, just as above) with CPI less energy (red). In the first 6 months through June CPI less energy increased at a 7.7% rate, and since then at a 5.3% rate (a 31% decline):

Again, focusing on the most important aspect, the rate of decline in core inflation since June has been 33%, inflation ex-energy 31%, but total inflation including energy 78%. So, in terms of CPI .it’s pretty clear that energy has been the primary reason by far that the rate of inflation has declined.

Measured using PCE, total PCE prices were up 8.0% at an annualized rate, core PCE less food and energy was up 5.3%, and energy was up 62.3%. Since June, at an annualized rate, total PCE costs were up 2.4%, core PCE prices up 3.6%, and energy costs down -29.8%:

Unfortunately, there’s no “PCE cost index less energy” on FRED, but the pattern as compared with CPI inflation is the same. Comparing the first 6 months of this year with the last 5 on an annualized basis, core PCE cost increases declined 32%, but total PCE costs including energy and food declined  70%. Presumably if we stripped out food, the decisive impact of energy price declines would be even more clear.

So, while the abatement of supply bottlenecks is surely a factor, by far the decisive factor in the decline in inflation is the huge decline in the price of gas.

Finally, a note that I nevertheless come to the same ultimate conclusion as Professor Binder, which is that the Fed ought to declare victory and go home, but mainly because so much of the remaining part of core inflation that is problematic is tied up with the badly lagging “owner’s equivalent rent,” whereas actual house price increases are on track to be completely unchanged YoY by the middle of this year.  

Weekly Indicators for January 2 - 6 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

No big changes from the past month or so. The overall economic picture continues to be driven by the effects of the price of gas.

As usual, clicking over and reading will bring you up to the virtual moment as to the trends in the economy, and reward me a little bit for my efforts.

December jobs report: good headlines, but deceleration continues

 

 - by New Deal democrat

If the long leading indicators all last year, and the majority of the short leading indicators from the past few months are to be believed, a recession is near. And if that is the case, we ought to see the leading elements of the jobs report begin to roll over. One of them, the average manufacturing workweek, clearly has. Arguably so has temporary employment. Residential construction employment may have peaked. But total construction and manufacturing employment continued to increase through November’s report.

So my focus as of this report is on those remaining leading components, as well as whether the deceleration in the 3-month moving average of jobs growth is continuing.

As described below, the deceleration continues, also including wages, but the leading sectors have not materially deteriorated from the past few months.



Here’s my in depth synopsis.

HEADLINES:

• 223,000 jobs added. Private sector jobs increased 220,000. Government jobs increased by 3,000. The three month moving average of growth declined further to 247,000.
• The alternate, and more volatile measure in the household report had its best month in quite awhile, increasing by 717,000 jobs. The above household number factors into the unemployment and underemployment rates below.
• U3 unemployment rate declined -0.2% to 3.5%.
• U6 underemployment rate also fell -0.2% to 6.5%.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and will help us gauge whether the strong rebound from the pandemic will continue.  These tilted to the negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, declined -0.3 hours to 40.6, and is down -1.0 hours from its February peak last year of 41.6 hours. This is recessionary.

• Manufacturing jobs increased 8,000, and are at a level higher than before the pandemic.
• Construction jobs increased 28,000, also at a level higher than before the pandemic. 
• Residential construction jobs, which are even more leading, increased by 3,100.

• Temporary jobs, which until several months ago had been rising sharply, declined again, by 35,000.
• the number of people unemployed for 5 weeks or less declined by 11,000 to 2,233,000, about 100,000 above its pre-pandemic level.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel, which was recorded at $28.10 in November, was revised downward by $-.09, and increased $.06 from that to $28.07, a 0.2% gain m/m, and up 5.0% YoY, vs. its 6.7% peak at the beginning of 2022.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers declined for the second month in a row, by -0.2% which is still above its level just before the pandemic.

•  the index of aggregate payrolls for non-managerial workers was unchanged, and is up 7.4% YoY. This metric has been decelerating nominally almost consistently for the past 16 months.  Compared with inflation through November, it is up only 0.2% YoY (recessions typically start when it crosses zero).

Other significant data:

• Leisure and hospitality jobs, which were the most hard-hit during the pandemic, rose 67,000, but are still about -6% below their pre-pandemic peak.
• Within the leisure and hospitality sector, food and drink establishments added 26,300 jobs, but are still about -4% below their pre-pandemic peak. 
• Professional and business employment declined -6,000, the second poor reading in a row after last month’s measly increased of 1,000.
• Full time jobs decreased -1,000 in the household report.
• Part time jobs increased 689,,000 in the household report.
• The number of job holders who were part time for economic reasons rose 190,000.
• The Labor Force Participation Rate increased 0.2% to 62.3%, vs. 63.4% in February 2020.
• Those not in the labor force at all, but who want a job now, declined -352,000 to 5.176 million, compared with 4.996 million in February 2020.
• October was revised downward by -21,000, and November was also revised downward by -7,000, for a net decrease of -28,000 jobs compared with previous reports. This is at least the second such downward revisions in a row.

SUMMARY

This report was mixed. There were many positive elements, including the unemployment and underemployment rates, labor force participation rate, and the absolute number of gains in jobs. The gains in the household report were the best in months. The leading sectors of manufacturing and construction employment continued to gain. It is nearly impossible to envision a recession beginning while that is still happening.

On the other hand, the manufacturing workweek declined to recessionary levels (suggesting job cuts will be close behind), and temporary employment continued to decline. Aggregate hours worked declined for the second month in a row, and aggregate payrolls were stagnant. There were again downward revisions to previous months’ data. Wages increased at the lowest pace in nearly two years.

This does not suggest to me that a recession is imminent, but it does suggest that deceleration in that direction has continued.

New jobless claims end 2022 on a positive note; preview of tomorrow’s jobs report

 

 - by New Deal democrat

Initial claims started off the year - or ended last year if you are technical about it - on a positive note, declining 19,000 to a 3 month low of 204,000. The more important 4 week moving average declined 6,750 to 213,750, a two month low. Continuing claims for the prior week also declined by 24,000 to 1,694,000 (due to either a software or human entry glitch, FRED recorded the entries as December 31, 2023! Which leaves a one year gap, so I have omitted this week’s data on the graph below):

All three numbers also remained lower YoY. The most important leading indicator, the YoY% change in the 4 week moving average of new claims, is 3.2% lower than its level one year ago (due to the same glitch, this week’s data is omitted on the below graph):

Although seasonal distortions can be at their maximum right now, this is a very good weekly report.

Tomorrow we get the much more important monthly jobs report. Because initial claims lead the unemployment rate, and have remained low, I expect the unemployment rate to remain unchanged +/-0.1%. As to payrolls themselves, I expect the three month average of 272,000 to continue to slowly decline, which suggests a monthly number below 250,000. Because tax withholding came in negative YoY for the second month in a row in December, I will be on particular alert for a downside outlier compared with recent reports.

Additionally, I will be looking to see if there is deterioration in some leading employment metrics that haven’t rolled over yet; specifically construction and manufacturing employment. Since the weekly Staffing Index has also weakened in the past month, I will also be looking to see if temporary employment continues to decline. 

November JOLTS report consistent with a continued “hot” labor market

 - by New Deal democrat 

The JOLTS report for November showed both continuing decelerating trends in some series, but overall a picture of a labor market that continued “hot.”

Here’s the graph I ran one month ago of job openings, hires, quits, and total separations:

Now here is an update for the past 2 years of all four series:

Three of the four series - openings, hires, and total separations - show a pattern of continued deceleration since the beginning of this past spring, although only hires made a new 12+ month low is this report. Only quits appear consistent with a stabilizing market - although they too could be read as decelerating.

At the same time, both openings and hires continue at levels above any month that predated the pandemic.

In the eight years before the pandemic, layoffs and discharges averaged 1800 +/-100 monthly, with a low of 1500. Since the end of the pandemic lockdowns, they have averaged 1400 +/-100. At 1350 in November, they continue right in that range:

Taken as a whole, the JOLTS data for November implies a hot labor market; just not as hot as before.

December manufacturing, new orders both decline further, to readings even more on the cusp of recession

 - by New Deal democrat

I described last month’s ISM manufacturing reading as being one “on the cusp of recession.” Well, this month’s reading was even cusp-ier.

To recapitulate, this index has a very long and reliable history. Going back almost 75 years, the new orders index has always fallen below 50 within 6 months before a recession. Recessions have typically started once the overall index falls below 50, and usually below 48.

This is the second straight month that the index was below 50, declining another -0.6 to 48.4. As noted above, per the ISM itself, typically recessions have not begun until this index falls below 48, and as you can see below it came close in 2012 and 2015 without a recession happening. 

Meanwhile the new orders subindex declined another -2 to 45.2, a new expansion low and the 6th time in the past 7 months that it has been below 50:

Like I said, cusp-ier.

Note that industrial production, the King of Coincident Indicators, has declined in the past two months and looks very much like it has been in the process of peaking (blue the graph below), while manufacturing employment (red) has still been rising as of last month’s jobs report:

I don’t think a recession will start until we see those manufacturing employment numbers starting down. We’ll see in two days.

2023 data begins with another lesson: the remedy for high prices is - high prices

 

 - by New Deal democrat

And so, another year begins. And kicks off with a look at the leading housing sector. And furthermore, there is even some good news.

Total construction spending in November rose 0.2% for the month, while the more leading residential construction spending declined -0.5%. While total construction spending is only down 0.6% from its recent high in July, residential construction spending is down -8.1% from its recent peak last May:

This is in line with the steady drumbeat of negative news in the housing sector for the past year.

Generally speaking, residential construction spending comports with the number of housing units under construction. But in 2022, like in 2018-19, spending (blue) has declined while the number of units under construction (red) has risen slightly:

The answer probably lays in the costs of construction materials, for which there is a special inflation index, shown in gold YoY below compared with the YoY% change in residential construction spending:

The cost of materials increases and decreases with a lag once there is a boom or bust in construction. This is what happened in 2018-19, and it happened in 2022 as well. The cost of construction materials, which was up as high as 35% YoY one year ago, as of November was only up 0.6% YoY!

The remedy for high prices is - high prices. The good news is, with the complete abatement in the rise in the price of construction materials, some of the pressure is taken off of construction sales. 

As I’ve already mentioned several times, while I am watching for coincident indicators like employment and consumer spending to turn down, I am already on the lookout for a positive turn in some long leading indicators. And the abatement of construction costs increases in the housing sector is one such sign.