Weekly Indicators for September 2 - 6 at Seeking Alpha

 

 - by New Deal democrat

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

In the wake of yesterday’s weak jobs report, bond yields and mortgage rates declined to 12 month+ lows, commodities declined across the board, stocks sold off sharply, and the 10 year to 2 year Treasury spread un-inverted.

That’s bad news and good news. It’s bad news because it indicates a belief that the economy has weakened substantially, but good news because lower rates will enable increased activity out in the future.

As usual, clicking over and reading will bring you up to the virtual moment as to the economic data, and reward me with a little lunch money for collating and organizing the data for you.

August jobs report: for the first time, including revisions, more consistent with a hard landing

 

 - by New Deal democrat

My focus continues to be on whether jobs gains are most consistent with a “soft landing,” i.e., no further deterioration, or whether there is further decline towards a recession. 

For a change, this month the Establishment report was the weakest in several years, if still positive. Meanwhile the Household report rebounded for the month, but now shows an absolute decline in job holders YoY.

Below is my in depth synopsis.

HEADLINES:

• 142,000 jobs added. Private sector jobs increased 118,000. Government jobs increased by 24,000. 
• There were big downward revisions to the last two months. June was revised downward by -61,000, and July was revised downward by -25,000, for a net decline of -86,000. This continues the pattern from nearly every month in the past 18 months of a steady drumbeat of downward net revisions.
• The alternate, and more volatile measure in the household report, showed an increase of 168,000 jobs. On a YoY basis, however, this series has now actually *declined* by -66,000 jobs. With the sole exception of 1952 and one month in 1957, this has always and only occurred shortly before or during recessions.
• The U3 unemployment rate declined -0.1% to 4.2%, but the “Sahm rule” recession indicator Is still in effect.
• The U6 underemployment rate rose 0.1% to 7.9%, 1.5% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now rose another 37,000 to 5.637 million, vs. its post-pandemic low of 4.925 million in early 2023.

Leading employment indicators of a slowdown or recession

These are leading sectors for the economy overall, and help us gauge how much the post-pandemic employment boom is shading towards a downturn. Outside of construction, all of the rest were flat or negative.

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, increased 0.1 hours to 40.7 hours, but is down -0.8 hours from its February 2022 peak of 41.5 hours.

• Manufacturing jobs declined -24,000.
• Within that sector, motor vehicle manufacturing jobs increased 2,500. 
• Truck driving declilned -1,400.
• Construction jobs increased 34,000.
• Residential construction jobs, which are even more leading, rose by 4,800 to another new post-pandemic high.
• Goods producing jobs as a whole rose 10,000 to another new expansion high. These should decline before any recession occurs. *BUT* these are only up 0.9% YoY, the lowest such increase since the pandemic shutdowns, thus showing clear signs of deceleration.

• Temporary jobs, which have generally been declining late 2022, fell by another -2,900, and are down about -500,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer rose 117,000 to 2,468,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.11, or +0.4%, to $30.27, for a YoY gain of +4.1%. This is an increase from 3.8% YoY growth last month, but the longer term trend continues to be deceleration from their post pandemic peak of 7.0% in March 2022. Importantly, this is significantly higher than the 2.9% YoY inflation rate as of last month.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers increased 0.1%, and is up 1.2% YoY, in trend for the past 12+ months.

•  the index of aggregate payrolls for non-managerial workers was rose 0.4%, and is up 5.3% YoY. These have been slowly decelerating since the end of the pandemic lockdowns, but have remained almost steady for the past 9 months. With the latest YoY consumer inflation reading of 2.9%, this remains powerful evidence that average working families have continued to see gains in “real” spending money.

Other significant data:

• Professional and business employment rose 8,000. These tend to be well-paying jobs. This series had generally been declining since May 2023, but earlier this year had resumed increasing again. As of this month, they are only higher YoY by 0.5% - a very low increase that has *only* happened in the past 80+ years immediately before, during, or after recessions.
• The employment population ratio remained steady at 60.0%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate also remained steady at 62.7%, vs. 63.4% in February 2020. The prime 25-54 age  participation rate declilned -0.1% from84.0%, the highest rate during the entire history of this series except for the late 1990s tech boom, to 83.9%.

SUMMARY

This month confirmed a significant further downshift in job creation. From 2020 through this past March, the lowest monthly job gains were 136,000 in December 2022, which was the *only* month during that period below this month’s 142,000. But since then, four of the five last months were below 150,000. In addition to this month, April showed 108,000 job gains, June as revised 118,000, and July 89,000. This is just barely enough to keep up with population growth. Further, as indicated the Household report (which has probably underestimated immigration substantially) now shows an absolute decline YoY.

The best news was the continued growth in nonsupervisory payrolls, which after inflation for August is reported will almost certainly show another all-time high. It is unheard of for a recession to happen while real aggregate payrolls for average workers are still growing. That the leading construction sector, and goods production as a whole, continued to show growth also are pluses, and negative any imminent recession.

But manufacturing seems at long last to have rolled over, with the lowest reading in almost two years except for one month in 2023, despite the slight increase in the manufacturing workweek. 

Along with the big downward revisions to the last several months, this month’s report is the first time that there is substantial evidence that the jobs market may have moved past a “soft landing” into a hard slowdown that could easily tip over into outright declines by the end of the year. This adds to the evidence that the Fed has been behind the curve, and needs to cut rates, perhaps aggressively, beginning asap. 

Economically weighted ISM indexes show an economy on the very cusp of - but not in - contraction

 

 - by New Deal democrat

Recently I have paid much more attention to the ISM services index. That’s because, since the turn of the Millennium, manufacturing’s share of the economy has contracted to the point where even a significant decline in that index has not translated into an economy-wide recession, as for example in 2015-16. 

When we use an economically weighted average of the non-manufacturing index (75%) with the manufacturing index (25%), it has been a much more reliable signal, particularly when we use the 3 month average, requiring it to be below 50. 

Once again this month the contraction shown in the manufacturing index has been more than counterbalanced by continued expansion in the services index, which was reported at 51.5. The more leading new orders subindex (not shown in the graph below) came in stronger, at 53.0:

Here are the last six months, including August, of both the manufacturing (left column) and non-manufacturing index (center column) numbers, and their monthly weighted average (right) :

MAR 50.3. 51.4. 51.1

APR 49.2  49.4.  49.3 

MAY 48.9. 53.8. 52.5

JUN 48.5. 48.8. 48.7

JUL. 46.8. 51.4. 50.2

AUG. 47.2. 51.5  50.4

And here is the same data for the new orders components:

MAR 51.4. 54.4. 53.6

APR 49.1. 52.2. 51.4

MAY 45.4. 54.1. 51.9

JUN. 49.3  47.3. 47.8 

JUL.  47.4. 52.4. 51.2

AUG. 44.6. 53.0. 50.9 

Note that the single month average for both the headline and new orders components showed contraction in June, but it did not trigger a signal based on the three month average. The current three month weighted average of the headline numbers is just below the 50.0 threshold at 49.7, while the new orders component is 49.97, which rounds to 50.0 for purposes of this analysis.

This is right on the cusp of giving a “recession warning” signal. In fact, had the new orders component of the services report been even -0.1 lower, it would have done so. Next month the poor June readings for the new orders subindex in particular go out of the average. It is quite possible that the weakness in the headline number, which is not leading, will pick up as well.

In the end, the economically weighted ISM reports show an economy which is not contracting, but in the aggregate has stalled, with contracting production being just balanced by weakly expanding services. This puts even more weight on what the leading components of the jobs report will show tomorrow.

Jobless claims: all good news

 

 - by New Deal democrat

The weekly news from jobless claims continues to be good. The hypotheses that the summer increase was unresolved post-pandemic seasonality, plus the several week spike post-Beryl was all about Texas, both have held up very well. And that has continued to be the case against more challenging YoY comparisons as the data heads into September.

Initial claims declined -5,000 last week to 227,000. The four week moving average declined -1,750 to 230,000. Continuing claims, with the usual one week delay, declined -13,000 to 1.838 million:

The two year chart really pays off in showing the unresolved summer seasonality post-pandemic both in 2023 and this year.

On the more important YoY basis for forecasting purposes, initial claims are down -0.4%, the four week average down -3.3%, and continuing claims up only 2.0%, the lowest YoY increase in over 18 months:

Needless to say, all of these forecast that the economic expansion will continue in the next few months.

Finally, let’s look at the unemployment rate, which will be updated tomorrow. Although I won’t show a graph, it appears that the post-Beryl increase in *continuing* claims in Texas has now abated as well. But because it continued into mid-August, it would not surprise me to show up in yet another 0.1% increase in the unemployment rate tomorrow. In any event, here’s the update graph of initial and continuing claims (right scale) vs. the unemployment rate (left scale):

This year the unemployment rate has departed from over 50 years of almost continuous precedent by not following initial claims in particular. What the above graph shows me is that, absent the surge in immigration-related unemployment, the unemployment rate would be trending down towards 3.8%.

July JOLTS report: relentless deterioration?

 

 - by New Deal democrat

The JOLTS survey parses the jobs market on a monthly basis more thoroughly than the headline employment numbers in the jobs report. In July, it painted a picture of what looks like pretty relentless deterioration.

The theme for three of the four data series I track was the same: job openings, hires, and quits, all had their lowest or second lowest readings since the start of 2021. In the case of the “second worst” hires and quits numbers, it was only because last month’s numbers were even lower.

Specifically, job openings (blue in the graph below), a soft statistic that is polluted by imaginary, permanent, and trolling listings, declined 227,000 to 7.623 million. Actual hires (red) rose 273,000 to 5.521 million (vs. a pre-pandemic peak of 6.0 million). Voluntary quits (gold) rose 63,000 to 3.277 million. In the below graph, they are all normed to a level of 100 as of just before the pandemic:

Both hires and quits are significantly below their immediate pre-pandemic readings, by -7.9% and -5.4% respectively.

To put them in a wider historical context the below graph shows all three series from their inception in 2001. But because the US population has grown almost 20% since then, I divide by the prime age population over the same time. I have also normed the current values to the zero line to better show the historical comparison:

On the one hand, hires, even on a population adjusted basis, are better than almost any time before the pandemic except 2005-06 and 2017-19. But note they are also at a level equivalent to during the 2001 recession. Quits are better than at any time before the pandemic except for just before the 2001 recession and 2018-19. This suggests to me that the real, “hard data” jobs market is still positive, and not weak by historical standards. It’s just not as strong as we have become accustomed to over the past several years.

Meanwhile, layoffs and discharges increased to their highest level since late 2020 except for several months in early 2023:

The above graph also shows the monthly average of initial jobless claims (red). It appears that layoffs and discharges did pick up the post-pandemic seasonality shown in the  summer increase during May through July.

Finally, the quits rate (blue in the graph below) has a record of being a leading indicator for YoY wage gains (red). For over half a year the quits rate had stabilized. That has no longer been the case in the past two months, as it also is at its lowest point since late 2020:

As you can see above, this forecasts continued deceleration in nominal wage gains, down to 3.5% YoY or even lower in the coming months. Unless consumer inflation moderates further as well, this will put some financial pressure on ordinary workers (not a negative, just significantly less positive).

Manufacturing and construction together suggest weak but still expanding leading sectors

 

 - by New Deal democrat

As usual we start the month with two important reports on the leading sectors of  manufacturing and construction.

First, the ISM manufacturing index showed contraction yet again, with the headline number “less negative” by way of increasing from 46.8 to 47.2, and the more leading new orders subindex declining sharply by -2.8 from 47.4 to 44.6:

Including August, here are the last sis months of both the headline (left column) and new orders (right) numbers:

MAR 50.3. 51.4

APR 49.2   49.1

MAY 48.9. 45.4

JUN 48.5. 49.3

JUL. 46.8. 47.4

AUG 47.2. 44.6

Because manufacturing is of diminishing importance to the economy, and was in deep contraction both in 2015-16 and again in 2022 without any recession occurring, I now use an economically weighted three month average of the manufacturing and non-manufacturing indexes, with a 25% and 75% weighting, respectively, for forecasting purposes.

The three month average of the headline manufacturing number is 47.5. The average for the new orders component is 47.1  For the past two months, the average for the non-manufacturing headline has been 51.1 and the new orders component has been 49.8. That means on Thursday the threshold for the August non-manufacturing numbers is 50.2 and 51.6 respectively for the economically weighted average not to forecast recession.

  

If the news for manufacturing seems a little grim, the status of construction spending is better.

In nominal terms, total construction spending declined -0.3% in July, while the more leading residential construction spending declined -0.4%. Here’s the long term picture:

A post-pandemic close-up shows that spending appears to have been topping for the last 4 months:

But the picture looks better once we adjust for the cost of construction materials:

So deflated, total construction spending rose 0.7% for the month and is at its highest level since 2007. Residential construction spending rose 0.2% for the month and is also at its highest level since 2007, except for three months at year-end 2021.

I do not see the US economy falling into recession unless either both construction and manufacturing are in synchronous decline, or else at least one of them contracts very sharply. While manufacturing is on the brink, that is not the case with construction at this point. Basically the picture is of weak, but overall still slightly positive leading sectors of the economy.

For Labor Day: 4 measures of worker wage growth

 

 - by New Deal democrat

On this Labor Day, it is fitting to update the economic state of ordinary workers. There is a variety of economic data series to track both average and median wages:

• The most commonly known measure is that of average hourly pay for nonsupervisory workers, which is part of the monthly jobs report.
• The Bureau of Labor Statistics, which conducts the household employment survey, also reports "usual weekly earnings" for full-time workers each quarter.
• The BLS also measures the Employment Cost Index quarterly.
• The BLS also measures "business sector compensation per hour" quarterly.

Without further ado, here is the update for all four. Average hourly wages are updated through July; the other three are updated through the end of Q2. All series are normed to 100 as of February 2022; the nominal series are deflated by the CPI:

It is important to keep two things in mind. 

First, with the exception of the “Employment Cost Index,” which follows wages on offer for each given type of employment, all are subject to the distortion that arose from the much bigger layoffs of low wage service workers during the pandemic lockdown era than office workers. This boosted the averages, since more high wage workers were employed.

Second, all of the measures suffered from the spike in gas prices from $3 to $5 as Putin threatened, and then invaded Ukraine. After June 2022, as gas prices retreated back down towards $3 again, all of the measures benefitted.

Of the four, only one - the Employment Cost Index - is below its pre-pandemic level, down -1.7%. This is not nearly as negative as it may seem at first blush, since the Boom in job availability meant that many workers switched jobs to higher paying occupations.

That is reflected in the other three indexes. Real average hourly wages are up 3.8%. Real median usual weekly earnings and real hourly compensation are both up 0.3%.

This improvement in real earnings for workers since June 2022 is reflected in the recent increase in consumer confidence about the economy, and is also reflected in the improvement in the “incumbent” political party’s prospects in November.

Happy Labor Day to all.

Weekly Indicators for August 26 - 30 at Seeking Alpha

 

 - by New Deal democrat

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

There were two noteworthy events this past week. First, the 10 year minus 2 year Treasury spread briefly normalized during the week, on Wednesday, and ended the week only inverted by 1 basis point  (.01%). Second, almost *all* of the coincident indicators are now positive.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me a little bit for organizing the information for you.

July personal income and spending: an excellent report, with only one fly in the ointment

 

 - by New Deal democrat

The monthly personal income and spending report is now the most important report of all, except for jobs. That’s becuase it tells us so much about the state of the consumer economy. It is the raw material for several important coincident indicators that the NBER looks at, as well as several leading indicators on the spending side.

To the numbers: in July nominal personal income rose 0.3%, and spending rose 0.5%. Since PCE inflation rose 0.2%, real income rounded to an increase of 0.2% and real spending to 0.4%:

Since spending on services tends to rise even during recessions, the more important component to focus on is real spending on goods. This rose 0.7% to a new all-time high. Real spending on services also increased 0.2% to an all-time high as well:

Prof. Edward Leamer’s business cycle model indicates that spending on durable goods tends to peak first, before nondurable or consumer goods. In fact both rose in real terms, by 1.7% and 0.2% for the month, respectively:

As indicated above, PCE inflation was relatively tame, at +0.2%. On a YoY basis, PCE inflation is 2.5%:

While this measure appears to have stopped declining YoY, it has been stable only slightly higher than the Fed’s target.

If there is a fly in the ointment, it is that the personal saving rate declined another 0.2%, to 2.9%. This is the lowest post-pandemic rate of saving except for the month of June 2022, and is lower than at any other point since the turn of the Millennium except for the 2005-07 timeframe, as shown in the below graph which norms the current rate to zero:

The positive of this number is that it indicates increasing consumer confidence. The negative of this number is that consumers are very vulnerable to any adverse shock.

Finally, as indicated above this report goes into the calculation of two important coincident indicators. The first is real personal income less government transfer payments. This rose 0.2% to another all-time record:

Second, with the usual one month delay, real manufacturing and trade sales rose sharply, by 0.4%, also to their highest level ever excluding last December:

In short, this was an excellent report, with all of the important leading and coincident metrics increasing to records or near-records. It is indicative of a healthy economy both now and for the immediate future. As indicated above, the only fly in the ointment is that the very low savings rate is leaving consumers vulnerable to any future financial shock (of which there is no present sign).

Jobless claims: almost all good

 

 - by New Deal democrat

The news about initial and continuing jobless claims was almost all good this week.

Initial claims declined -2,000 to 231,000, and the four week moving average declined -4,750 to 231,500, the lowest since early June. Continuing claims increased by 13,000 to 1.868 million:

As usual, more important for forecasting purposes are the YoY% changes. In that regard, initial claims were down -1.3%, and the four week moving average down -5.6%. While continuing claims remained higher by 2.7%, this is the lowest YoY% increase in 18 months:

All of these forecast continued economic growth. Additionally, the hypothesis that the increase in late spring and early summer was due to unresolved post-pandemic seasonality appears firmly confirmed; as is the fact that the temporary increase to 250,000 in late July was due to Hurricane Beryl’s affect on Texas claims. I won’t bother with the graph, but initial claims in Texas have returned to normal levels. The only negative in this entire report is that continuing claims in Texas remain elevated by about 20,000 YoY, or 14.5%.

That continuing claims in Texas remain elevated is likely to show up in next week’s employment report, as to which here is the latest updated forecast:

On a monthly basis, initial claims have continuously remained lower than they were a year ago. For almost all of the past 60 years, this would reliably forecast that the unemployment rate would not rise higher than it was last autumn, i.e., roughly 3.8%. It is almost certain that the additional increase in the unemployment rate is related to diminished employment prospects for recently arrived immigrants. Because of the continued Beryl effect in Texas, the increase in continuing claims there is likely to be reflected in an increase in the number of total unemployed in the August jobs report next week.

Finally, in review of the near new record highs in the stock market this week, here is my updated “quick and dirty” short leading forecast for the economy, which relies upon stock prices and jobless claims (YoY, inverted in the graph below):

The quick and dirty model indicates not a hint of recession.

Domestic factory orders and production vs. real imports as economic forecasting tools

 

 - by New Deal democrat

Over the past year, I have downgraded the importance of manufacturing indicators as a forecasting tool for the economy as a whole. This post explores why, and suggests a revised tool that may be a helpful short leading indicator.

On Monday, durable goods orders rebounded sharply in July from their abrupt June decline. Still, as shown in the graph below, growth in both new factory orders and core capital goods orders has stalled in the past year:

In the past 30 years, such as stall has not been unusual, as shown by the YoY% changes in each:

New factory orders and core capital goods orders similarly stalled - or even declined YoY - in 1998, and most of the entire period from 2013-19, including what I called the “shallow industrial recession” of 2015-16. And yet in none of those periods did a wider economic downturn happen.

This quite simply has to do with the rise of imports in the US economy. Below is a graph of domestic manufacturing production (blue) vs. the real value of imports in GDP (red), both normed to 100 as of Q1 of 1972 (log scale to better show trends over time):

We can see that imports took off in the 1980s and never looked back, even as domestic manufacturing production made its all time peak over 15 years ago in 2007. In fact in this post-pandemic expansion, production has not even equaled its peaks during the 2010s.

Here’s a close-up of the last ten years normed to 100 as of Q1 of 2017:

Even though domestic manufacturing has stalled in the past year, real imports have grown by 5.4% during that time.

This suggests that real imports might be more important than domestic production is signaling broad economic weakness, because they are so attuned to consumer spending.

And here is the historical look at the quarterly change in both domestic manufacturing production and real imports, first from 1972 through the 2001 recession:

And this is from just before the 2001 recession through 2019:

On most of the occasions before a recession occurred, real imports turned down one Quarter before domestic manufacturing production. In one instance it was simultaneous, and only before the 2001 recession did domestic production turn down first. At the same time, note that there are several false positives, such as 1984 and 2016, where there were brief and shallow declines in both metrics without a recession occurring.

Now here is the post-pandemic close-up:

There was another false positive in late 2022, but as of the end of Q2 this year, both metrics are positive, with domestic production up 0.6%, and exports up 1.9%. 

Along with economically weighting the two monthly ISM reports to better capture any flagging in services, keeping track of whether imports are signaling weakness along with domestic production appears a useful addition to the forecasting arsenal.

Repeat home sale indexes show continued decelation in house price inflation, more comfort room for Fed to cut rates

 

 - by New Deal democrat

This morning we got the repeat home sales price data from the FHFA and Case Shiller. And the news was good, especially in the slightly leading FHFA Index.

This is of heightened importance compared with normal historical times. That’s because to reiterate, my focus is looking for any movement towards rebalancing between new and existing home sales. As to existing home sales, this means increasing inventories and more stable or even slightly declining prices, and we did see another increase in inventory earlier this week. In the repeat sales index, I am looking for signs that price increases might be abating. 

And abating they are - slowly. On a monthly basis, the FHFA showed prices *declilning* -0.1% in the three month average through June after being unchanged in May. In the Case Shiller national index, which tends to lag by a month or so, prices increased 0.2% during the same period. Outside of late 2022, these are the lowest monthly  price changes since the pandemic lockdown months:

On a YoY basis, both indexes are up 5.4%. This is the lowest reading since December in the Case Shiller index, and the lowest since last July in the more leading FHFA index:

For the entire first half of this year, both indexes are up only 2.3%, for a 4.6% annual rate. As you can see from the above graph, that rate would be absolutely typical for an annual increase before the pandemic.

Becase the house price indexes lead the shelter component of the CPI (Owners Equivalent Rent, black in the graph below) by 12-18 months, this also means we can expect continued (if slow) deceleration in that very important component of consumer prices as well:

Specifically Owners Equivalent Rent, which is 25% of the entire CPI, should continue to trend towards 3% YoY increases in the months ahead.

Most people expect the Fed to cut rates by at least 1/4% later this month, and this report should give them a further reason for comfort to do so.

The state of the consumer, August 2024

 

 - by New Deal democrat

One of my alternate systems for forecasting recessions is what I call the “Consumer Nowcast.” This is a fundamentals-based system that looks at all the likely potential sources of consumer spending (which is 70% of the economy) and asks whether or not they have been stymied.

At the present moment, the answer is pretty decisive.  I have posted this as an article at Seeking Alpha, exploring the relevant metrics and coming to a firm conclusion, albeit a nowcast only and not a forecast.

Weekly Indicators for August 19 - 23 at Seeking Alpha

 

 - by New Deal democrat

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

This week, for the first time in several years, the number of long leading indicators improved just enough for me to move the rating from “negative” to “neutral.” And the short leading indicators are lopsidedly very positive.

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

New and existing home sales for July: the rebalancing is underway

 

 - by New Deal democrat

I figured this month I would report on new and existing home sales at the same time, since they have been reported only one day apart, and I have been looking for a rebalancing of the market between the two, which means *relatively* more existing vs. new home sales, firming in new home vs. existing home prices, and more inventory growth in existing homes vs. new homes. 

To cut to the chase, it looks like that rebalancing is beginning to happen. With that in mind, let’s check the data.

Let me start by reiterating the big picture: mortgage rates lead sales, which in turn lead prices. Further, new home sales are the most leading of all housing metrics, but they are noisy and heavily revised. The much less noisy single family permits lag them slightly.

Mortgage rates declined to near 12 month lows in July (gold in the graph below), and unsurprisingly, new home sales (blue) increased. In fact they increased to the highest level in 2.5 years with the exception of one month. If this holds up after revisions, it bodes well for an increase in single family permits (red), which are much less noisy, but typically slightly lag sales, in the next few months as well:

Meanwhile prices (brown in the graph below), which are not seasonally adjusted, increased 3.1% m/m, but more importantly declined -1.4% YoY. Prices of new homes have been well behaved recently, being down YoY in all but 3 of the last 15 months (vs. sales, blue, YoY):

And inventory has very likely peaked, as it has been generally flat for the past half a year, and was down 1% in July:

In short, for new home sales, lower mortgage rates have worked their typical magic, increasing sales and putting a lid on inventory, while prices have slowly moderating from their extreme levels of several years ago.

Turning to existing home sales, which are about 90% of the total market, yesterday they too increased slightly, and remain within the range they have been in for the past 18 months. Lower mortgage rates will likely cause further increases in this metric in the next month or two:

Prices here have also moderated, relatively speaking. They were higher YoY by 4.2%, but down from their peak of 5.4% in April. Here’s what their non-seasonally adjusted trajectory looks like for the past five years:

Meanwhile, inventory has made substantial progress towards normalization in the last several months, as shown in this graph cribbed from WolfStreet:

Last month II summed up new home sales by writing that “I expect existing home inventory to continue to rise sharply until prices stop rising faster than prices for new homes. Meanwhile sales for both will continue their existing flat to slowly decreasing trend until mortgage rates are significantly lower.”

And for existing home sales I wrote, “What we are looking for is rebalancing in the housing market. For that to happen, we want the inventory of existing homes to increase, prices to stabilize, and sales to gradually pick up.”

In July, with lower mortgage rates, the trend in new home sales broke, and existing home sales will likely shortly follow. Inventory of existing homes has indeed continued to rise significantly, especially in comparison to flat to slightly declining inventory of new homes. Price increases in existing homes have moderated somewhat, but need to go much further before the normal balance with new home sales is restored. 

We still have a long way to go, but the rebalancing is underway.