Weekly Indicators for December 9 - 13 at Seeking Alpha

 

 - by New Deal democrat

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

While the short term forecast and nowcast have remained relatively constant, the “action” has been in the long leading indicators - some things good, some bad.

The biggest thing that happened this week is that the 10 year minus 3 month Treasury yield spread re-normalized, joining the 10 year minus 2 year spread.

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 my efforts in organizing the information for you.

Good news on real aggregate payrolls, but an additional yellow flag on jobs

 

 - by New Deal democrat

With the update on inflation earlier this week, let’s take a look a real average wages and real aggregate payrolls. Plus there is a significant update to my yellow flag caution on the employment situation.

First, nominally nonsupervisory wages rose slightly under 0.3% in November, while consumer prices rose slightly more than 0.3%. Thus real average hourly wages declined slightly, but rounded to unchanged:

Real hourly wages remain at their all-time record high excluding the two months of pandemic lockdowns, where the result was heavily skewed by the layoffs of low income workers.

Aggregate nonsupervisory payrolls rose slightly under 0.4%, so after inflation real aggregate payrolls rounded to up 0.1%:

This is yet another all time record high. I pay a lot of attention to this metric, because it has almost always turned down at least several months in advance of any recession. 

That’s the good news. Now the bad news.

On Monday I wrote that the Establishment jobs Survey started flashing some yellow caution signals, partly in the downturn in manufacturing jobs, and its spread to a slight downturn in goods producing jobs sector. Beyond that, the YoY% gain for jobs as a whole was a little under 1.5%. I pointed out that in the past a gain that low has typically presaged a recession. I further wrote that the latest preliminary release for Q2 of this year of the comprehensive QCEW, a nearly full census of all employment, showed a gain of only 0.8% for the entire 12 month period, vs. a gain of 1.6% for the official nonfarm payrolls report.

One drawback of the QCEW is that it is not seasonally adjusted. But the Philadelphia Fed has a series called the Early Benchmark, which does undertake a seasonal adjustment based on some 75% of the entire employment universe.

This was released yesterday, and the news was not good. According to the Phildelphia Fed, there was an actual decline of -0.1% in Q2 of this year, vs. a gain of 0.3% in the official monthly reports, mainly due to a downturn in the month of June:

An important word of caution: a similar episode happened in 2022, which gave rise to a number of recession forecasts. And then when the preliminary QCEW was finalized, the decline was completely revised away. We won’t get that for 2024 for several more months, so as usual take this with a grain of salt. But it does add to the yellow flags.

Jobless claims: seasonality strikes again

 

 - by New Deal democrat

As is so often the case this time of year, seasonality likely played havoc with this week’s new jobless claims. Last year Thanksgiving was November 23rd; this year it was the 28th, putting it in a different week for many statistics.

So the jobless claims this morning were for the first full week after Thanksgiving, whereas last year the equivalent week was one week before. And on a non-seasonally adjusted basis, claims jumped from 211,000 last week to 310,000 this week, as we moved from a 3 day workweek back to a 5 day workweek.

With that massive helping of salt, here are the seasonally adjusted numbers. 

Initial claims rose 17,000 to 242,000, a seven week high. The four week moving average rose 5,750 to 224,250, still below average for the past two months. With the typical one week delay, continuing claims rose 15,000 to 1.886 million, right in the middle of their range for the past two months:

On the YoY basis more important for forecasting purposes, initial claims were up 18.0%, while the four week moving average was only up 5.9%. Continuing claims were up 3.7%:

This is a case where the four week average is giving a much truer reading. In fact, I think it is best to average several of the past weeks even in that metric together. And I doubt the seasonality will completely abate next week either.

Also, because this is the first full week of the month, I’ll dispense with any look at what this might mean for the unemployment rate in the next monthly jobs report.

The takeaway here is to beware any one week’s number in this season of seasonality. Both the four week average and continuing claims say that the situation is a little weaker than one year ago, but nowhere near being negative. Score this week as another neutral reading. 

November consumer inflation remains well-contained except for the two most lagging sectors of shelter and transportation services

 

 - by New Deal democrat

Let me pick up where I left off yesterday discussing trends in consumer prices.

One thing I have done every month for the last couple of years is to review all the categories for any “hot” numbers showing price increases of 4.0% a year or more. And a propos of yesterday, as of this morning we are now down to 2: shelter and transportation services. There are a couple of areas where inflation has picked up in the last few months; namely new and used car prices and also medical care, but so far they remain behaved on a YoY basis.

Probably most of the analysis you will read today will be about the firming of both the headline and core CPI readings, so for the record both increased 0.3% for the month. On a YoY basis, headline prices are up 2.7%, an increase of 0.3% from their 2.4% low two months ago. Core prices excluding food and energy are up 3.3% YoY:

Now let’s look at CPI for shelter vs. ex-shelter:

Shelter prices increased 0.3% for the month. *Everything* else all together *declined* -0.2%. On a YoY basis, shelter increased a little under 4.8%, its lowest such reading in almost 3 years. All other prices increased 1.6% YoY, the 19th month in a row they have risen less than 2.5%.

In the broadest terms, high inflation remains almost all about shelter.

Within shelter, rents increased 0.3%, while “owners equivalent rent,” the fictitious measure of house prices, increased 0.2%. On a YoY basis, rent increased 4.4% while OER increased 4.9%. YoY OER is at a 2.5 year low, while actual rent YoY is close to a 3 year low:

The decline in apartment rents as shown in the Apartment List National Rent Report, as well as the moderation in house price increeases, have both finally shown up in the official CPI. Additionally, the Philadelphia Fed’s experimental new and all rent indexes, which are designed to lead the CPI for rents, for the last two quarters have been forecasting a decline below 4% YoY, and at the current pace of deceleration, that forecast could come to fruition within the next 2 to 3 months.

Now let’s discuss the other remaining problem child, transportation services. 

As I wrote yesterday, transportation services (mainly insurance and repair costs) lag vehicle prices. In November, vehicle prices increased a strong 0.9%, while transportation services increased less than 0.1%. On a YoY basis, vehicle prices remain *down* -2.2%, while the increase in transportation services costs slowed to 7.1%, which is bad, but still the lowest in nearly 3 years:

Within transportation services, motor vehicle repairs increased 0.2% for the month, and are 5.7% higher YoY:

This comparison has risen in the last several months, but is still within the range of noise. The real problem child is motor vehicle insurance (for which unfortunately FRED does not provide a graph), higher by only 0.1% for the month, but higher 12.7% YoY!

What the above all means is that if we were to take out the two areas that we know lag, shelter and transportation services, consumer inflation would probably be up only something like 1% YoY.

Although I won’t bother with a graph, the former problem children of food away from home and electricity both waned this month, with the former increasing 0.3% for the month and the latter declining -0.4%. On a YoY basis they are now up less than 4%, at 3.6% (nearly a 4 year low) and 3.1% respectively.

But as indicated above, there are several emerging areas where prices are firming.

The first is new and used vehicle prices. While these remain lower YoY, in the past few months the prices for each have risen again. In November new car prices increased 0.7% and used cars 2.0%. Both of these are near or at their highest monthly increases in the past two years:

On a YoY basis, while new car prices are still down -0.7%, used car prices are up 2.0%.

So this sector will bear watching more closely.

The second emerging sector of concern is medical care services, which increased 0.4% for the month, and are up 3.7% YoY:

In the context of the last 10 years, this increase is not unusually high, but they have been in an uptrend for the past two years.

To summarize: while the much-covered headline and core inflation measures firmed, this was nearly all about two lagging sectors: shelter (especially fictitious house rents) and motor vehicle insurance and repairs. Aside from that, prices remain well behaved, although there are several new sectors to watch, namely vehicle and medical service prices.

The case for accelerating inflation is weak

 

 - by New Deal democrat

No economic news again today. Tomorrow we will get the CPI report for November. As to which, I have read a few posts in which the claim is made that inflation, especially core inflation, is picking up again. It certainly could happen, but in my opinion the evidence for such a claim at present is pretty weak.

Let me start with the below graph that arrives from Apollo Investments via Carl Quintanilla:

 

Notice the emphatic arrow at the far right. But then take a look at the actual lines on the graph. Neither the 3, 6, nor YoY averages are moving up. The only basis for the arrow is the one month change, annualized. So in the next graph below I have decomposed the one month changes in core inflation (blue) into shelter (red) and core services less shelter (gold):

At root, the basis for that upward arrow is a one month very low reading for shelter in June, and an increase especially in services less shelter in September and October.

Another graph I came across puts this in good perspective, decomposing the contributions to headline CPI into food and energy, goods, shelter, and services ex-shelter:

Since food and energy aren’t included in core inflation, we can ignore those bars. And goods obviously are not contributing to inflation at all. So what we see is that the decelerating contribution by shelter (blue) has slowed, while the contribution from services ex-shelter (green) has held steady and actually increased a little.

As to shelter, here is the most recent update of house prices vs. owners equivalent rent:

There is simply every reason to believe that OER is going to continue to decelerate, although the YoY comparisons are more challenging.

As to rent of primary residence, here is the latest Apartment LIst National Rent Report:

Rents on new leases are simply not going up. As multi-year leases from 2021 and 2022 continue to roll off, this portion of CPI ought to continue to decelerate as well.

Finally, core services ex-shelter are dominated by transportation costs, in particular motor vehicle insurance and repairs. As I have written in the past, these are if anything even more lagging than OER:

They respond to previous increases in car prices, as the parts used for repairs of those vehicles also increase in price, and insurers respond to those collision and repair claims with increased premiums.

As to which, I saw another piece yesterday suggesting (used) vehicle prices were starting to rise again. Here’s the most updated graph of average hourly wages vs. new and used car prices:

It’s true that car prices are finally stabilizing again, as new vehicle production has ramped up to that prior to COVID, but any sustained surge looks unlikely. Used vehicle prices are somewhat noisy, so the one month increase in October doesn’t yet look like it is terribly significant.

Meanwhile, for what it’s worth, gas prices just made a new 3 year low:

Although by definition that doesn’t fit into core inflation, it’s still very good news for headline inflation.

The bottom line is that, excluding shelter, inflation is about average compared with the decade before the pandemic. Shelter remains the big issue, and there is every reason to believe it will continue to decelerate:

We’ll see tomorrow.

Yellow flags from the November jobs report

 

 - by New Deal democrat

Most of the commentary about Friday’s jobs report for November was positive. By contrast, my summary - in which I averaged the two last reports to take into account the hurricane whipsaw - was much more cautious, as were the takes by a few other commentators I respect, like Ernie Tedeschi.

 

In this post I am going to delve into more detail into why I believe it is now prudent to raise the yellow caution flag about employment.

Let’s start with the totals. For many months I and many others have written that the trend in the Household Survey (red in the graph below) has been frankly recessionary - but is probably skewed to the downside by failing to take into account the surge in new jobs entrants caused by the post-pandemic immigration spike. On a YoY% basis, for the second time in three months, the Household Survey recorded a net *decrease* in jobs.

Meanwhile the Establishment Survey (blue) has been much more positive, showing jobs gains in every single month. As of November, the YoY% growth rate was 1.45%. The below long term graph subtracts 1.45% from the Establishment number and adds 0.4% to the Household number to show both current YoY levels at the zero line: 

Unsurprisingly, with the exception of one month in 1952, any time the YoY change in jobs in the Household Report has been this low, it has been because of a recession. 

What is more concerning is that, with the exception of 1952 and a number of months in the decade before the pandemic, the same has been true of gains of only 1.45% YoY in the Establishment Survey as well. Here’s a close-up of that decade:

YoY employment gains of the current magnitude or less were only measured for one month in 2013, several months near the end of 2017, and during 2019 when contemporaneously I was worried about whether a recession was in the offing.

One important consideration is population growth over this long period of time. A gain of 100,000 jobs in a month now is likely very different than a 100,000 gain back when the US population was half of what it is now.

The next graph corrects for that, subtracting the YoY% gain in the prime working at population from the YoY% in job growth. The result is the net YoY% gain over and above the prime working age population for the period:

Except during the 1970s and 1980s, when women were entering the labor force by the millions, a 0.9% YoY net gain has almost always meant a recession. Even during the 10 years before the pandemic, there were only 4 months during 2018 when the YoY gain was so low.

If that weren’t concerning enough, there is good reason to believe that job gains in the Establishment Survey are going to be revised lower for 2024. That’s because the QCEW, which is not a sample but an actual census of about 95% of all firms, and to which the jobs survey is benchmarked twice a year, has shown a great deal more slowing in the past 18 months. Here’s Prof. Menzie Chinn’s most recent update from Econbrowser:

The QCEW unfortunately is not seasonally adjusted, so the best way to compare that and the 2024 payrolls numbers is YoY. This shows a stark difference.

In June 2023, the QCEW showed a 2.5% job gain. As benchmarked, nonfarm payrolls show a 2.4% gain. But the latest QCEW report through June 2024 shows only a 0.8% YoY job gain, vs. 1.6% for payrolls through that month. If nonfarm payrolls are similarly re-benchmarked, then the *only* month going back 75 years when such a meager gain did not coincide with a recession was one month in 1952.

Further, every month I update the leading components of the jobs report, which mainly are manufacturing and components of construction jobs, as well as goods-producing jobs as a whole. And for the first time during this recovery, goods-producing jobs as a whole have stopped growing over the last two months. Here’s what they look like post-pandemic:

Since July, only 7,000 goods producing jobs have been added, or only a .03% increase. In the past 8 months, only 39,000 goods producing jobs have been added, an increase of .18%. That isn’t necessarily recessionary. As the longer-term graph below shows, there have been similar stalls in 1995, 1999, and 2016 without recessions following:

But on the other hand, outright declines in goods producing jobs have occurred for at least six months, and sometimes over a year, before about 3/4’s of all recessions going back 75 years:

Indeed, even the current 0.7% YoY gain has almost always in the past meant a recession (blue in the graphs below):

The exception is the 10 years before the pandemic:

Further, if we simply continue the trend growth for the last eight months, that would be a 0.27% job gain in goods producing jobs YoY by March 2025, which would be lower than at any point in the 10 years before the pandemic.

But as the graphs just above also show, job growth in services remains robust, at present up 1.57% YoY. While up until 2000 even that would have typically only occurred in recessions, it has been an average rate of growth since throughout the expansions as well. 

Finally, the stalling out in goods-producing jobs has been exclusively a manufacturing story. As the below graph shows, job gains in construction (dark red, right scale) and residential construction (light red, right scale, *8 for scale) continue:

As I have pointed out many times in discussing housing, residential construction jobs have almost always turned down well in advance of recessions. While housing units under construction are down -15% or so, which typically in the past has coincided with layoffs in residential construction, as of now they certainly have not.

In conclusion, there is sufficient cause for concern to raise a yellow caution flag about the trend in employment growth. But there are nowhere near sufficient reasons to hoist a red warning flag.

Weekly Indicators for December 2 - 6 at Seeking Alpha

 

 - by New Deal democrat

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

This week whipsawed the data that was heavily influenced by Thanksgiving week. 

The tone of the short leading and coincident data remains positive. The negativity of much of the long leading data is becoming more problematic.

As usual, clicking over and reading will bring you up to the virtual moment as to the state of the economy, and reward me with a penny or two towards lunch for calculating and organizing it for you.

November jobs report: the expected monthly rebound masks deeper declining trends

 

 - by New Deal democrat



To understand this month’s jobs report, let’s start with last month’s, where I wrote that “there were some signs of real weakness in this report that do not appear to be hurricane-related. But Hurricane Milton, as well as the strike, had an impact, so take this report with a gigantic helping of salt.”

So everyone, including me, expected a big rebound this month, and we got one. As I’ll get into below, though, it is especially important to average the two months together to get a better idea of the trend.

Below is my in depth synopsis.

HEADLINES:

• 227,000 jobs added. Private sector jobs increased 194,000. Government jobs increased by 33,000. the two month average was an increase of +131,500.
• The pattern of downward revisions to the last months reversed this month.. September was revised upward by +32,000, and October by +24,000, for a net increase of +56,000.
• The alternate, and more volatile measure in the household report, showed a decrease of -355,000 jobs. On a YoY basis, this series has *declined* by -725,000 jobs, which remains consistent with recession, as it has for months. This is the second time in three months this measure has shown a YoY decline.
• The U3 unemployment rate rose 0.1% to 4.2%. Since the three month average is 4.167% vs. a low of 3.7% for the three month average in the past 12 months, or an increase of over 0.4%, this means the “Sahm rule” is back in effect.
• The U6 underemployment rate also rose 0.1% to 7.8%, 1.4% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now declined -180,000 to 5.486 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. This month they were again mixed, but tilted towards negative:

• the average manufacturing workweek, one of the 10 components of the Index of Leading Indicators, rose 0.1 hour to 40.7 hours. This remains down -0.8 hours from its February 2022 peak of 41.5 hours, but on the other hand is only -0.1 hour below its 18 month high.

• Manufacturing jobs rose 22,000. But this only reversed half of the -44,000 strike-related decline last month, so the two month average is negative.
• Within that sector, motor vehicle manufacturing jobs declined -400. The two month average is -3,200. 
• Truck driving increased 2,900. The two month average is +950.
• Construction jobs increased another 10,000. The two month average is +9,000.
• Residential construction jobs, which are even more leading, rose by 1,400 to another new post-pandemic high.
• Goods producing jobs as a whole rose 34,000, but because they declined -42,000 last month, the two month average is -4,000. This is especially important, because these typically decline before any recession occurs. As I wrote last month, “in the absence of special factors this would be a serious red flag for oncoming recession.” Thus the net two month decline is worth at least a yellow flag.

• Temporary jobs, which have generally been declining since late 2022, rose by 16,000, although the two month average is -850. These are down over -550,000 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 97,000 to 2,209,000. The two month average is an increase of +32,500.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.09, or +0.3%, to $30.57, for a YoY gain of +3.9%. Their post pandemic peak of 7.0% in March 2022. This is equal to their recent low in July. Nevertheless, and importantly, this continues to be significantly higher than the 2.6% YoY inflation rate as of last month.

Aggregate hours and wages: 

• The index of aggregate hours worked for non-managerial workers rose 0.1%, vs. last month’s revised unchanged level. This measure remains up 1.4% YoY, which is higher than its 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. This increase may be just noise, but at least for this month it reverses the slow deceleration since the end of the pandemic lockdowns. With the latest YoY consumer inflation reading of 2.6%, 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 26,000, but the two month average is a decline of -10,500. These tend to be well-paying jobs. Although the YoY comparison therefore improved this month, they are only higher YoY by 0.4% - a very low increase that has *only* happened in the past 80+ years immediately before, during, or after recessions. 
• The employment population ratio declined another -0.2% to 59.8%, after a -0.2% decline last month, vs. 61.1% in February 2020.
• The Labor Force Participation Rate declined another -0.1% to 62.5%, after a -0.1% decline last month, vs. 63.4% in February 2020. The prime 25-54 age  participation rate declined -0.3% to 83.5%, vs. 84.0% in July, which was the highest rate during the entire history of this series except for the late 1990s tech boom.

SUMMARY

On a month over month basis, this report was very positive, as with the exception of the labor force participation rate and the employment population ratio, everything rebounded - as expected.

That’s why looking at the average of the past two months is so important. And there, the news isn’t so good at all. In addition to upticks in the unemployment and underemployment rates, not only did manufacturing, motor vehicle production, professional and business jobs, and temporary help jobs decline further, but for the first time, so did goods-producing jobs as a whole. For the last four months, there has been less than a 0.1% gain, and only a 0.2% gain for the last eight months. Even since the accession of China to regular trading status, such meager gains have signaled at least weakness if not outright recession.

There certainly were bright spots, as construction, including residential construction jobs, continued to plow ahead. The downturn in trucking jobs reversed. Those who want a job now but have not applied for one also decreased. And aggregate hours worked and aggregate payrolls for nonsupervisory workers both increased. This suggests that consumer spending will continue a net positive in the next few months.

Last month I closed with “I would take 60% of this month’s decline as temporary, but 40% real.” This month’s report is confirmatory of that hypothesis, with the two month average gain being 131,500, and the three month average 173,000. In other words, the trend of deceleration in the jobs market is continuing without abatement. If this trend continues for another 12-15 months, it will be negative - in other words, signaling a recession.

Jobless claims: neutral - with an extra grain of salt

 

 - by New Deal democrat

As I cautioned last weekend in my “Weekly Indicators” update, we have entered that period of the year where Holiday seasonality means take everything with at least a little grain of salt. For example, this year Thanksgiving was almost one full week later than lat year.

With that caveat, initial jobless claims for Thanksgiving week this year increased 9,000 to 224,000. The four week moving average increased 750 to 218,250. Continuing claims, with the typical one week lag, declined -25,000 to 1.871 million:

As per usual, the YoY% changes are more important for forecasting purposes. So measured, initial claims were up 3.7%, the four week average up 0.3%, and continuing claims up 2.9%:

On the face of it, these comparisons are a little weak, since they are all higher YoY, but not nearly enough to warrant any special concern. Still, take even that statement with a little extra caution because of seasonality.

Looking at tomorrow’s unemployment rate for November, the suggestion is that absent the impact of immigration unemployment should be in the area of flat to 5% (as a percent of a percent, left scale) higher than one year ago. Since, per the gray line (right scale) which shows the actual unemployment rate, one year ago was 3.7% in November, that means trending towards an unemployment rate of 3.7%-4.0%:

This is all neutral - with a grain of extra salt.

ISM non-manufacturing shows that services continue to power the economy forward. Are they inflationary?

 

 - by New Deal democrat

Because services are roughly 3/4’s of the economy, I now pay a lot of attention to the economically weighted average of the ISM manufacturing and services indexes. Since the accession of China to normal trading status with the US, a downturn in manufacturing alone has simply not been enough to forecast recession - which has again been true in the past two years.

This morning the ISM non-manufacturing (i.e., services) index again came in positive, at 52.1, while the more leading new orders subindex came in at 53.7. Their three month weighted averages are 54.3 and 56.8, respectively.

Since the three month average for the manufacturing index is 47.4, and for the new orders component 47.9, that means the economically weighted three month averages are 52.6 for the total indexes, and 54.6 for the new orders components.

This means that the economy is nowhere near a recession for the next few months, as services continue to power it forward.

An interesting question is whether the strength in services, which as you can see above includes continued strong pricing pressure, translates into continued elevation in the non-shelter services portion of the CPI and PCE indexes. I haven’t done a comparison, but it very much looks like a significant correlation to calculate going forward.

JOLTS report for October: continuing trend of deceleration has begun to pose a problem

 

 - 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. It also is a slight leading indicators for both initial jobless claims and unemployment; and for forecasting wage growth as well. 

Like many other statistics concerning jobs, the JOLTS series have been deceleration for several years. The question now is whether they level off or continue to decelerate towards outright declines in net job creation. 

In October, the data was mixed. The soft statistic of job openings as well as the hard data of quits and also layoffs and discharges were positive, while actual hires declined. The below graph norms the series above (expect for quits) to 100 as of just before the pandemic:

Both actual hires, as well as quits, turned weaker than their pre-pandemic levels a little more or less than one year ago respectively. Openings remain higher but continue their decelerating trend as well.

Showing the same data as YoY% changes tells us that there has been no significant change in the decelerating trend:

In other words, there is no evidence that these metrics have begun to level off.

To show the longer historical trend, I have normed each of these series by the prime age population level, and also normed to zero as of their current readings, below:

None of these are actually negative, but hires in particular are mediocre compared to their performance since the turn of the Millennium, while quits remain at pretty robust rates. Job openings have softened but are confounded by their long term inflating trend that mainly shows changes in how businesses handle purported vacancies.

The best news in October was that after rising sharply due to hurricanes in September, layoffs and discharges retreated back into their range for the previous year. This is of a piece with the decline in initial jobless claims during November back to their previous range as well:

This may translate into a decline in the unemployment rate in Friday’s report for November as well.

Finally, the quits rate (blue in the graph below) has a record of being a leading indicator for YoY wage gains (red):

The quits rate stabilized earlier this year, before resuming its decline from June through September. This month, as you can see, the rate jumped again, but is likely just noise:

Despite the positive news on the quits rate this month, the likelihood is that on a YoY basis wage gains will continue to decelerate as well. If inflation stabilizes or picks up again, this could create a problem next year. The same could be said for the overall picture of the JOLTS data: no problem now, but if the trend continues, possibly a big problem by later next year.

ISM manufacturing remains weak, while construction spending continues to power along

 

 - by New Deal democrat

As usual, the month’s data begins with the ISM manufacturing index, and with a one month delay, construction spending.

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. As a refresher, any number below 50 means contraction.

In November both the total index and the more leading new orders subindex improved. The former rose 1.9 to 48.4, while the latter rose 3.3 into expansion at 50.4.

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

JUN 48.5. 49.3

JUL. 46.8. 47.4

AUG 47.2. 44.6

SEP 47.2. 46.1

OCT 46.5. 47.1

NOV  48.4. 50.4

Here is what they look like graphically:

The three month average for the manufacturing index is 47.4, and for the new orders component 47.9. For the past two months, the average for the non-manufacturing headline has been 55.5 and the new orders component has been 58.4. These are very strong positive numbers. For the weighted ISM infexes to signal recession, the services component would have to swan dive to about 40 in both readings. Since that isn’t going to happen, we can safely conclude that the ISM indexes forecast continued expansion for the next few months.

Construction spending for October also came in generally positive. On a nominal basis, total construction spending rose 0.4% to a new record, and residential spending rose 1.5%, down -0.8% since May 2024. Only manufacturing construction bucked the trend, declining -0.1%, and is now down -0.9% from its June 2024 peak.  Since the onset of the pandemic, total nominal construction spending is up 45.1%, residential up 53.7%, and manufacturing up 200.6% - this last due to incentivized re-shoring spending under the Inflation Reduction Act:

Since housing is such an important leading component of the economy, here is residential construction spending as above compared with the PPI for construction materials:

The prices of construction materials have been generally slowly declining for the past two years, meaning that real inflation-adjusted residential construction spending has risen to its highest level since January 2021, including a 0.4% increase in today’s reading:

The bottom line is that, while manufacturing remains weak, the economy continues to be powered along by (somewhat surprising) continued strength in construction, as well as the services sector.