Relevant and even prescient commentary on news, politics and the economy.

A closer look at the housing rebound

A closer look at the housing rebound

On Wednesday we got some excellent new residential construction numbers. I went into a lot more detail, showing how – exactly as I forecast – the turn in interest rates led the turn in housing sales by about six months, over at Seeking Alpha.

As usual, clicking over and reading helps reward me with a penny or two for my efforts.

While I am at it, on the subject of housing, here is a chart I am working on (not completed yet!) for another post, showing the maximum percentage decline in total and single family housing permits from expansion peak until the onset of recession, ever since reports started in the early 1960s, plus the decline from peak between the beginning of 2018 to the present:

Recession onset Total housing
Permits
1 unit housing
Permits
——
12/1969  -22.7%  -20.7% ———
11/1973  -42.0  -40.1
 6/1980  -36.8  -43.7
 7/1981  -37.4  -38.4
 7/1990  -44.3  -35.1
 3/2001  -11.5  -12.5
12/2007  -49.2  -58.7
2018-19   -12.4  -11.9

Note that in all cases but two (1969 and 2001), the declines were in excess of 30%. The recent  decline, at roughly 12%, is almost identical to the decline prior to the 2001 recession. Why the 2001 recession happened despite the relatively small decline is important (and a subject of that other post to come!).

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Initial claims increasingly foreclose 2019-early 2020 downturn

Initial claims increasingly foreclose 2019-early 2020 downturn


I’ve been monitoring initial jobless claims closely for the past several months, to see if there are any signs of stress. This is because the long leading indicators were negative one year ago, and many – but not a majority – of the short leading indicators have recently turned negative as well. So I have been on “recession watch.” But no recession is going to begin unless and until layoffs increase.
To reiterate, my two thresholds are:1. If the four week average on claims is more than 10% above its expansion low.
2. If the YoY% change in the monthly average turns higher.

As of this week, initial claims continue to be very close to their expansion lows. The 4 week moving average of claims as of this morning is 212,500, only 11,000, or 5.3%, above the lowest reading this expansion:

On a YoY% change basis, the 4 week average is 0.6% higher than one year ago:

 

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Housing: BOOM!

Housing: BOOM!

Well, this is an easy post. This morning’s report (Wed.) on housing permits and starts showed new expansion highs in both overall permits and starts. The less volatile single family segment also recovered, with both single family permits and starts at one year highs, although slightly below their expansion peaks.

Here are total and single family permits:

And here are total and single family starts:

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Industrial production rebounds; another message of slowdown, no recession

Industrial production rebounds; another message of slowdown, no recession

 Industrial Production is the King of Coincident Indicators.  When industrial production peaks and troughs coincides more often than any other indicator to NBER’s recession dating. Let’s take a look at the report for August, which was pretty darn good, which was released this morning.

Production as a whole increased 0.6%, and last month’s report was revised upward by +0.1%. The manufacturing component also increased, by 0.5%. Both, however, are still below their peaks set last December (left scale in the graphs below). The other important component, mining (which includes oil production) increased 1.4%, reversing July’s decline, missing a new high by less than 0.1% (right scale):

Stepping back for a longer term look, here is the same graph including the “shallow industrial recession” of 2015-16:

 

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August retail sales confirm healthy consumer sector

August retail sales confirm healthy consumer sector

Retail sales are one of my favorite indicators, because in real terms they can tell us so much about the present, near term forecast, and longer term forecast for the economy.

This morning retail sales for August were reported up +0.4%, and July, which was already very good at +0.7%,  was revised upward by another +0.1% as well. Since consumer inflation increased by +0.4% over that two month period, real retail sales have risen +0.7% in the past two months. As a result, YoY real retail sales, which had been faltering earlier this year, are  now up +2.3%.

Here is what the last five years look like:

Others may use other deflators. I use overall CPI because:

 

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Real average and aggregate wage growth for August

Real average and aggregate wage growth for August

Now that we have the August inflation reading, let’s take a look at real wage growth.

First of all, nominal average hourly wages in June increased a strong +0.5%, while consumer prices increased +0.1%, meaning real average hourly wages for non-managerial personnel increased +0.4%. This translates into real wages of 97.5% of their all time high in January 1973, a new high following revisions to prior months:

On a YoY basis, real average wages were up +1.7%, still below their recent peak growth of 1.9% YoY in February:

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July JOLTS report: m/m improvement, but slowing trend

July JOLTS report: m/m improvement, but slowing trend

Yesterday*s  morning’s JOLTS report for July was in general surprisingly positive on a monthly basis, but continued to show a slowing trend.

To review, because this series is only 20 years old, we only have one full business cycle to compare. During the 2000s expansion:

  • Hires peaked first, from December 2004 through September 2005
  • Quits peaked next, in September 2005
  • Layoffs and Discharges peaked next, from October 2005 through September 2006
  • Openings peaked last, in April 2007

as shown in the below graph (quarterly, normed to 100 as of May 2018):


Here is the close-up on the past three years (monthly):

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Scenes from the August jobs report

Scenes from the August jobs report

The August jobs report was the mirror image of most earlier reports this year: a lackluster Establishment report but a strong Household report. Let’s take a look.

By now the fact that there has been a jobs slowdown is pretty well established. In the last 7 months, only 964,000 jobs have been added, an average of 138,000 per month. If we subtract this month’s temporary census hiring of 25,000, those numbers drop to 939,000 and 134,000, respectively:


And keep in mind that the number of jobs added between March 2018 and March 2019 is going to be reduced from roughly 210,000 to 167,000 per month.

Since last December, of the leading employment sectors, only residential construction has continued to increase significantly. Manufacturing has added only 19,000 jobs in the last 6 months, and temporary jobs have actually declined since the end of last year:

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August jobs report: for once, the underwhelming headline masked very good internals

August jobs report: for once, the underwhelming headline masked very good internals


HEADLINES:
  • +130,000 jobs added (+105,000 ex-Census)
  • U3 unemployment rate unchanged at 3.7%
  • U6 underemployment rate rose 0.2% to 7.2%

Leading employment indicators of a slowdown or recession

 
I am highlighting these because many leading indicators overall strongly suggest that an employment slowdown is coming. The following more leading numbers in the report tell us about where the economy is likely to be a few months from now. These were positive.

  • the average manufacturing workweek rose +0.2 from 40.4 hours to 40.6 hours. This is one of the 10 components of the LEI and is positive (note last month was -0.3 so on net this is still -0.1 hours from two months ago).
  • Manufacturing jobs rose by 3,000. YoY manufacturing is up 138,000, a deceleration from last summer’s pace.
  • construction jobs rose by 14,000. YoY construction jobs are up 177,000, also a deceleration from last summer. Residential construction jobs, which are even more leading, rose by 7,000.
  • temporary jobs rose by 15,400 (note this *may* reflect census hiring).
  • the number of people unemployed for 5 weeks or less rose by 6,000 from 2,201,000 to 2,207,000. The post-recession low was four months ago.

Wages and participation rates

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Two sharply contrasting reports on the economy to start September

Two sharply contrasting reports on the economy to start September

We got two contrasting views of the economy this morning. (Tuesday)

First, the good news: residential construction spending increased in July. Below I show it in comparison with single family permits:

Typically construction follows permits. In the past few years, it has been almost coincident with permits. This is more good news for the important and leading housing sector, indicating that the decline that started in early 2018 has ended. With the continued recent further decline in mortgage rates, I expect further advances, although possibly not strong.

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