Weekly Indicators for May 23 - 27 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

Few changes to the headlines, but lots of churning underneath.

People seem to have jumped the gun on recession, thinking one is either here or imminent. It’s not here, and it isn’t imminent. I wonder if people will get complacent later in the year, thinking we have dodged a bullet. That probably won’t be true either.

In any event, clicking over and reading will bring you right up to the moment on the long leading, short leading, and coincident readings on the economy, and bring me a little pocket change.

Real income and - especially - spending increase in April, but households are getting much more overextended

 

 - by New Deal democrat

In April nominal personal income rose 0.4%, and spending rose 0.9%. March’s spending was revised up from 1.1% to 1.4%. In more good news, the personal consumption deflator, i.e., the relevant measure of inflation, rose only 0.2%, so real income rose 0.2%, and real personal spending rose 0.7%. So far, so good.

While both real income and spending are well above their pre-pandemic levels, I have stopped comparing them with that, but instead with their level after last winter’s round of stimulus. Accordingly, the below graph is normed to 100 as of May 2021: 

Since then spending is up 3.3%, while income has declined -1.0%.

Comparing real personal consumption expenditures with real retail sales for March (essentially, both sides of the consumption coin) shows big increases in both:

The one fly in the ointment is that, as a result, the personal saving rate declined another -0.6% from a revised 5.0% in March to 4.4% in April.  The below graph of the last 60+ years subtracts 4.4% from all months, so that the current reading is shown as 0:

Usually the savings rate has tended to decrease as expansions grow longer, leaving consumers more vulnerable to shocks (e.g., gas prices). The current value is the lowest of any period except the two months after 9/11, and the 2004-2008 period when home equity refinancing from the last housing bubble was all the rage. In other words, so far consumes are making up shortfalls by digging into savings or tapping another source of credit, probably home equity. 

This is very concerning late cycle consumer behavior, and leaves households very vulnerable to further prices increases in, e.g., gasoline. But it may continue until house prices inevitably break.

Initial and continuing jobless claims continue moderating trend

 

 - by New Deal democrat

Initial jobless claims declined 8,000 to 210,000 last week, continuing above the recent 50+ year low of 166,000 set in March. Meanwhile the 4 week average rose by another 7,250 to 206,750, compared with the all-time low of 170,500 set seven weeks ago.  Continuing claims also rose from their 50 year low of 1,317,000 set last week to 1,346,000:

Initial claims have trended slightly higher over the past 2 months. This continues to indicate a little cooling in the white hot employment market, which nevertheless remains  the brightest spot in the entire economy.

Real money supply declines sharply; another leading indicator for recession next year

 

 - by New Deal democrat

Real M1 declined -0.8% in April, and real M2 declined by -0.7%, following March declines of -1.0% for each:

These have been the sharpest monthly declines since 2005:

Real money supply is a long leading indicator, as shown in the below graph of both real M1 and real M2 going back over 60 years (shown in log scale to prevent inflation from showing earlier periods as mere squiggles):

Here is a close-up of the past 10 months showing both:

Real M1 is at a 9 month low. Real M2 is at a 12 month low.

Real M2 fell out of favor after failing to actually decline YoY prior to the 2001 and 2008 recessions, but a YoY% decline in real M1 and a real YoY% gain of M2 of less than 2.5% is nevertheless an excellent leading indicator for recession:

Again, the short term view shows that real M1 is only up 0.7% YoY (and if the trend continues, will be negative YoY in one month). Real M2 is already negative YoY:

Real money supply is now another negative leading indicator for recession next year.

New home sales get walloped

 

 - by New Deal democrat

New single family home sales got walloped in April, declining -16.6% for the month compared with March, and down -26.9% from one year ago. Measured from their most recent peak last December, they are off -29.6%, and measured from their pandemic peak of August 2020, they are down a whopping -43.0%! :

In the long term perspective, a decline like this is usually recessionary:

But not always: from November 1965 to September 1966, sales declined -41.9%; from March 1986 to January 1988, they declined -33.5%; and from December 1993 through February 1995, they declined -31.2% - in each case without a recession following, although in each case real GDP decelerated sharply to nearly zero, even if it remained positive.

Further, new home sales are heavily revised after the first report. It is not unusual at all for big monthly moves like this to suddenly look much less severe when the number gets revised one month later. I would not be surprised in the slightest if that happened to this month’s cliff dive, when next month’s report comes out.

As to prices, in the first graph above note that the median price of a new home continued to rise (red). As shown in the below graph of YoY changes, prices are still up 19.6% from one year ago, even as sales are down:

This confirms for the umpteenth time that sales lead prices, as shown in the longer term YoY perspective (note: graph averaged quarterly to cut down on noise):

In the past prices have continued to rise sometimes for over a year after sales went into steep declines.

Finally, here is a comparison of housing starts (blue), single family permits (red), and new home sales (gold), all normed to 100 as of February 2020:

Although it is a very noisy number, new home sales frequently do peak and trough before either of the other two numbers - and it appears they did so again during this expansion. Keeping very firmly in mind my above note about revisions, today’s new home sales number suggests that more substantial declines in permits, and ultimately starts, will soon take place. This does not portend recession now, but is a significant piece of evidence adding to the heightened possibility of recession next year.

Inflation reversals as unique markers of Boom and Bust cycles vs. Fed interventions

 

 - by New Deal democrat

As I’ve already mentioned a couple of times, I am seeing posts from the usual DOOOMERS warning that a recession is imminent, if we’re not already in one. Typically - again, as per usual - they cite data that they never bothered with before, and won’t bother with again when it turns up, in support of their claims.

These cherry-pickers have strong narratives, so they get a lot of dedicated (and probably a lot of new, naive) followers. But they’ve been wrong many times before, and they’re probably wrong again now.

Another issue I’m seeing is people projecting the negative or decelerating trends of the last few months ahead. That’s also very typical, and also makes for lots of mistakes. While it is OK to use, e.g., a short leading indicator to project a coincident indicator forward, it is a mistake to project that *same* indicator forward simply because of its recent trend.

I’ve also mentioned before that we are currently in a “boom and bust” type cycle that we used to have before the Federal Reserve actively managed interest rates starting in the late 1950s. So let me very briefly compare an important difference between the two types of cycles.

Here are the Boom and Bust cycles from the end of WW2 through the 1950s:

Note that the Federal Reserve basically stayed on the sidelines. In fact, the yield curve never inverted at all until late in the 1950s - and yet there were two complete cycles, typified by sharply accelerating commodity and consumer inflation, which abruptly reversed coursed an decelerated to close to if not outright deflation at the onset of recession. This occurred because consumers could not keep up with the price increases. Typically mortgage rates (not shown) also rose enough to cause big changes in monthly house payments.

Now here are the 1970s stagflationary cycles:

There cycles were also typified by high inflation, but the Fed intervened early, raising rates substantially and (again not shown) causing an inversion of the yield curve. The recessions happened before either commodity or consumer inflation decelerated that much - in two cases not at all!

Now, here is our current cycle:

As in the two immediate post WW2 cycles, the Fed has barely intervened - if you squint, you can see the slight rise in the Fed funds rate from zero at the far right. But also, neither commodity nor consumer inflation has cooled at all on a YoY basis.

Until one or both of those markers - an inverted yield curve or a sharp decline in inflation - occur, I do not see any recession in the immediate future.

I plan on examining this in much more detail in a post at Seeking Alpha.

Weekly Indicators for May 16 - 20 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

The yield curve tightened some more this week (but did not invert).

Meanwhile, I am seeing a fair amount of commentary suggesting that a recession is imminent. This is jumping the gun, and is mainly relying on the downturn in the stock market as well as the increase in gas prices. These are short leading indicators, but only signal correctly once the long leading indicators have been in place for a sustained period of time - which they have not.

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

Coronavirus dashboard for May 20: signs of a peak in BA.2.12.1 in bellwether jurisdictions; is BA.4/BA.5 next?

 

 - by New Deal democrat

With no significant economic data today, let’s take a look at where the BA.2.12.1 COVID wave is.

Nationwide cases (thin line below) have increased about 3.5x from their bottom of roughly 26,700 five weeks ago, to just over 100,000. Meanwhile deaths (thick line) appear to still be in the process of making a bottom at under 300 per day:

A longer term perspective shows that, compared with the Omicron peak, both deaths and cases are comparatively very low:

The CDC variant update shows that, as of last week, the BA.2.12.1 variant was causing just under 50% of cases nationwide. Its share has been increasing by only about 6%-7% per week nationwide in the past month:

As usual, different regions of the country show very different progress of the BA.2.12.1 variant:

NY, NJ, and PR remain the epicenter, with BA.2.12.1 constituting a majority of cases along the rest of the East Coast and, surprisingly, in the central Plains. Meanwhile it constitutes a distinct minority of cases along the West Coast.

Focusing on the bellwether region, in NY, NJ, and PR, BA.2.12.1 made up almost 75% of cases last week:

And this week showed the first signs that BA.2.12.1 cases are peaking in the Northeast and portions of the upper Midwest that also began to rise early this spring:

Puerto Rico has been particularly hard hit, so I am showing it separately, but it too is apparently peaking:

New Jersey has still been rising, with a possible peak beginning to form in the past few days:

With the exception of PR, where cases increased 30x, and Vermont, where cases only increased roughly 2.5x, the other bellwether States increased roughly 5x from their March bottoms to their present peaks.

If we extrapolate the experience of the bellwether jurisdictions to the rest of the country, we can expect cases to continue to rise for about another month, with a peak of about 140,000 -150,000 cases. A similar increase in deaths would put a peak of roughly 1400-1600/day in about 2 months.

With ever more evidence that reinfections are becoming common, plus plenty of evidence that the Omicron variants can break through vaccinations (although it must be emphasized that cases in vaccinated people are typically much milder, with much less risk of poor outcomes), we meanwhile await the inevitable next variant, which may or may not be the BA.4 and BA.5 lineages from South Africa, which are now being found in almost every State albeit in very small amounts.

Initial claims: a little cooling in the white hot employment market

 

 - by New Deal democrat

Initial jobless claims rose 21,000 to 218,000, continuing above the recent 50+ year low of 166,000 set in March. The 4 week average also rose by 8,250 to 199,500, compared with the all-time low of 170,500 set six weeks ago. On the other hand, continuing claims declined another -25,000 to 1,317,000, yet another new 50 year low (but still well above their 1968 all-time low of 988,000):

Initial claims have trended slightly higher over the past 2 months, which, while it shows some cooling in the white hot employment market, is nowhere near a cause for concern at this point. This continues to be the brightest spot in the entire economy.

Housing permits and starts decline slightly, but housing still an economic positive over the next 12 months

 

 - by New Deal democrat

Housing permits and starts declined, but not by much, in April.

Importantly, while typically permits, especially single family permits, lead these series, in the past year there has been a unique divergence between permits and starts due to construction supply shortages.  This has been reflected in the number of housing units authorized but not started increasing to 50+ year records. In April that number declined by a tiny 0.6 million annualized to 293.3: 

As a result, I am paying the most attention to the three month average of housing starts (blue in the graph below) for the time being, as these reflect actual economic activity, vs. permits (gold) which don’t. And that three month average increased slightly to 1.743 annualized, a new 15 year record:

Meanwhile, single family permits (red above, right scale) declined .53 million units annualized to a 5 month low of 1.110. This is -9% off from their peak in January 2021, and does give us the best signal as to where housing is going in the near future.

And what does that future hold? Below are the YoY% change in starts (blue) and single family starts (red), vs. the YoY change in mortgage rates (inverted, *10 for scale), showing that mortgage rates are higher by 2% YoY (shown as -20%). The last time this drastic an increase in mortgage rates YoY happened was in 1994. Note that housing permits and starts declined 20% in the next year, and changes in mortgage rates in 1999 and 2018 resulted in similar declines in permits in starts in 2000 and 2019.  At present the three month average of starts is still 13% higher YoY, while single family permits are now down -4% YoY:

The “demographic tailwind” that buoyed housing activity 5 and 10 years ago has dissipated, as the number of 25-35 year old first time buyers has stopped increasing. Thus I expect a 20% YoY decline in housing permits and starts to manifest in roughly the coming 12 months. But while ordinarily that would be a major negative long leading indicator, actual construction starts mean the downturn will be delayed until the 50+ year record backlog has been cleared - which might take another 6 to 12 months. Since starts are the actual, hard economic activity, this indicates that housing is still going to make a positive to the economy looking out ahead 12 months.

Industrial production continues to show excellent growth

 

 - by New Deal democrat

I call industrial production the King of Coincident Indicators, because it speaks volumes about where the economy is at any particular moment, and empirically is the indicator whose peaks and troughs coincide most definitively with NBER recession dates.

In April the story told by industrial production continued to be very positive, as total production rose by 1.1%, and manufacturing production rose by 0.8%.  The former made yet another new record high, while the latter has only been exceeded in a 12 month period from spring 2007 through winter 2008:

On a YoY basis, total production is up 6.4%, while manufacturing is up 6.0%. Compared with the last 40 years, and particularly the last 20, this is excellent  growth:

Taken together, this morning’s economic reports show us a consumer who is still doing OK, and a production sector that also continues to perform well.

Real retail sales signal further expansion, but also continue to suggest slower payrolls growth ahead

 

 - by New Deal democrat

Nominal retail sales for the month of April were up 0.9%, and previous months were revised higher. That means that , after inflation, real retail sales for April were up 0.6%, a very positive number.

Yesterday I wrote that, rather than a YoY comparison with last April, during the stimulus spending spree, the more important comparison was with last May. Although the direct YoY comparison is absolutely unchanged, vs. last May real retail sales were up 1.7%:

This is consistent with a relatively slow consumer-fueled expansion (a moderate expansion would be a number more like 2.5%-3.0% YoY), and not consistent with any imminent recession.

Next let’s turn to employment, because real retail sales are also a good short leading indicator for jobs.

As I have written many times over the past 10+ years, real retail sales YoY/2 has a good record of leading jobs YoY with a lead time of about 3 to 6 months. That’s because demand for goods and services leads for the need to hire employees to fill that demand.  The exceptions have been right after the 2001 and 2008 recessions, when it took jobs longer to catch up, as shown in the graph below, averaged quarterly through the First Quarter: 

Now here is the monthly YoY comparison through April:

The above graph is an excellent way to compare the relationship in a more normal expansion, viz., 2019, where real retail sales/2 was in the .3%-1.0% range, vs. last year, where they were in the 5% range. I have been expecting the blowout job numbers of about 500,000 per month to end in several months. This report is more evidence for that, since the comparison with last May is 0.85%. This suggests that monthly job gains are going to slow down to a range of about 100,000-300,000 per month by early autumn.

Finally, real retail sales per capita is one of my long leading indicators. Here’s what it looks like for the past 25 years:

These are up 1.4% since last May, and the highest of all time except for March and April 2021. While for that reason I can’t call these a positive, the recent rebound in no way resembles their declining pattern before the last two recessions, and switches the long leading signal from negative to neutral for this metric.

Will tomorrow’s real retail sales report forecast a recession, or just a continued slowdown?

 

 - by New Deal democrat

No economic data today of significance; but tomorrow one of my favorite economic indicators, retail sales, will be reported for April. Since real retail sales lead employment, and generally are a short leading indicator for the economy as a whole, I wanted to update on what I see as their importance right now.

Here are real retail sales per capita (red) vs. real aggregate payrolls per capita (blue), both normed to 100 as of last May (note: I chose May because of the stimulus fueled spending spree in March and April that abated by then):

As you can see, payrolls have continued to grow by about 10% since then, while real retail sales per capita have for all intents and purposes been flat for the 10 months since, up only 0.3% as of March.

Why is this important? Here is a look at the same two metrics going back 60 years measured YoY:

Two important relationships ought to jump out. First, while the relationship is noisy on a monthly basis, over the longer term real retail sales lead payrolls, usually on the order of about 6 months. Second, real retail sales being negative YoY for any sustained period of time is an excellent harbinger of recession. Not only have they turned negative YoY in advance of every recession in the past 50+ years, but on the few occasions where a recession did not follow a negative number that was sustained for more than a month or two - 1966, 1987, 1994, 2002 - there was a marked economic slowdown that was not far off from recession.

Now let’s take a look at the same numbers for the past 3 years:

Note that payrolls were up 20% YoY in April 2021, and real retail sales jumped 50%! Since the biggest previous advance was about 12% YoY, had I included this data in the long term chart above, everything else would have been squiggles.

Note also that real retail sales per capita were negative YoY in March. They will presumably remain negative in April, because they are being compared with the stimulus spending spree last April.  For purposes of a pre-recession marker, the real marker is whether they will be down compared with last May, after the spending spree. Since consumer prices increased 0.3% in April, retail sales must increase 0.3% just to keep pace. A decline of -0.4% or more would make them negative compared with last May.

Because my suite of long leading indicators has not indicated a recession this year, I am expecting real retail sales to escape such a negative reading. But not necessarily by much. At the moment, they are forecasting a marked slowdown in the economy continuing this year. We’ll get the update tomorrow.

Weekly Indicators for May 9 - 13 at Seeking Alpha

 

 - by New Deal democrat

My Weekly Indicators post is up at Seeking Alpha.

One measure of how the Russia-Ukraine war has been “normalized” globally, is that industrial commodity prices have declined sharply - on the order of 25% - in the past two weeks, taking back their entire sharp increase at the start of hostilities.

Meanwhile, the Treasury yield curve has “normalized” somewhat more in the past several weeks. Despite that, the majority of financial indicators outside of the yield curve are decidedly negative.

As usual, clicking over and reading will bring you up to the virtual moment on the economy, and reward me just a little bit financial for the effort I make putting the news together.

Coronavirus dashboard for May 13: the virus will gradually become less lethal - because you can only die once

 

 - by New Deal democrat

COVID-19 is still a pandemic, and is gradually going to transition to endemic. A year ago I thought that between nearly universal vaccinations and an increasing percentage of the population already infected, the virus would wane into a background nuisance by now.

No more.  I am now thoroughly convinced that there will be an unending series of variants that will create continuing waves of new infections and, increasingly importantly, RE-infections. The percent of the population fully vaccinated (not even counting boosters) has come to a screeching halt at 66%. And even in jurisdications with high percentages of vaccinated people, like Vermont, Puerto Rico, and Rhode Island, new infections have continued to run rampant (although the death numbers have steeply declined with vaccinations). 

Rhode Island is particularly instructive, because 35% of the population had already had *confirmed* cases of COVID two months ago (which means that probably double that percentage, or 70%, had *actually* been infected), and 83% of the population was fully vaccinated. In other words, probably 95% or more of the population had either been vaccinated or previously infected. And yet, that was no protection at all against the BA.2 and BA.2.12.1 wave that began over a month ago.

Nevertheless, let’s look at the numbers.

BA.2.12.1 has gradually been becoming the dominant variant, per the CDC’s variant “nowcast” through last Saturday:

In about another month, BA.2.12.1 should be 90% or more of all infections.

BA.2.12.1 is already dominant in NY, NJ, and PR, constituting 66% of all cases:

BA.2.12.1 is also nearly half of all cases along the rest of the East Coast and, oddly, the northern Great Plains, but a much smaller percentage elsewhere, especially along the West Coast:

In the bellwether jurisdictions of NY, NJ, and PR, cases are still rising by 20%-30% a week:

To the extent there is good news, is that in most areas of Upstate New York, cases are flat or already declining. This is particularly true in the Central NY region, where BA.2.12.1 was first identified:

Cases tripled between March and April, but are down 30% since then. Even at peak, cases were only about 20% of their previous Omicron peak.

Nationwide cases have tripled since their bottom 5 weeks ago, but deaths have only started to rise in the past week:

Deaths will probably be near 1000/day in about a month.

The long term picture of deaths vs. infections shows that, with the exception of Delta, each successive wave has been *relatively* less lethal than the wave before it (thick line is deaths; thin line ins infections):

This probably shows us the longer-term evolution of the virus. It will gradually move from pandemic to endemic. This is not necessarily because the virus will become intrinsically less deadly. It is more likely going to be because over time (several years) an increasing percent of the population will finally get vaccinated, and repeated re-infections will give the population more inherent resistance. Meanwhile the virus will continue to evolve to become ever more transmissible, as those mutations most capable of successfully infecting the vaccinated and the previously infected population will reproduce more. Meanwhile, to be blunt, that portion of the population most susceptible to lethal outcomes, like the institutionalized elderly, will already have been killed by the virus, and they can only die once.

New jobless claims rise slightly, but continuing claims make another 50+ year low

 

 - by New Deal democrat

Initial jobless claims rose 1,000 to 203,000, continuing above the recent 50+ year low of 166,000 set in March. The 4 week average also rose by 4,250 to 192,750, compared with the all-time low of 170,500 set five weeks ago. On the other hand, continuing claims declined -44,000 to 1,343,000, yet another new 50 year low (but still well above their 1968 all-time low of 988,000):

The graph above shows a slight trend of increased new layoffs, which may or may not  just be noise. In any event, the tightest market for keeping a job in half a century continues. With so many other data points weakening, this is probably the brightest spot in the entire economy.

With the Fed already having begun to “stomp on the brakes,” inflation is still running very hot

 

 - by New Deal democrat

As promised, here is my second post on the April CPI number.

The YoY advance in consumer prices, +8.3%, is down from last month’s 8.6%, which was the highest 12 month rate since 1981. As I suggested last month, “the spike in gas prices may be - to use a recently dreaded word - transitory,” since gas prices had declined 5% month over month at the time of last month’s report. In the April report, energy prices declined -2.7%, and since they are 8% of the total weighted, that was certainly helpful. So far this month they have been more or less steady.

There was also good news in that the price of used cars and trucks fell -0.4% in April, after declining -3.8% in March. They constitute another 4% of the weighting of the CPI. As a result, the price of used vehicles was “only” up 22.7% YoY, vs. 41.2% YoY in February (which was the highest YoY increase in 70 years):

As I noted last month, used vehicle prices are down because they have become unaffordable for enough people that sales of such vehicles has also turned down.

Now let’s focus on the housing component of CPI, which constitutes 32% of the total input. There, both rent, and the much larger CPI component of owner’s equivalent rent, which is how house prices are figured into inflation, rose 0.6% and 0.5% respectively, for the month, and are up 4.8% YoY, respectively. This is the highest YoY rate of housing inflation for either measure in over 30 years:

I continue to expect the housing component of inflation to worsen considerably. That’s because, as I first pointed out half a year ago, the major house price indexes - the FHFA index and the Case Shiller index - lead owners equivalent rent by roughly 12 to 24 months, particularly in major moves.

The below graph shows the YoY% change in both house price indexes in shades of blue, compared with the YoY% changes in the CPI measures of rent of primary residence, and owners’ equivalent rent in shades of red:

There have been 3 major pulses of house price increases in the last 25 years: in 1997-98, 2004-06, and 2020-present. In each case, after roughly a 12-24 month lag, both CPI rent measures surged as well. That’s because big surges in house prices make renting more attractive (or necessary for those on more limited budgets); this drives more demand for apartments, which drives rent increases.  Further, the current rise in house prices of nearly 20% YoY, is significantly worse than either of the previous two - and has been up almost 20% YoY for the last 8 months running. With CPI housing inflation already at a 20 year high, we can further record CPI housing increases as this year progresses.

As I have also pointed out before, before owners equivalent rent is fully passed through into CPI, total inflation has normally cooled, as shown in the graph below:

That is because, faced with surging inflation, the Fed has embarked on a series of rate hikes (shown in black above) that culminated before owners equivalent rent peaked. The economy buckled, recessions started, and total inflation subsided as a result, before owners equivalent rent had fully peaked.

Unfortunately, even after the record surge in house prices was in full swing over a year ago, the Fed stayed on the sidelines. Now, as both rents and owners’ equivalent rents surge as well, and the Fed has so far only increased rates by 0.75%. Last month I wrote that “now the Fed is almost certainly going to stomp on the brakes, with a hard landing to follow;” and I would say that last week’s 1/2 point increase, the first in 28 years, was just the beginning of that stomping.

Let me conclude this month’s installment by exactly restating my closing paragraph from last month’s installment, because it certainly is the object lesson for the Fed:

It’s too late for this cycle. But with three examples of surging house prices feeding through with a delay into the CPI in the past 25 years, in the future the Fed simply *must* pay attention to house prices as reflected in those indexes. Better a small tamping down of the economy early than a major sudden stop later.