Analyzing Economic Indicators

…It has begun. Over the last year, I have made the strongest possible case for the Fed to be proactive. Rates should have been cut this week – indeed, the rates should have been cut in January. We have seen this movie before. The Fed was very late to take inflation seriously in 2021. They brushed it off as “transitory”. However, it seemed obvious that inflation was surging. Real-time shelter inflation was increasing at a double-digit rate. Shelter has the largest weight in the CPI. Shelter operates with a lag. Hence, it was easy to forecast the surge. The Fed was forced to react after the damage was done. The same mistake has been repeated – despite many warnings. The recent CPI print was 3% year-over-year (YOY). Nearly two thirds of this print was driven by one component – shelter. Shelter inflation is reported at 5.2% YOY. This number is far from reality. For example, Apartmentlist.com rents are running -0.8% YOY - a full 6% below the official CPI number. Suppose we believe the real-time shelter inflation is 2%, not 5.2%. This means the real-time CPI would be 1.8%. If you believe shelter is 3%, then real-time CPI would be 2.2%. These numbers are well within the Fed’s target. The Fed prides itself on making data-driven decisions. However, it is unwise to make decisions based on stale data. The shelter inflation happened in the past. Keeping rates high will not impact what happened last year. It is always best to look at forward-looking indicators for policy decisions. ·      My yield curve indicator has been inverted for 20 months. It is 8 of 8 with no false signals since the 1960s. The maximum historic lead time has been 23 months (before the great recession). Ignore it at your own risk. ·      The Sahm Rule has been triggered. This indicator is not necessarily predictive because employment moves with the business cycle – but it is useful in telling us whether we are in a recession or not. We know that hiring has slowed and unemployment has risen – though the absolute rate is still relatively low. ·      Retail sales are highly correlated with personal consumption expenditures. Retail Sales are flat. Many do not realize that Retail Sales are not inflation adjusted. Taking inflation into account recent sales growth as well as YOY sales are negative. ·      There is considerable evidence that COVID-era savings have been drawn down. A recent release from Philadelphia Fed carried the headline: “Share of Delinquent Credit Card Balances Reaches Series High”. (The same report shows an alarming plunge in mortgage originations.) People are paying 20%+ interest on a card because their savings have run out. Indeed, if people are cutting back on fast-food expenditures, you know this is serious.  Drawing down the savings has fueled consumption expenditures over the past two years. That source of growth has ended. Now the Fed will have to play catch-up and cut by at least 50bp in September. Any recession is a self-inflicted wound. 

Back on recession watch, Leading Indicator #2 – the FHA mortgage delinquency rate. This isn’t typically in lists of leading economic indicators, but it may be a proverbial canary in the coal mine in the current context. FHA borrowers have low to moderate incomes, with a median income of about $75,000 a year, and most are first-time homebuyers. Judging from the recent increase in the delinquency rate on FHA loans, these households are under mounting financial stress. This is despite the exceptionally low 4% unemployment rate and goes in part to the credit characteristics of the borrowers, including lower credit scores and downpayments. Even more important may be their high debt-to-income ratios. With mortgage rates and house prices as high as they are, borrowers have to shell out a big share of their income to their mortgage payment to get into a home. They may have gambled that rates would fall and could refinance, bringing down their payment. However, the Fed’s higher-for-longer rate policy and quantitative tightening have forestalled that exit strategy. Combine this with higher homeowner insurance premiums and property taxes, and borrowers struggle to make mortgage payments. What happens when the job market wobbles even a little bit? Thus, why this is a good statistic to include in our recession watch. Not that the financial troubles of FHA borrowers are enough to push the economy into recession. Indeed, high and middle-income mortgage borrowers are having no trouble making their payments at this time – the gap between the FHA delinquency rate and those on Fannie and Freddie loans has never been as large. But if the economy is headed for trouble, it is FHA borrowers who will signal it first. And they are. #rates #FHA #income #recessionwatch #fed

This morning’s U.S. retail sales report landed squarely in “never judge a book by its cover” territory. Headline sales for March rose +1.4%, surpassing both consensus expectations and February’s +0.22% figure, but a deeper dive into the data reveals some concerning details: (1) Sales growth was highly concentrated in motor vehicles and building supplies (see accompanying chart), two areas likely to be among the most heavily affected by new U.S. tariffs; (2) The retail sales “control group,” which excludes autos, building materials and gasoline, and is considered a more precise gauge of consumer spending for the purpose of GDP calculations, increased just +0.4%in March, failing to meet the +0.5% consensus. What do these devilish details mean for investors? We think March’s favorable headline retail sales print is more likely a result of consumers accelerating purchases to get ahead of U.S. tariff implementation than a true indication of a rebound in consumer spending. This view is supported by the dramatic decline in nonstore retail sales growth, which collapsed from +3.2% in February to a meager +0.1% in March. Additionally, we anticipate that “hard” data (quantifying actual economic activity, such as retail sales) will soon begin to show the negative impact of trending weakness in “soft” data (such as consumer sentiment surveys) — perhaps beginning with releases covering the month of April. This could translate into continued market volatility, as deteriorating consumer resilience poses a potentially serious headwind to the broader economy.

Manufacturing edging toward expansion [with corrected figure] The Institute for Supply Management's® Manufacturing Purchasing Managers Index (PMI®) for September is out. The index shows continuing contraction in manufacturing, but at only a marginal rate. 💡 The Manufacturing PMI® came in at 49, compared with 47.6 In August. This number is a diffusion index, which measures the difference between positive and negative responses. Because the September number is below 50, it indicates that slightly more purchasing managers are reporting contracting activity than those reporting expanding activity. The number tells us how widespread contraction is among responding firms, but not how severe the decline in activity is. ⬇ The manufacturing PMI® has been contracting now for eleven consecutive months, as the manufacturing part of the economy has fallen into recession. Manufacturing industrial production, reported by the Federal Reserve, has been lower than the previous year for the past six months. ⬆ The September figure of 49 continues an improving trend that began in July. According to ISM®, "A Manufacturing PMI® above 48.7 percent, over a period of time, generally indicates an expansion of the overall economy." In any case, the less widespread contraction give some hope that manufacturing weakness may soon ease. ⬆ The PMI® data also include more detailed sub-indexes. In September, the production index broke into positive territory after being flat in August. Slightly more respondents reported employment expansion than contraction. A larger proportion of respondents reported an increase in new orders, but order backlogs are shrinking. Prices paid for materials decreased more broadly in September, although the recent energy price could change that in coming months. The ISM® also reports an index for the the services sector. That one has been running in slight positive territory, consistent with other indicators that the service side of the economy has held up better than manufacturing. The September services PMI® comes out Wednesday. You can read more about the ISM® Report on Business® at their web site, https://lnkd.in/gD4hy76r. #ism #PMI #manufacturing #production  

American consumers confidence plunges amid sweeping tariffs in effect The number one keyword that everyone needs to focus on in this tumultuous time is confidence. A lack of confidence from businesses, the financial markets, and consumers alike can become a vicious cycle that can push an economy into a recession. The financial markets have already cast their vote of no confidence in the current tariff policy and the escalating trade war between the U.S. and China, as both the dollar and bond yields have dropped significantly. Following the release of the University of Michigan consumer confidence data, American consumers have also shown a vote of no confidence. The index has fallen to its lowest level since 2022, while short-term inflation expectations have risen to their highest levels since the 1980s. We will soon receive more data on business confidence. However, given the current level of uncertainty, we should expect a sharp decline in business sentiment—likely resulting in a significant pullback in capital expenditures. This drop in market confidence is one of the main reasons we believe the probability of a recession in the next 12 months is now much higher than it was just three months ago. The final piece of the puzzle—and perhaps the biggest question on everyone’s mind—is: “How will the Fed react?” As things stand, we believe the Fed will have to prioritize controlling inflation over addressing unemployment, as both inflation and inflation expectations risk spiraling out of control.

If you thought strong wage growth was a sign that the US labor market was still overheated, you can put that concern to rest. According to the Employment Cost Index, compensation and wage growth continued to slow in the second quarter of the year. Wages for private sector workers, a key metric, slowed considerably over the quarter and are now growing at an annual rate of 3.4%. This is the slowest growth since September 2020. Not only is this a slower pace compared to the past few years, but the current rate is consistent with low inflation and current labor productivity growth. Even if the firming of wage growth for non-incentive-paid private sector workers—a series closely watched by the Federal Reserve—suggests that underlying wage growth is closer to 4%, this is still a sustainable rate. With the current robust labor productivity growth, employers can afford robust wage growth. Additionally, inflation-adjusted wages remain below their pre-pandemic trend, indicating that workers could benefit from an increase in purchasing power. The wage growth data aligns with other labor market indicators: this labor market is not adding fuel to the inflationary flames.

While it is loads of fun to think all is well, we must on occasion confront our biases regularly in order to survive long-term. So allow me to help with that. Fed Funds is at 5.50%; 30-fixed mortgage rates are at 8%; CRE re-fi's are pushing 9%+ and losses are accumulating. Over $8 trillion of US debt will re-fi from a ~2% coupon to a ~5% coupon in the next 12 months. Inflation from the beginning of the Biden presidency in January 2021 to now is nearly 18%. And now one more brick in the wall folks. The US Leading Economic Indicators (LEI) Index has dropped again for the 19th consecutive month. That is the longest streak of consecutive monthly LEI index declines since June 2007-April 2008 (22 months). There are 10 components of the LEI Index: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM Index of New Orders; Manufacturers’ new orders for non-defense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500 Stock Price Index; Leading Credit Index; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions. The LEI Index, an index of indexes, is "... constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component," per the Conference Board, which publishes the index. As part of the latest report, they said "The Conference Board expects elevated inflation, high interest rates, and contracting consumer spending - due to depleting pandemic saving and mandatory student loan repayments - to tip the US economy into a very short recession." They expect a short recession in 2024 and a very low positive GDP of +0.8% for the year. The Conference Board's recession call is a revision from their report last month, where they expected a soft landing. Just saying... Expect the best; prepare for the worst. #fedpolicy #interestrates #riskmanagement

There is a lot of pessimism in the business and financial news cycle these days due to the uncertainty related to the administration's moves on trade, immigration, foreign policy, and other matters important to our nation's future. The dreaded "R" word (#recession) is appearing more and more. What I find missing is the discussion of the momentum visible in the US #economy coming into 2025. Take the consumer for example. Although #consumerconfidence has taken a steep dive in recent months, we were out there spending money at a healthy clip through February. Compared to last February, seasonally adjusted Advanced Retail Trade and Food Services were up 3.1% last month. Quarterly growth was even higher at 3.8%. Yet all the headlines talked of a whiff in consumer spending. The B2B economy, as reflected in US #industrialproduction data released this week, was also on the rise (from a business cycle perspective - see chart below) through February. In fact, the annual growth rate entered positive territory for the first time since late 2023, while the quarter-over-quarter #data implies further cyclical rise in the months ahead. Why is no one talking about this? At the very least we must recognize that the economy was accelerating before all the trade-related shenanigans began. Alex's Analysis: Leading indicators like Capacity Utilization (6-month lead), Copper Futures (9-month lead) and ISM's PMI (12-month lead) continue to point to further rise in the US industrial economy into the second half of the year. Most consumers, who account for nearly 70% of our economy in GDP terms, remain employed (outside of DOGE cuts), and thus should be able to continue spending in the near-term future if the trend holds. My current assessment is if the policy volatility and uncertainty can be contained to the first half of the year, with decisions on reciprocal #tariffs and specific product categories made soon after the April 2nd research deadline, we should not see a recession in the US in 2025. However, if we can't get out of our own way and the chaos continues past Q2, then the headwinds may become strong enough to result in a contraction of economic activity this year. I will eagerly await the developments and keep you updated if my expectations change.

📊 Investors React to Election Results: Winners and Losers Investors are showing clear preferences after election results. Here’s a breakdown and the underlying drivers: 🔼 Top Performers: - Financials (+6.16%): Tax cuts and lighter regulations are expected to spur economic growth, which benefits financial institutions. Increased spending could lead to more borrowing and investments, driving the sector forward. - Industrials (+3.93%): Pro-business policies, such as reduced regulations and tax cuts, fuel economic growth, making industrial stocks more attractive. Additionally, companies with a domestic focus benefit from tariffs that penalize imports. - Consumer Discretionary (+3.62%): Increased economic growth and potential tax cuts often lead to higher consumer spending. Sectors like retail and leisure could see a boost as disposable income rises. Energy (+3.54%): Less regulatory pressure on traditional energy sectors like oil and gas could increase production and profitability, driving up stock values in this space. - Information Technology (+2.52%): Although international tech companies may feel the pinch of tariffs, domestic-focused tech firms are still poised for growth, especially with a potential boost from stronger economic conditions. 🔽 Underperformers: - Utilities (-0.98%) and Consumer Staples (-1.57%): These defensive sectors generally underperform in a high-growth, high-inflation environment. With the prospect of economic expansion, investors tend to rotate out of safe-haven assets into more cyclical stocks. - Real Estate (-2.64%): Higher interest rates, expected because of inflation, could make borrowing costlier, negatively impacting real estate investments. 💬 Key Drivers Behind Market Sentiment: - Tariffs: Domestic-focused companies benefit as tariffs make imported goods more expensive. However, this could harm companies that are heavily reliant on international markets and supply chains. - Tax Cuts & Reduced Regulation: Expected tax cuts and deregulation catalyze higher economic growth, favoring cyclical sectors like financials, energy, and industrials. - Defense Spending: Increased defense budgets could provide tailwinds for contractors and related industries. - Inflation & Interest Rates: Higher interest rates are anticipated with rising inflation concerns. This strengthens the dollar, making U.S. equities more attractive than fixed-income securities. 📈 Investment Implications: The election results signal a potential economic policy shift favoring domestic, cyclical, and growth-oriented sectors. In this environment, investors might find more opportunities in equities over fixed income, especially in sectors benefiting from economic expansion and reduced regulatory constraints. This post is for informational purposes, not investment advice. 

March Retail Sales: Cautiously Resilient Retail sales for goods increased 1.4% month/month in March compared to 0.4% growth previously. Auto sales were a main driver of this accelerated growth. When interpreting retail sales data, it’s essential to look deeper: ➡️ Retail sales mainly reflect goods consumption, a small part of overall consumption, as two-thirds of U.S. expenditures relate to services. ➡️ Retail sales aren’t adjusted for price changes, so higher growth could reflect faster price increases, even if volumes grew more slowly. Breaking down retail sales into subcomponents and aligning them with corresponding CPI components gives a clearer picture: 1️⃣ Real core goods spending (inflation-adjusted retail sales excl. gas stations) went up ever so slightly at 0.7% annualized 3-month basis, after declining in January and February (first chart 👇). 2️⃣ Real core goods spending, excluding motor vehicles, however, grew at a 2.9% 3-month AR pace, after recording 11.9% growth in February. On a monthly basis this inflation-corrected spending category has been expanding for December and February (+3.5%, +8% and +25.4% m/m AR resp. - see orange line in second chart 👇) but declined a notable -19.4% m/m AR in March. 3️⃣ Bar and restaurant spending growth was 1.7% 3-month AR in inflation-adjusted terms (purple line in first chart 👇), after declining in the preceding three months. Over the month, real bar/restaurant spending recovered significantly in March vs. February: +18.2% vs. -13.8% (see purple line in second chart 👇). The sharp rise in trade policy uncertainty since the elections incentivized households to pull forward durable goods spending to avoid future tariffs-induced durable goods price increases. Consequently, inflation-adjusted motor vehicles spending in particular has been volatile in both Q4 and Q1 on account of elevated trade policy uncertainty (third chart 👇). For Q1 consumption spending in the forthcoming Q1 GDP report, the relevant metrics are real core goods excl. motor vehicle dealer and maintenance spending as well as real bar/restaurant spending, and these suggest a slower but still solid pace for both. While underlying trends in the March CPI report suggest sticky, above-target inflation trends, real spending remained solid in March as households ramp up durable goods spending ahead of forthcoming tariff hikes. Combined with a still solid labor market this means the Fed will likely not have a lot of scope to cut rates in 2025, in contrast to, e.g., the ECB where underlying inflation trends are at the ECB's inflation target (final chart 👇) which could temper further dollar weakening in the near term. For more visit Macro Market Notes (including thoughts on last week's CPI report): https://lnkd.in/eUqaWm73 #retailsales #federalreserve #dollar