Weekly Indicators for March 25 - 29 at Seeking Alpha

 

 - by New Deal democrat

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

After several weeks of flirting with full recovery, the remaining regional Fed’s weighed in with their monthly manufacturing indexes, and they all went in the tank again. On the bright side, payroll tax withholding has had its best month in the fiscal year so far.

As usual, clicking over and reading will bring you up to the virtual moment with the economic data, and reward me a little bit for my efforts in organizing it for you.

Real personal income and spending: if last month was “Goldilocks”, this month was close to “anti-Goldilocks”

 

 - by New Deal democrat

Personal income and spending has become one of the two most important monthly reports I follow, because it nets out the impacts of higher interest rates and abating inflation due to the unlinking of the supply chain. To repeat, the big question this year is whether the contractionary effects of Fed tightening have just been delayed until this year, or whether the fact that there have been no rate hikes since last summer mean that the expansion will strengthen.

Because real personal spending on services for the past 50 years has generally risen even during recessions, the more leading components of this report have to do with spending on goods. Additionally, there are several components that form part of the NBER’s “official” toolkit for determining when and whether a recession has begun, including real spending minus government transfers, and real total business sales.

In February, nominally income rose 0.3%, while nominal spending rose a sharp 0.8%. Prices as measured by the PCE deflator increased 0.3% for the month, meaning that in real terms income were unchanged and spending (after rounding) rose 0.4%. Since just before the pandemic real incomes are up 7.0%, and spending is up 10.7% (NOTE: Data in all graphs below except for YoY comparisons, and the personal saving rate, is normed to 100 as of just before the pandemic):

On a YoY basis, the PCE price index is up 2.5%, just above January’s three year low of 2.4%. In the previous 16 months, the YoY measure had been declining at the rate of 0.25%/month, suggesting that it would hit the Fed’s 2.0% target this spring:

This month’s slight increase is probably just noise due to rounding, as the monthly change in the YoY rate was only 0.02%.

As I indicated above, for the past 50+ years, real spending on services has generally increased even during recessions. It is real spending on goods which declines. Last month real services spending rose 0.6%, while real goods spending rose 0.1%:

As per form, real services spending has risen consistently since the pandemic, while goods spending has been somewhat of a mirror image of gas prices, which peaked in June 2022.

Real durable goods spending tends to turn before non-durable goods spending. The former rose 1.2% for the month, reversing about half of January’s very sharp decline, while the latter declined -0.6% for the second such drop in a row:

Durable goods spending had been very much affected over the past several years by the shortage of new vehicle inventory, which has largely abated as 2023 progressed.

Another important metric for the near future of the economy is the personal savings rate. In February it declined -0.5% from an upwardly revised January’s rate of 4.1% to 3.6%. This longer term look shows how the present compares with the all time low rate of 1.4% in 2005:

On the positive side, the declining trend in this rate since last May indicates a lot of consumer confidence. But on the negative side it remains close to the all time low readings of 2005-07, indicating vulnerability to an adverse shock. One of my forecasting models uses such a shock as a recession warning indicator. In any event, there is no such shock indicated at the moment.

Also as indicated above, the NBER pays particular attention to several other aspects of this release. Real income excluding government transfers (like the 2020 and 2021 stimulus payments) declined -0.1% for the month, the first such decline since November 2022:

This has been something of a mirror image of gas prices, which not coincidentally have been rising sharply in recent weeks.

Finally, the deflator in this morning’s report is used to calculate real manufacturing and trade sales (with a one month delay), another metric relied upon by the NBER. This declined sharply for January, by -1.4%, more than reversing December’s downwardly revised 0.7% increase:

I described last month’s report as being pretty close to “Goldilocks.” Well, this morning’s report for February was something of “anti-Goldilocks.” Real spending on durable goods is off peak for the second month in a row. Inflation YoY did not decelerate further. Real business sales also declined sharply. Spending rose - the most significant continued positive in the report - because consumers went into their savings. 

While, as I noted above, it could just be noise, there is some evidence of a real slowing in YoY spending on goods in general and durable goods in particular:

As this has historically been the first sign of consumer distress, it will need to be watched extra carefully.

Initial claims remain somnolent, while continuing claims pop slightly

 

 - by New Deal democrat

The divergence in the trends between initial and continuing claims continued this week, as the former continued their somnolent good news, while the latter had a slightly disconcerting pop.

Initial claims declined -2,000 to 210,000, and the four week average declined -750 to 211,000. On the other hand, with the usual one week delay, continuing claims rose 24,000 to 1.819 million:

The first two are in the same range they have been in for the past 4 to 6 months, while continuing claims are at their highest number but for 2 weeks in the past two years.

On the more important YoY basis for forecasting purposes, initial claims are down -9.5%, and the four week average is down -7.0%, the best YoY comparison in the past 12 months. Continuing claims are up 7.2%, but this is the second lowest YoY comparison in the past 12 months:

.

Now let’s update the forecast of the Sahm rule. With last month’s 2 year high in the unemployment rate, I’ve been wondering whether, because unemployment includes both new and existing job losses, it followed continuing claims more than initial claims (although initial claims leads both). The historical graphs, which I posted two weeks ago so I won’t repeat now, indicated that continuing claims also lead the unemployment rate, although with much less of a lead time.

With that in mind, here is this week’s update of the post-pandemic record for the past two years on a monthly YoY% basis (unemployment rate YoY shown in red):

Since on a monthly basis so far initial claims are significantly lower YoY, and continuing claims a little over 7% higher, I expect the unemployment rate to be either unchanged or slightly higher YoY in the next several months. This would take it back down to the 3.7% area.

Here’s the same comparison on an absolute rather than YoY basis:

This similarly suggests a slight decline in the unemployment rate to 3.7% or 3.8%. Since the lowest three month average of the unemployment rate in the past 12 months was 3.5%, it would take an increase to 4.0% averaged over three months to trigger the Sahm rule. Both initial and continuing claims indicate that is not going to happen in the immediate future.

A detailed look at manufacturing, and an update on frieght

 

 - by New Deal democrat

As I wrote on Monday, the big question for this year is whether the recessionary effects of the Fed rate hikes have just been delayed, or whether, because the rate hikes have stopped, so has the headwind they normally produce. Watching manufacturing and construction, especially housing construction, is what I expect to supply the answer.

On Monday I focused on housing construction and sales. Since there’s no big economic news today, let’s take a more detailed look at manufacturing.

There are three manufacturing metrics that are “official” components of the index of Leading Economic Indicators: the ISM manufacturing new orders subindex, average weekly hours of manufacturing workers, and capital goods new orders. Note that since manufacturing makes up less of the US economy than it did in the 20th century, it takes a steeper downturn in these components to be consistent with a recession than it used to.

Let’s start with the ISM manufacturing index and its new orders component, which were last updated at the beginning of this month:

These are in a definite uptrend, although neither has definitively broken above the dividing line of 50 which separates expansion from contraction.

Next, let’s compare capital goods new orders, which were reported yesterday for February (dark blue), with industrial production (red), a premier coincident indicator, and also manufacturing employment from the payrolls survey (gold), all YoY for easier comparison. First, here’s the historical look:

Note that capital goods orders are very noisy (one reason I typically don’t highlight them), and did not turn negative in advance of the Great Recession. Nevertheless, they generally do turn in advance of industrial production, which typically turns in advance of manufacturing employment.

A similar dynamic has existed since the pandemic:

YoY gains in new capital goods orders decelerated first, followed by industrial production, followed last by manufacturing employment. The two first metrics are generally flat YoY, and manufacturing employment is only slightly positive.

Now let’s compare the average manufacturing workweek (black) with capital goods orders, both again YoY and first historically:

The average manufacturing workweek is even more leading than capital goods orders, turning first, but is even more noisy, and over-sensitive to the downside. That is, sharp declines in manufacturing hours always happen before recessions, but a downturn in hours frequently does not presage a recession at all.

Here’s the post-pandemic look at these two metrics:

Hours turned negative first, and if anything are getting “less bad” in recent months, while capital goods new orders, as already indicated, are essentially flat YoY.

Put the data together, and you get a relatively mild manufacturing recession in 2023, which appears to be recovering this year, as the ISM new orders index and the manufacturing workweek are trending higher (if not positive yet), while capital goods orders and production are flat. Manufacturing employment growth -the least leading metric - appears still to be decelerating. 

Before I conclude, let’s take a brief updated look at transportation. Remember, the theory is that everything that is produced must be shipped to market. So to confirm a trend, both should be moving in the same direction.

Here is the Freight Transportation Index through January (dark blue), the noisier and more negatively biased Cass Transportation Index (light blue), compared with heavy weight truck sales which has been an excellent leading indicator (red):

In February, preliminarily there was a steep drop in excess of -3.5% in the Freight Transportation Index, but it has not been updated at FRED, possibly because at least one component (air freight) was withheld pending further seasonal adjustments.

There was a steep drop off in all of these metrics late last year following the Yellow Freight bankruptcy. The Cass Index and truck sales may be showing the beginning of a recovery from that, although the data is too noisy to say anything definitive.

One final note: we’ll bet a detailed updated look at the spending side of construction and production via the personal spending report this Friday.

Repeat home sales price declined slightly in January; expect deceleration in the CPI measures of shelter to continue

 

 - by New Deal democrat

As I noted again yesterday, house prices lag home sales, which in turn lag mortgage rates. Yesterday we got the final February reading on sales. This morning we got the final January read on prices, for repeat sales of existing homes.

Last week’s report on existing home sales showed a sharp increase in February, a repeat of the seasonally adjusted sharp increase last February, which was almost completely taken back over the next two months. YoY sales remained down by over 3%, but the median price of an existing home remained higher by 5.7% - very much *unlike* new homes, where sales have firmed, but price remain almost 20% down from their peak.

This morning the FHFA purchase only price index through January declined -0.1% on a seasonally adjusted monthly basis, while the YoY gain decelerated from 6.6% to 6.3% YoY. Meanwhile the Case Shiller National index declined -0.4% for the month of January on a seasonally adjusted basis, but accelerated from 5.1% to 6.1% YoY. Since the FHFA index (dark blue) has frequently led the Case-Shiller index (light blue) at turning points by a month or two, I put more weight on that Index.

But first, here’s what the monthly numbers look like for the past five years:

Next, here is the long term graph of both of them below, compared with the CPI for shelter (red, *2.5 for scale) shows that the YoY gain particularly in the FHFA index is actually similar to gains during the majority of the past 25 years outside of recessions:

Here’s the close-up view of the last five years, better to show the current trend in both prices and shelter inflation:

For the next seven months the comparisons will be against an average 0.7% increase per month in 2023. Because house price indexes have shown a demonstrated lead over shelter costs as measured in the CPI, if present trends continue, as these YoY comparisons drop out, the YoY deceleration in OER in the CPI index should continue towards its more typical rate of between 2.5% to 4% YoY in the ten years before the pandemic. How soon it gets there will have a lot to do with when the Fed might begin to lower interest rates. 

As mortgage rates remain rangebound, so do new home sales

 

 - by New Deal democrat

Let’s begin this post by putting why I am watching new home sales in context.

The economy was kept out of recession last year, despite aggressive Fed rate hikes, in large part by commodity price deflation, much or most of which was triggered by the un-kinking of supply chains after the pandemic. That gale force economic tailwind is gone, but the Fed rate hikes remain. So the big question for this year is whether the effects of the Fed rate hikes have just been delayed, or whether, because the rate hikes have stopped, so has the headwind they normally produce. Watching manufacturing and construction, especially housing construction, is what I expect to supply the answer.



So, to the data, starting with my usual caveat: while new home sales (blue in the graphs below) are the most leading of the housing metrics, they are noisy and heavily revised. There was little this month, as January was only revised higher by 3,000 to 664,000. February gave back -2,000 of that, coming in at 662,000 annualized. In the below graph I also show th slightly less leading but much less noisy single family permits (red, right scale):

Before I discuss this graph a little further, let’s compare sales with the even more leading metric of mortgage rates. Both are shown YoY (rates inverted, and *100 for scale):

Except for the distortion created by the pandemic shutdowns in spring 2020 and the YoY comparisons in spring 2021, we see that new home sales have almost simultaneously followed the trajectory of mortgage rates: the higher the mortgage rate YoY, the lower new home sales YoY. Because mortgage rates remain slightly elevated compared with one year ago, the progress YoY in new home sales has almost completely stopped. As a result, I expect single family permits to follow the more noisy downward trend in month over month comparisons in sales in the immediate future.

In other words, so long as mortgage rates remain in the 6%-7% range, I expect new housing sales and construction to stall out as well, but not to decline significantly either.

Finally, as I always reiterate, prices lag sales. So here’s the YoY update on median prices (red), which are not seasonally adjusted (red) compared with YoY sales:

Again, aside from the spring 2020 and 2021 YoY distortions due to the pandemic lockdowns, we see that prices followed sales higher, and then in 2023 followed sales lower. We will probably continue see negative YoY comparisons in prices for a few months more before they follow sales back higher YoY probably by late this year.

But the big takeaway remains that, generally speaking, I am not expecting much in the way of big moves in new home sales or prices until there is a significant change in mortgage rates.

Weekly Indicators for March 18 - 22 at Seeking Alpha

 

 - by New Deal democrat

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

With interest rates having come down from their highs of five months ago, I anticipated that the shorter leading indicators might follow suit and improve. This week, there was some more evidence that they have.

As usual, clicking over and reading should bring you up to the virtual moment as to the important indicators for the economy, and will reward me with a little pocket change.

Signs of a thaw in the frozen existing homes market, but a very long way to go

 

 - by New Deal democrat

There’s no big economic news today, but yesterday existing home sales were released. While they have historically constituted up to 90% of the entire market, they have much less economic impact than new home sales, which involve all sorts of construction activity, followed by landscaping, furnishings, and other sales.

Since the Fed started raising rates two years ago, the two markets have gone in entirely different directions, since existing homeowners are largely trapped by new or refinanced mortgages in the 3% range, while builders of new homes can make all sorts of accommodations to entice buyers even with mortgage rates near 7%.

As a result, the existing home market for all intents and purposes froze. Yesterday’s report on existing home sales showed that there is a little thawing going on - but hold the pom poms for now.

The seasonally adjusted annual pace of existing home sales rose 38,000 to 438,000 in February, vs, 4,530,000 one year ago. But as the comparison with non-seasonally adjusted data shows, February is typically one of the slowest sales months of the year. Thus a relatively small change - caused by, say, unusually accommodating winter weather - can make a big difference in the seasonally adjusted rate:

When we step back and look at the data for the past 5 years, we can see that there was a similar jump in February of last year as well, that made for the highest seasonally adjusted total for the entire year:

As usual, take one month’s seasonally adjusted data, especially during winter months, with an extra grain of salt.

That being said, there are signs of some improvement in the market, as both total active listings (blue) and new listings (red) housing inventory has been higher YoY for the past four months:

For new listings, this is the first sustained uptick in three years.

But if this is a thaw, it is only the beginning of the thaw, as we can see when we look at the absolute levels rather than the YoY changes (note separate scales):

The first thing to point out is that this data is not seasonally adjusted. Typically listings bottom in December or January, and improve until mid year. So we need to compare this February with February in previous years.

Before the pandemic, total active listings in February averaged just over 1 million units. New listings averaged about 425,000 for the month. After the pandemic struck, both really plunged, with active listings in February bottoming at 347,000 in 2022, while new listings in February bottomed at 305,000 last year. In February this year, active listings totaled 665,000 and new listings totaled 339,000.

In other words, while there are definitely signs of improvement, the existing home market has a long ways - as in, about 400,000 more monthly active listings and 100,000 new monthly listings - to go.

The positive streak of news from initial and continuing jobless claims continues

 

 - by New Deal democrat

Initial and continuing claims once again continued their recent good streak. 

Initial claims declined -2,000 to 210,000, while the four week moving average rose 2,500 to 211,250. Continuing claims, with the typical one week delay, increased 4,000 to 1.807 million:

While these aren’t the 50+ year lows we saw 18 months ago, they’re not far off.

For forecasting purposes, the YoY% change for initial claims is -15.0%, while the four week average is down -10.4%. Continuing claims are now only up 0.2%:

Needless to say, these strongly indicate no recession in the next few months.

Because jobless claims can be used to forecast the “Sahm rule” for recessions, let’s update that as well.

With last month’s 2 year high in the unemployment rate, last week I write that U wondered whether, because unemployment includes both new and existing job losses, it followed continuing claims more than initial claims (although initial claims lead both). The historical graph, which I won’t repost this week, indicated that continuing claims also lead the unemployment rate, although with much less of a lead time.

Here is this week’s update of the post-pandemic record for the past two years on a monthly YoY% basis (unemployment rate YoY shown in red):

Since both initial and continuing claims YoY are virtually unchanged, or even lower, I expect the unemployment rate to recede to at least unchanged YoY in the next several months. This would take it back down to the 3.7% or 3.6% area.

Here’s the same comparison on an absolute rather than YoY basis:

This also suggests a lowering at least back down to 3.8%.

The bottom line: no triggering of the Sahm rule.

“Are you better off than you were four years ago?”

 

 - by New Deal democrat

No economic news today, so let me take a look at the supposed killer recent GOP meme that they claim is completely unanswerable: “Are you better off today than you were four years ago?”

This is based primarily on consumer sentiment reading as well as polling that has consistently shown that most people think that the economy is poor, even though they rate their own situation as doing well. Dan Guild has a model comparing consumer sentiment with Presidential approval ratings. He concludes that Biden will lose re-election unless consumer sentiment as measured by the University of Michigan does not improve to the index level of 82.

As I’ve pointed out in the past, Presidential approval correlates quite well with the price of gas. Here’s the historical record updated through last month:

Except for those periods late in recessions and shortly thereafter, when the price of gas has typically declined sharply but the unemployment rate is very high, generally speaking, the lower the cost of gas, the higher the consumer sentiment. Interestingly, except for the early part of the 1990s, when gas prices were ridiculously low, the correlation holds better nominally than adjusted for income.

But perceptions aside, are most people in fact worse off than 4 years ago? Here are two ways of looking at that.

First, as I noted several months ago, Motio Research has produced very good monthly estimates of median household income, that track very well with the (unfortunately) annual measure, which is only reported in September of the next year (thus, for example, the most recent official report even now is for the year 2022). Here’s their update through February:

Note that they recommend (in the small print at the bottom) ignoring the results from March through October 2020, when response rates were very skewed. Leaving those out, only three months during Trump’s term were better than the current reading, and two of those, at 112.7, were equaled by January’s reading. Only February 2020 scored higher, at 112.9.

A second way of measuring is to compare real average and aggregate wages. Below I show average hourly wages (blue), average weekly wages (red), and aggregate payrolls divided by population (black), all deflated by the CPI, and normed to 100 as of February 2020:

Most of the surge in average hourly and weekly earnings in 2020 and early 2021 were compositional. That is, most of the workers laid off during the worst of the pandemic were low wage service workers, in places like restaurants, bars, and entertainment venues. When those workers were rehired during 2021 and 2022, the averages went down, with a very big assist from gas prices spiking to $5/gallon. Since then, both measures have exceeded their levels from just before the pandemic.

Aggregate payrolls, even divided by population, and so including everyone who is not working, and not even in the labor force, hit their pre-pandemic level late in 2021 and haven’t looked back. They are *not* affected by compositional issues. And they are currently 2.9% higher, even on this per capita basis, than they were just before the pandemic.

So the truthful answer for most people to “Are you better off than you were four years ago?” is by any reasonable measure, “Yes.”

Housing construction rebounds in February, as permits and starts are stable and rebounding

 

 - by New Deal democrat

Yesterday I wrote of how Fed rate hikes had not translated into a decline in the amount of housing under construction, and without that I did not see how a recession could occur. And in reaction to January’s housing construction report I concluded, “To signify a likely recession, units under construction would have to decline at least -10%, and needless to say, we’re not there. With permits having increased off their bottom, I am not expecting such a 10% decline in construction to materialize.”

This morning’s report for February confirmed that sentiment, as single family permits, total permits, and housing starts lol rose, with starts making up almost all of their steep, and noisy, decline in January:

Single family permits, which are the most leading and least noisy of the above metrics, made a new 18 month high at 1.031 million annualized, which is 37% higher than their low of 748,000 annualized last January. They have made up about 60% of the ground they lost since the start of the Fed’s rate hikes over 2 years ago. Starts, which lag slightly and are much more noisy, have likely bottomed as well.

To reiterate: housing units under construction (red in the graph below) are the best measure of the actual economic activity in the housing market, and while these declined -8,000 for the month to a new nearly 2 year low, they are only down -2.6% from their peak. Single family units have actually increased 17,000 from their bottom last October, while multi-family units have declined -3.5% from their all-time 50+ year high last July:

The reason I have broken out single vs. multi-family construction is because, in response to record high house prices, builders turned to higher density, lower cost apartment and condo construction. Hence the record high last year in that metric.

Unsurprisingly, permits (blue in the graph below) lead housing units under construction (red), but a major disconnect has opened over the past 10 years, as especially large multi-unit developments take longer to complete:

I do expect a further gradual decline in total housing units under construction in the months ahead, to catch up with the decline in permits that bottomed one year ago. But I doubt we will cross the -10% threshold that it would normally take to signal a recession.

A large part of that is because mortgage rates have stabilized (red in the graph below), and since permits and starts follow mortgage rates, they have generally stabilized as well:

The best way to view this relationship is YoY, which is shown below:

Mortgage rates are slightly higher than they were 12 months ago. After a brief decline last spring, mortgage rates rose to multi-year highs last autumn. So unless there is a renewed major move upward in mortgage rates, I expect the YoY comparison by permits to turn positive by this summer sometime. That is going to translate into gains in permits and starts, and a likely bottom in housing units under construciton. 

As to prices, they generally follow housing sales. Because of the bifurcation in the housing market, with many existing homeowners frozen in place by their 3% existing mortgages, new home sales have rebounded, and new home prices are in a bottoming process. We’ll get more information later this week and next week when new and existing home sales are reported.

Manufacturing and construction vs. the still-inverted yield curve

 

 - by New Deal democrat

Prof. Menzie Chinn at Econbrowser makes the point that the yield curve is still inverted, and has not yet eclipsed the longest previous time between onset of such an inversion and a recession. So he believes the threat of recession is still on the table.

And he’s correct about the yield curve, although it is getting very long in the tooth. In the past half century, the shortest time between a 10 minus 2 year inversion (blue in the graph below) to recession has been 10 months (1980) and the longest 22 months (2007). For the 10 year minus 3 month inversion (red), the shortest time has been 8 months (1980 and 2001) and the longest has been 17 months (2007):

At present the former yield curve has been inverted for 20.5 months, and the latter for 16.5 months. So if there is no recession by May 1, we’re in uncharted territory as far as the yield curve indicator is concerned.

My view for the past half year or so has been much more cautious. While there has been nearly unprecedented Fed tightening (only the 1980-81 tightening was more severe), on the other hand there was massive pandemic stimulus, and what I described on some occasions as a “hurricane force tailwind” of supply chain unkinking. If the two positive forces have abated, does the negative force of the Fed tightening, which is still in place, now take precedence? Or because interest rates have plateaued in the past year, is it too something of a spent force? Since I confess not to know, because the situation is unprecedented in the modern era for which most data is available, I have highlighted turning to the short leading metrics. Do they remain steady or improve? Or do they deteriorate as they have before prior recessions?

First of all, let me show the NY Fed’s Global Supply Chain Index, which attempts to disaggregate supply sided information from demand side information. A positive value shows relative tightening, a negative loosening:

You can see the huge pandemic tightening in 2020 into 2022, followed by a similarly large loosening through 2023. For the past few months, the Index has been close to neutral, or shown very slight tightness.

Typically in the past Fed tightenings have operated through two main channels: housing and manufacturing, especially durable goods manufacturing.

Let’s take the two in reverse order.

Manufacturing has at very least stalled, and by some measures turned down to recessionary levels.  Last week I discussed industrial production (not shown), which peaked in late 2022 and has continued to trend sideways to slightly negative right through February.

A very good harbinger with a record going back 75 years has been the ISM manufacturing index. Here’s its historical record through about 10 years ago (when FRED discontinued publishing it):

And here is its record for the past several years:

This index was frankly recessionary for almost all of last year. It is still negative, although not so much as before.

Two other metrics with lengthy records are the average hourly workweek in manufacturing (blue, right scale), which is one of the 10 “official” leading indicators, as well as real spending on durable goods (red, measured YoY for ease of comparison, left scale):

As a general rule, if real spending on durable goods turns negative YoY for more than an isolated month, a recession has started (with the peak in absolute terms coming before). Also, since employers generally cut hours before cutting jobs, a decline of about 0.8% of an hour in the average manufacturing workweek has typically preceded a recession - with the caveat in modern times that it must fall to at least roughly 40.5 hours:

The average manufacturing workweek has met the former criteria for the last 9 months, and the latter since November. By contrast, real spending on durable goods was up 0.7% YoY as of the last report for January, and in December had made an all-time record high.

But if some of the manufacturing data has met the historical criteria for a recession warning, it is important to note that manufacturing is less of US GDP than before the year 2000, and had been down more in 2015-16 without a recession occurring.

Further, housing construction has not meaningfully constricted at all. The below graph shows the leading metric of housing permits (another “official” component of the LEI, right scale), together with housing units under construction (gold, *1.2 for scale, right scale), and also real GDP q/q (red, left scale):

Housing permits declined -30% after the Fed began tightening, which has normally been enough to trigger a recession. *BUT* the actual measure of economic activity, housing units under construction, has barely turned down at all. In comparison to past downturns, where typically it had fallen at least 10%, and more often 20%, before a recession had begun, as of last month it was only 2% off peak!

The only other two occasions where housing permits declined comparably with no recession ensuing - 1966 and 1986 - real gross domestic product increased robustly. This was similarly the case in 2023.

An important reason is the other historical reason proppin up expansions: stimulative government spending. Here’s the historical record comparing fiscal surpluses vs. deficits:

Note the abrupt end of stimulative spending in 1937, normally thought to have been the prime driver of the steep 1938 recession. Note also the big “Great Society” stimulative spending in 1966-68, when a downturn was averted (indeed, although not shown in the first graph above, there was an inverted yield curve then as well). Needless to say, there as been a great deal of stimulative fiscal spending since 2020 as well.

Fed tightening typically works by constricting demand. Both government stimulus and the unkinking of supply chains work to stimulate supply. 

All of which leads to the conclusion that, while manufacturing has reacted to the tightening, the *real* measure of construction activity has not, or not sufficiently to be recessionary.

Tomorrow housing permits, starts, and units under construction will all be updated. Unless there is a sharp decline in units under construction, there is no short term recession signal at all.