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.

As the Debby effect dissipates, initial claims remain positive for the economy

 

 - byNew Deal democrat

For the last several months, jobless claims have been buffeted first by unresolved post-pandemic seasonality, and then also by the effect of Hurricane Debby on claims in Texas. The first is now abating, and the second has ended, as this week claims in Texas declined to their typical level last year at this time.

To the numbers: initial claims rose 4,000 to 232,000, while the four week moving average declilned -750 to 235,000. With the typical one week delay, continuing claims rose 4,000 to 1.863 million:

The YoY% change removes the effects of unresolved seasonality, and is the best metric to use for forecasting. Measured this way, initial claims were down -3.7%, and the four week average down -4.4%. Continuing claims were up 3.7%, the fifth best reading in almost 18 months:

Thus, jobless claims remain is a positive short leading indicator for the economy, while the persistent slight increase recently in continuing claims tells us that it is slightly weaker than previously.

Here is the updated comparison with the unemployment rate:

This year has departed from the near-universal relationship of the past 60 years in which initial claims led the unemployment rate. What this tells us is that a significant portion of the people telling the BLS that they are unemployed were not previously working. They are either new entrants, or re-entrants, to the labor force, and very likely recent immigrants. In other words, the rise in the unemployment rate is not telling us that there is a recession, but rather that the wave of recent immigrants, who easily found employment during the 2021-22 Boom, are having a harder time finding a job now.

Preliminary benchmark revisions wipe out 30% of jobs growth in the past 16 months

 

 - by New Deal democrat

Every month I write about the Jobs Report. But while it is timely, it is only an estimate. There is an actual census of over 95% of all employers that also gets reported, called the QCEW, and it is the “gold standard” of actual jobs growth (or loss). Its two drawbacks are that it is not seasonally adjusted, and it is reported almost 6 months after the end of the quarter it updates.

Which is a lengthy introduction to saying that it was just reported through March of this year this morning. More importantly, the BLS preliminarily re-benchmarked all of its data beginning in March of last year.

And which is a further introduction to saying that, as expected, job growth was a lot less late last year and earlier this year than we originally thought.

To wit, according to the QCEW, job growth was only 1.3% YoY through March (sorry, no graph, just the chart):

This compares with the official payrolls data showing 1.9% YoY growth through that same period:

Note that the two are consistent through last June. It is beginning last July that there is a major divergence, with payrolls estimating 2.1% job growth and the QCEW only showing 1.7% growth.

The actual total preliminary revision to job growth over this period was -818,000. Note that the biggest hits were to manufacturing (-125,000), retail (-129,00) leisure and hospitality (-150,000), and professional and business services (-358,000 !). These four areas made up over 750,000 of the 818,000 decline:

Here’s what the “official” total jobs gain since March of last year looks like:

But instead of a nearly 3 million gain, this is going to be raised down to only about a 2 million gain - a loss of about 30% of the total official gain.

Here is what the other “official” gains look like in the 3 sectors hardest hit by the reivions:

*All but one* of these sectors will be revised to show losses. Manufacturing will be down -96,000 YoY as of this past March, retail down -45,000, and professional and business services down -202,000. Only leisure and hospitality will still show a gain, of 296,000 (vs. 446,000).

Note that this is not the “final” benchmark revision, which we’ll get at the beginning of next year. So the numbers are not going to change yet in the official payrolls report. 

The bottom line is that, while this is not recessionary, it takes the “pretty good” growth over the last 16 months, and revises it to mediocre growth.

How restrictive are “real” interest rates?

 

 - by New Deal democrat

This post is inspired by a Xtweet from Paul Krugman this morning, in which he pointed out that if we measured inflation the same way it is done in Europe, the Yoy% change would be only 1.7%. That got me wondering, since the primary difference is how shelter inflation is measured, just how restrictive is current Fed policy across a number of the most important inflation measures?

Let’s begin by reviewing what the current YoY% changes in consumer prices are using the harmonized index (red), CPI les shelter (gold), headline CPI (dark blue) and core CPI (light blue):

As I pointed out when the CPI was reported last week, ex-shelter consumer prices are only up 1.8% YoY, while headline inflation was 2.9%, and the core measure was 3.2%.

The Fed funds rate has remained at 5.33% for the past year. That means that the “real” Fed funds rate for headline inflation is 2.4%, 2.1% for core inflation, and 3.6% for both CPI less shelter and the harmonized index:

That’s certainly tight compared with the previous few years. But how does it compare historically? Below I subtract the current “real” Fed funds rate to show each metric at the 0 line, and divide into two segments better to show the historical record:

Before 1982, the current “real” Fed funds rate is higher than at any time except in the year or so before recessions, and also during the 1966 slowdown. Since the turn of the Millennium, it is also higher than at any time except for the lead-up to the Great Recession. On the other hand, the real rate was higher durning almost all of the 1980s and mid- to late-1990s.

Since the 1980s and 1990s are remembered as periods of prosperity, is that such a big deal?

Well, remember that during both of these decades interest rates, and in particular mortgage rates, were in an almost persistent rate of decline. Indeed, it is only when they stopped declining for 3 years or more that recessions occurred:

By contrast, mortgage rates have been at or close to 15 year highs for the past two years.

In other words, going back 60 years, “real” interest rates have only been this high in the year or two before recessions, except for those periods when households could free up more cast to spend by refinancing their mortgages at lower rates.

It is hard to escape the implication that if the Fed does not start lowering rates very soon, it has brought about recessionary conditions.

Real hourly wages, median income, and aggregate payrolls: update for July

 

 - by New Deal democrat

It’s a slow economic news week, so don’t be surprised if I play hookie tomorrow or Wednesday.

In the meantime, now that we have July’s inflation data, we can update some “real” consumer well-being indicators.

First, real average hourly wages for nonsupervisory workers rose 0.1% in July to a new all-time high excluding April through June 2020:

It has risen 3.8% since its pre-pandemic all-time high, and 3.0% from its June 2022 post-pandemic low (when gas prices were $5/gallon).

Meanwhile, Motio Research has updated their monthly calculation of real median household income through June. It is also at an all-time high excluding the months of  March through August 2020:

Note this includes pandemic stimulus payments as well as wages, which is why it surged during the early months of the pandemic.

Finally, real aggregate payrolls for nonsupervisory workers - the best measure of the collective buying power of America’s middle and working class - declined -0.1% in July from its all-time high in June:

Although, per the BLS, Hurricane Beryl did not affect the employment or unemployment numbers for July, there is some indication that it *did* impact the number of hours worked, which declined -0.2%. This decline in hours explains why aggregate payrolls declined, even though real wages per hour worked increased.

If real aggregate payrolls fail to make a new high in the next couple of months, that would be cause for some concern, since the peak in this metric is a short leading indicator for recessions.

But all in all, real income in July continued the recent run of good news.

Weekly Indicators for August 12 - 16 at Seeking Alpha

 

 - by New Deal democrat

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

With the bond market anticipating Fed rate cuts ahead, it has already lowered mortgage rates somewhat on its own. That has led to a jump in new applications, and to an even bigger spike in refinancing.

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

But for Beryl, housing construction would have warranted hoisting a yellow caution flag for recession

 

 - by New Deal democrat

The effects of Hurricane Beryl had just enough of an effect on home building in July to cause me not to hoist a yellow recession caution flag in this important leading sector. While the hurricane had no significant effect on permits, it likely did have an effect on starts and on units under construction, as I’ll go into further below.

Let’s start with the overall view. Starts (blue in the graph below), which are noisier and slightly lag permits, declined -6.8% in July, while total permits (gold) declined -4.0%. by contrast, the least noisy, most leading single family permits (red, right scale) declined a mere -0.1%:

Comparing single family with multi family permits, the former as above declined -1,000, while the latter (gray), which is much noisier, declined -58,000:

Still, multi-family permits show signs of stabilization, as the current reading is higher than both April’s and May’s, and the three month average rose very slightly (+333 units).

But units under construction is the measure of real economic activity in this sector. While it is not so leading as permits and starts, it has always turned down, typically by more than -10% (often -30% or more) before a recession begins. I’ll spare you the long term graph this month, but here is the graph of the last five years comparing total permits (blue, right scale) with housing units under construction (red):

There had been a long time after single family construction turned down while multi-unit construction continued to increase and then plateaued. But this year both have declined:

Indeed, the total decline in housing units under construction this month surpassed the -10% cutoff level necessary for a yellow caution flag as to recession, as they are now down -10.1%:

But as I wrote at the outset, Hurricane Beryl apparently did affect these numbers. We can estimate its impact by deducting the number of permits, starts, and units under construction in the South Census Region from the nationwide total. Here’s what we get when we do so. In the chart below, the first number is the nation total as above, and the number in parentheses is the number excluding the South Census Region:

Permits: -4.0%. (-3.7%)

Starts: -6.8%. (+1.7%)

Under construction: -1.6%. (-1.0%)

While Beryl likely had little effect on permits, it most likely did have a sizeable impact on housing starts and also to some extent units under construction.

Had housing units under construction declined only -1.0% instead of -1.6% for the month, the total decline from peak would have been -9.5% rather than -10.1%.

In other words, except for Beryl, there is a very good chance that the -10% threshold would not have been crossed.

Further, because mortgage rates in the last two weeks have been at 12 month lows, and close to their lowest levels in two years:

we can expect permits to rise in the next several months, followed by starts.

That the most leading metric, single family permits, as well as mult-family permits, appear to be stabilizing, plus the likely effect of lower mortgage rates, plus the probable effect of Beryl on units under construction, together cause me to believe that raising the yellow caution flag for housing would be premature based on this month’s report. It’s very close, but I don’t think we’ve crossed the threshold yet, and there are still good reasons to believe we may not cross it at all.

Industrial production: negative number, important negative revisions

 

 - by New Deal democrat

In the past, industrial production has been the King of Coincident Indicators, since its peaks and troughs tended to coincide almost exactly with the onset and endings of recessions. That weighting has faded somewhat since the accession of China to the world trading system in 1999 an the wholesale flight of US manufacturing to Asia, generating several false recession signals, most notably in 2015-16. But it is still an  important coincident measure in the economy. 

This month was one of those times where revisions made all the difference. Last month I headlined my note by pointing out that both manufacturing and total industrial production were reported near 10 year highs. But this morning both of those numbers were revised down significantly, and this month was reported down -0.3% for manufacturing and -0.6% for total production (graph normed to 100 as of pre-pandemic high water mark):

As a result, both series, which had climbed into positive YoY territory, are now back down slightly:

In the above graph, I’ve also added the updated YoY real retail sales YoY data (gold), which shows that both the production and real sales numbers have been flat to trending slightly downward since the end of the last pandemic stimulus over two years ago, with production following sales, as per usual, with a few months’ delay.

Earlier this month I noted that construction is now the pre-eminent element holding up the goods-producing sector of the economy. That’s important because once the goods-producing sector as a whole turns down, the economy as a while typically follows shortly thereafter.

Tomorrow we will get the report on housing, including housing units under construction. If that metric continues to decline, that spells trouble for construction as a whole.

Real retail sales the highest so far this year, but still negative YoY

 

 - by New Deal democrat

The second point of economic data released this morning, retail sales, were also positive.

On a nominal basis, retail sales in July rose 1.0%. After adjusting for inflation, they rose 0.8% to the highest level so far this year. The below graph norms both real retail sales (dark blue) and the similar measure of real personal consumption of goods (light blue) to 100 as of just before the pandemic:

Since the end of the pandemic stimulus in spring 2022, real retail sales have been trending generally flat to slightly declining, while real personal consumption expenditures on goods have continued to increase.

On a YoY basis, however, real retail sales are still negative at -0.3%, which while also the second best reading this year, remains problematic:

That’s becuase, although I won’t bother with the graph, a negative YoY comparison in real retail sales over the past 75 years has usually meant recession. Obviously that wasn’t the case in 2022 and 2023, but at some point the historical relationship is likely to be valid again.

Finally, since real sales are a good if noisy short leading indicator for employment, here is the above YoY graph adding YoY payroll gains (red):

This forecasts continued weak job reports in the range of 75,000 to under 200,000 in the month immediately ahead.

Two months ago I concluded that , especially in view of the relatively poor numbers since the start of this year, real retail sales had to be regarded as raising a caution flag for the economy. Last month I concluded by saying “The yellow caution flag is up,” especially in conjunction with the negative ISM manufacturing and non-manufacturing numbers. The reversal in the latter to positive this month takes some pressure off, but the longer real retail sales go without posting a positive YoY number, the more concerned I will be.

Jobless claims still a positive, even with some lingering Beryl after-effects in Texas

 

 - by New Deal democrat

Last week I pointed out that the YoY increases in initial and continuing claims appeared to be all about Texas in the wake of Beryl. This week there was good news even with some continued Beryl effects in Texas.

Initial claims declined -7,000 to 227,000 for the week, while the 4 week average declined -4,500 to 236,500. Continuing claims with the typical one week delay declined -7,000 to 1.864 million:

There was even better news on the more important YoY comparisons. There, initial claims were down -8.5%, and the four week average down -3.2%. Continuing claimswere up 3.4% YoY, but this is the best YoY comparison except for one week in the past 1 1/2 years:

The news is all the better because there was still a Beryl effect in Texas, where unadjusted claims were 18.5 thousand, roughly a 2.5 thousand increase from typical summer levels last year. In other words, ex-Texas claims were down even more YoY.

Here is the updated “Sahm rule” comparison. This has not been working this year, as the unemployment rate has continued to increase even as initial and continuing jobless claims have leveled off or are lower YoY. This points to new immigrants not finding work as the root cause for the increase:

In short, the hypothesis that this summer’s increase in initial and continuing jobless claims was unresolved post-pandemic seasonaility continues to be sustained. As of right now, claims remain positives for the near term future economy.

For July, “ The index for shelter … accounti[ed] for nearly 90 percent of the [otherwise sleepy] monthly increase”

 - by New Deal democrat

The CPI for July continued all of the trends I have been writing about for the past year or more:

 - Headline and core CPI continue to slowly decelerate. 

 - energy inflation is non-existent

 - shelter inflation remains very elevated but continues to declerate, following house prices.

 - all prices except for shelter coming in near or below the Fed’s 2% target

 - there are a few other problem children that don’t amount to too much

So let’s take these in order.

Both headline and core inflation rose 0.2% for the month. On a YoY basis the former is up 2.9% YoY (blue) and the latter is up 3.2% YoY (red):

Both of these are at their lowest YoY levels since 2021.

Now let’s add in CPI less shelter (gold), which was unchanged for the month, and is only up 1.8% YoY:

CPI less shelter has been 2.3% YoY or less for the past 15 months.

In other words, for the Fed, the only reason not to treat inflation as well within its target zone is shelter.

Shelter (including actual rent, up 0.5%, and imputed rent of owned residences, up 0.4%) (red) increased 0.4% for the month, and is still up 5.1% YoY - which is still lower than at any time in the past two years. It continues to decelerate as forecast by the sharp previous deceleration in home prices (as measured by the FHFA index, blue):

At its current pace, shelter inflation will not have decelerated into the Fed’s target range for about 12 more months.

Energy inflation was nonexistent in July, and prices were only up 1.0% YoY:

The former problem children of new (red) and used (blue) vehicle prices declined -0.2% and -2.3% for the month, are are down -1.0% and -10.3% YoY respectively (shown as the change since right before the pandemic, below):

The remaining problem children remain food away from home, up 0.2%, electricity, up 0.1%, and transportation services including vehicle maintenance, repair, and insurance, up 0.4%. On a YoY basis they remain up 4.1%, 4.9%, and 8.8% respectively:

To reiterate what I have previously pointed out, the last item is a typical delayed reaction to the previous big increase in vehicle prices.

Although I won’t bother with a graph this month, I have previously pointed out that wages have grown at about the same rate as vehicle prices, so in “real” terms they are not that much of a problem any more. The Census Bureau’s own release summarizes my view, to wit: “the index for shelter … account[ed] for nearly 90 percent of the monthly increase in the all items index.”

If 2% inflation is a target and not a ceiling, the Fed has really had all the ammunition it has need for months. With the further YoY deceleration in July, it has even more. Unless there is an upside blowout surprise in August employment and wages, the real debate is likely to be whether the Fed cuts interest rates 0.25% or 0.5% at its September meeting.

Motor vehicle sales and recession: current status

 

 - by New Deal democrat

In the paradigm popularized by Prof. Edward Leamer 20 years ago, motor vehicle sales are the 2nd domino to fall, after housing, in the procession of sectors that turn down prior to recessions.

I haven’t updated this in awhile, so let’s take a look.

As an initial matter, the cycle in this sector was particularly hard hit by supply chain kinks during the pandemic, as electronic parts in particular were not produced at nearly a fast enough rate to allow full-scale production. This was a major reason why the prices of motor vehicles rose 20% since just before the pandemic by 2023:

Turning to history, I’ve noted many times before that sales of heavy trucks (red, left scale) tend to turn down first, and much less noisily, than passenger vehicle sales (blue, right scale) before recessions:

In general, sales of heavy weight vehicle must turn down at least -10% on a consistent basis to be consistent with an oncoming recession. The below graph captures the essence of this by measuring the YoY% change in both passenger and heavy truck sales, averaged quarterly to reduce noise, and adding 10% so that the dividing point shows at the zero line:

Sometimes both light vehicle and truck sales are down -10% before recessions, and sometimes heavy truck sales are down much more while passenger vehicle sales are treading water.

For our present situation, here is the post-pandemic close up on absolute numbers:

Truck sales did decline over -10% last year, coincident to the bankruptcy of a major hauler, Yellow Truck. Passenger vehicle sales are still holding steady.

Now here is the YoY% look, monthly, again adding 10% so that the crucial cutoff appears at the zero line:

Heavy truck sales have flirted with the -10% level for the last 10 months. If they remain at their current level for several more months, the YoY comparison will be unchanged. Passenger vehicle sale remain steady.

The bottom line is that motor vehicle sales have not given, and are not now giving, any recession signal.

Producer prices remain tame

 

 - by New Deal democrat

Producer prices for final demand (blue) rose 0.1% in July, while upstream raw commodity prices (red) rose 0.7%, close to their highest monthly increases in the past two years:

In the larger pre-pandemic scheme of things, the one month rise in commodity prices is not a matter of concern at this point.

On a YoY basis, final demand producer prices are up 2.2%, while raw commodity prices are up 1.5%:

Like all other prices except for imputed shelter costs, this is well within the Fed’s target range. We’ll see how this pans out for consumer prices tomorrow.

Weekly Indicators for August 5 - 9 at Seeking Alpha

 

 - by New Deal democrat

My “Weekly Indicators” post is up, a day later than usual, at Seeking Alpha.

While there was some excitement at the racetrack Monday as stocks just missed making a new 3 month low by a hair, the more exciting news by the end of Friday was that mortgage rates made a new 12 month low, and mortgage refinancing is showing signs of life again.

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 the effort I put into the work.