– by New Deal democrat
Once again there is no significant economic news on a Monday, so let’s take a look at the important data I am especially interested in later this week.
Consumption leads employment, and since consumption is about 70% of the US economy, any downturn in consumption is important, as it directly affects two of the coincident series that the NBER uses to date recessions.
And since spending on services tends to rise right through recessions, the critical datapoint is real consumer spending on goods, which will be updated for June on Thursday. Below are the YoY% changes in real spending on services (dark blue) vs. real retail sales (light blue), which covers about 50% of the same territory. On a YoY basis as of the last report real retail sales was up 1% and real spending on goods up 3%; the below graph norms those to the zero line:
Now let’s look at the same series, identically normed to 0, since the 1990s:
Real spending has typically been this tepid YoY going in to recessions, but also during slowdowns, such as 1994, 2002, and 2019.
After strong monthly gains due to March and April front-running of tariffs, consumers pulled back in May. I will be watching to see if the pullback continues or even intensifies, or whether there is a rebound.
Since consumption leads employment, what happens with real spending on goods also has ramifications for job growth. The below graph includes both of these YoY, again normed to zero as of their most recent readings (slightly above 1% for employment):
And here is the historical look. Pay particular attention to employment:
In the 30 years before the pandemic, YoY employment growth was never as low as it is now outside of recessions except during the severe “jobless recovery” of 2002.
Last month only 74,000 private sector jobs were added. Seasonally adjusted, education jobs shot up 63,000. The rest of government added 10,000. It is likely that some or all of the seasonal adjustment for eduction is going to be given back this month, so I am watching to see if there is a surprise low payroll number, especially given the recent relatively anemic level of goods spending by consumers.
In fact, it is likely that real payroll growth has been even weaker. The Quarterly Census of Employment, covering over 95% of all jobs, indicated that payrolls grew only 0.8% through the end of last year. The Business Dynamics Survey seasonally adjusts this data for about 75% of all employment, and will be released for Q4 of last year this coming Thursday.
Finally, we’ll get our first look at Q2 GDP this Wednesday. I’ll be paying extra attention to proprietors’ income, the proxy for corporate profits, which won’t be reported until next month’s revision. This is because historically corporate profits have led the stock market, which has risen sharply higher since its April lows. Although I won’t show the graph, the S&P 500 is higher YoY by over 15% as of last week. Typically at or about the onset of recessions the market goes lower YoY.
At the end of May, S&P 500 profits were expected to be over -1% lower in Q2 than Q1, which was signficantly lower than Q4 of last year:
Typically companies beat the last earnings estimates, and that has been the case so far this quarter as well, as with just over 1/3rd of all companies reporting, Q2 profits are supposed to end up being slightly higher than Q1 profits:
Corporate profits as reported in GDP are a good check on those estimates. So I will be paying particular attention to whether proprietors’ income continued to grow in Q2, or whether it foreshadows problems for “real” corporate profits.
As I noted a few weeks ago, in the past 50+ years it has typically taken some kind of “shock” to the system to derail the US consumer economy, whether the pandemic, or a sudden spike in gas prices, or the collapse of the housing market leading to the collapse of financial institutions caught up in the mania. At present we have a potential double-shock in the form of tariff increases not seen in the past 90 years, and the shock to the food industry (both agricultural and butchering) caused by the widespread deportations of their workers, and the fear of many thousands of others that showing up to work may lead to their deportation as well – causing crops to rot in the fields, and slaughterhouses to grind to a halt.
