Q1 credit conditions showed no significant change

 

 - by New Deal democrat

The Senior Loan Officer Survey is a long leading indicator, telling us about credit conditions that typically turn worse a year or more before the economy turns down, and improve just at the economy is ready to turn up.

The big drawback of this series is that the information is only reported Quarterly, and with a one a one month lag. As I indicated in my introductory note yesterday, data for Q1 was released yesterday.

There are two series that have a long enough record to give us a lot of information: whether banks are tightening or loosening standards; and the demand for commercial and industrial loans. 

Let’s look at each in turn.

The first series is the percentage of banks tightening lending standards, meaning that a positive number means more tightening than loosening standards, i.e., positive is worse for the economy. In Q1, there was a slight increase in the percentage of banks tightening credit conditions:

Versus Q4 of last year, in Q1 there was a 1.1% increase to 15.6% in the number of banks tightening standards for large firms, and a 1.2% increase to 19.7% as to small firms. This is similar to what happened in 2002, is not a significant change q/q, and is much lower than the roughly 50% for both metrics back in Q3 of last year. As with Q4, this is consistent with coming out of past recessions.

The story was similar as to the second series, demand for commercial and industrial loans (confusingly, in this one higher does mean better). There was a slight downshift q/q of -1.6% as to large firms and -0.6% as to small firms:

Again, this has been more typical of an economy coming out of a recession than going in to one. 

The Chicago Fed also looks at credit conditions, but their data is weekly and thus much more timely. Here the data has been much more consistently good (these series, again, are ones in which a positive number means “tightening” and so is worse for the economy):

The Index adjusted for “normal” credit conditions has never shown any tightness since the end of the pandemic lockdowns in 2020. The more leading leverage subindex did show tigh contentions after the Silicon Bank failure last year, but has been negative or neutral for the past six months. Note that the leverage index has been more prone to false positives than the adjusted financial conditions index.

Unless for some reason the Fed decides to tighten again, or there is another spate of bank failures, credit conditions are either relatively loose (the Chicago Fed indexes) or “less restrictive” (the Senior Loan Officer Survey), which do not indicate any particular credit stress in the system.

For the second time in three months, the Household jobs Survey was recessionary

 

 - by New Deal democrat

First, a brief programming note. This week is particularly sparse in the new economic data department. The Senior Loan Officer Survey will be reported this afternoon, and on Thursday as usual we get jobless claims. Aside from that, nada. So I might take a day or two off.

But I want to spend some time looking more closely at last Friday’s jobs report(s). I use the plural, because last Friday there really were two very divergent reports. The Establishment report was decent, but as I say in the title to this post, for the second time in three months, the Household Report was what I would expect to see in a recession.

Let’s start by comparing the employment level (blue) with the unemployment level (red). The former did increase by a paltry 25,000, while the latter increased by 64,000. On a YoY basis, the employment level is up 0.3% (blue in the graph below), while the unemployment level is up 13.6% (red, /15 for scale). The graph adds or subtracts the current change so that both show at the zero line):

The next two graphs give the historical view, with the same adjustment:

At no point in the past 75 years have both metrics been at their respective current levels except during recessions. Only twice - in the 1950s - did they come even close.

A similar story is told by the U-3 unemployment rate (blue) and the U-6 underemployment rate (red)(this latter statistic has only been reported since 1994). Currently the unemployment rate is 0.5% higher than 12 months ago, and the latter 0.8% higher:

Again, here is the historical view:

Neither one has ever been this much higher YoY without a recession having already started.

Note that the above is different from the “Sahm Rule,” which is a three month average increase of 0.5% over the 3 month average low in the past 12 months. That metric currently stands at .37%:

With only 4 exceptions (and one near miss) in the past 75 years, even at this level a recession has already been occurring:

Turning to the employment side of the coin, the YoY change in the employment level is slightly below the YoY change in the prime age population, i.e., the number of people who became employed is less than the number of people who on net entered this prime employment demographic:

Historically only 4x in the past 50+ years has this been the case without a recession already occurring or at least imminent, and one of those times was only for one month:

At root the source of this divergence dates back to March 2022. Since then, while the Establishment Survey has indicated that jobs have grown by 4.6%, the Household Survey has indicated only a 2.1% gain:

Indeed this divergence between the two measures, on a YoY population-adjusted basis presently at about 1.7%, has only been matched, and usually only for a month or two, 8x in the past 50+ years:

As the above graph shows, while there is lots of noise, there has always been a reversion to the mean. Normally this is because the noisier Household series converges towards the more stable Establishment survey data. 

I suspect what is going on has to do with the formation and closure of new businesses. There is plenty of evidence that in the immediate aftermath of the pandemic, a record number of new businesses were started. If some of the self-employed at those businesses have attritted back into employment by others, that may explain the disparity. If so, I would expect to see a couple of outsized gains in the Household survey in the months ahead. We’ll see.

Weekly Indicators for April 29 - May 3 at Seeking Alpha

 

 - by New Deal democrat

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

Very little change this week in any of the indicators, but what there was had everything to do with the frame of reference, because all gas prices under $3/gallon have now dropped out of the three year reference period. Which means that - *relatively* speaking - gas prices are currently cheap!

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 some pocket change for organizing it for you in a coherent format.

April jobs report: counterbalancing March’s blockbuster good report, the first significant “ding” to the soft landing scenario in months

 

 - by New Deal democrat



In the past few months, my focus has been on whether jobs gains are most consistent with a “soft landing,” i.e., no further deterioration, or whether deceleration is ongoing; and more specifically: 

• Whether there is further deceleration in jobs gains compared with the last 6 month average, vs. a “soft landing” stabilization - and even whether the recent increase in monthly jobs numbers signifies a re-strengthening.

• Based on the leading relationship of initial and continuing jobless claims, whether the unemployment rate is neutral or decreasing; or whether there is further weakness.
• Based on the leading relationship of the quits rate to average hourly earnings, whether YoY wage growth would continue to decline slightly. It did continue to decline to a new post-pandemic low - but still at 4%.

All three of these metrics came in negative, in the sense of the lowest gain in jobs since last October, and the 4th lowest in over 3 years. The unemployment rate increased. And average hourly wage growth decreased to its lowest rate in almost 3 years as well.

Here’s my in depth synopsis.

HEADLINES:

• 175,000 jobs added. Private sector jobs increased 167,000. Government jobs increased by 8,000. 
•  February was revised downward by -34,000, while March was revised upward by 12,000, for a net decline of -22,000. This continues the pattern from nearly every month in the 16 months of a steady drumbeat of downward net revisions.
• The alternate, and more volatile measure in the household report, showed a paltry 25,000 increase. On a YoY basis, in this series only 529,000 jobs, or 0.3%, have been gained. This is the lowest YoY increase since the pandemic lockdowns.
• The U3 unemployment rate rose 0.1% to 3.9%, tying February’s 2 year high.
• The U6 underemployment rate also rose 0.1% to 7.4%, 0.9% above its low of December 2022.
• Further out on the spectrum, those who are not in the labor force but want a job now rose 194,000 to 5.637 million, vs. its post-pandemic low of 4.925 million set just over 12 months ago.

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. These were very mixed:

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

• Manufacturing jobs rose 8,000.
• Within that sector, motor vehicle manufacturing jobs declined -2,100. 
• Truck driving declilned -300.
• Construction jobs increased 9,000.
• Residential construction jobs, which are even more leading, rose by 2,800 to another new post-pandemic high.
• Goods producing jobs as a whole rose 14,000 to another new expansion high. These should decline before any recession occurs.

• Temporary jobs, which have generally been declining late 2022, fell by another -16,400, and are down almost -500,000 since their peak in March 2022. This appears to be not just cyclical, but a secular change in trend.
• the number of people unemployed for 5 weeks or fewer rose 73,000 to 2,262,000.

Wages of non-managerial workers

• Average Hourly Earnings for Production and Nonsupervisory Personnel increased $.06, or +0.2%, to $29.83, for a YoY gain of +4.0%. With revisions, the YoY growth in these have been sliding almost relentlessly since 2 years ago. This is the lowest YoY gain since June 2021, vs. its post-pandemic peak of 7.0% YoY in March 2022.

Aggregate hours and wages: 

• the index of aggregate hours worked for non-managerial workers declined -0.2%, and is up 1.4% YoY.

•  the index of aggregate payrolls for non-managerial workers rose 0.1%, and is up 5.5% YoY, the second lowest YoY advance since the end of the pandemic lockdowns. This is 2.0% above the most recent YoY inflation rate, and despite the decline in growth remains powerful evidence that average working families have continue to see gains in “real” spending money. On the other hand, most likely once April’s CPI is reported, there will be a month over month decrease.

Other significant data:

• Professional and business employment declined -4,000. These tend to be well-paying jobs. This series had generally been declining since last May, but in the previous 4 months had resumed their increase; but are still only higher by 0.4% from one year ago.
• The employment population ratio declined -0.1% to 60.2%, vs. 61.1% in February 2020.
• The Labor Force Participation Rate remained steady at 62.7%, vs. 63.4% in February 2020.

SUMMARY

After last month’s extremely strong report, it was perhaps inevitable that this month’s report would be relatively disappointing. And disappoint it did, as the Establishment survey was very mixed, and the Household report was *very* weak.

There were some good points, as job growth continued in manufacturing, construction, and goods production in general. I would expect all of these to turn down before.- in the case of the first two, well before - any recession were to hit. And the reason for the relatively poor headline jobs number was the paltry growth in government jobs. Growth in the private sector was actually average for the past 18 months.

But these were overwhelmed by most of the bad points. In the Establishment Survey, auto, trucking, and temporary help jobs declined. Revisions were once again net negative. The manufacturing workweek declined slightly. Worse, the aggregate number of hours worked declined. And aggregate payrolls rose a paltry 0.1%. In the Household Survey, only 64,000 jobs were gained, while unemployment increased by 25,000, driving an increase in the unemployment and underemployment rates. The YoY gain of 0.3% in jobs in this survey historically has been recessionary. 

On net, this report mainly balances last month’s great report. It doesn’t set off any alarm bells, but it’s the first significant ding in the “soft landing” hypothesis in many months.

The snooze-a-than in jobless claims continues; what I am looking for in tomorrow’s jobs report

 - by New Deal democrat

 The snooze-a-thon in jobless claims continues, as both initial and continuing claims are well-behaved within the narrow range where they have been generally for the past six months.

Initial claims were unchanged least week at 208,000, while the four week moving average declilned -3,500 to 210,00. With the usual one week delay, continuing claims were unchanged at 1.774 million, which is tied for the lowest level in nearly 9 months except for a three week period right at the turn of the year:

Ask per usual, the YoY% change is more important for forecasting purposes. On that basis initial claims were down -2.8%, the four week average down -3.1%, and continuing claims higher by 4.0%, just above last week’s 14 month low point for that metric:

As has been the case for a number of months, since jobless claims lead the unemployment rate with a several month lag, plugging these numbers into the Sahm rule indicates that we should expect the unemployment rate not to rise from 3.8% in tomorrow’s report, and it is more likely to decline to 3.7% or even 3.6% in the next few months:

The forecast is for continued economic expansion.

Turning to several more metrics that guide my thinking on tomorrow’s employment report, here’s a look at the status of the “consumption leads employment” indicator. The YoY% change in both real retail sales and real personal consumption have improved in recent months, but nevertheless I would expect a slow deceleration in the YoY comparisons of monthly job growth to continue:

Since last spring we were running close to 300,000 monthly, I would expect less than that but probably greater than 200,000 tomorrow. Lots of monthly noise! But that should be the trend.

Here is a repeat of yesterday’s graph of the quits rate vs. YoY wage gains:

I expect the trend of deceleration to continue with wage gains as well. I am looking for a range of between 4.1% to 4.4% YoY.

Continuing as to wages, the below historical graph of the YoY% change in wages is what is behind my not being alarmed about the recent monthly upticks in inflation:

Note that with the exception of twice in the 1970s stagflation era, YoY wage growth has always increased as the expansion wears on. If I saw wage growth turn around and start to rise again, I would be alarmed. But that simply isn’t happening.

Finally, earlier this week the Employment Cost Index for Q1 was reported, showing an uptick to 1.1% q/q for wages and 1.2% q/q for all compensation including other benefits:

These series are both a little noisy, and I interpret the quarterly wage increase as being within the normal range of fluctuation. Benefits compensation, on the other hand, definitely jumped. This index is important because, as the BLS’s explanation indicates:

“The Employment Cost Index measures the change in the hourly labor cost to employers over time. The ECI uses a fixed ‘basket’ of labor to produce a pure cost change, free from the effects of workers moving between occupations and industries and includes both the cost of wages and salaries and the cost of benefits.”

In other words, the ECI is not affected by the change in the make-up of the job market (such as we had during the pandemic, when many more low wage workers were laid off in comparison with high-wage workers).

The E.C.I. Is telling us that workers still have a very strong “hand” compared with the past 50 years, if not quite as strong as several years ago.

This is the template of what I will be particularly looking for in tomorrow’s jobs report.