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By New_Deal_democrat September 7, 2017 11:16 am
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Are consumer long leading indicators rolling over?

The various long leading indicators that I have been parsing for years can be divided up into three basic groups:

1. Financial indicators

2. Producer indicators

3. Consumer indicators

The first group, financial indicators, generally have to do with the background "price of money." How easy or tight are the money supply, interest rates, and credit conditions?  As of now, most are still positive, several are neutral, and only one (that mortgage rates have not made new lows in over three years) is negative. 

The second group, producer indicators, include corporate profits and its less accurate but more timely proxy, proprietors' income. If businesses' bottom line is shrinking, they begin to think about how to cut costs. These both declined in the last quarter, but until then, proprietors' income was growing. Corporate profits suffered in the shallow industrial recession of 2015, but have bounced back -- but not to new highs -- since.

The final group, consumer indicators, deal with the propensity of consumers to spend increasing amounts of money on items the production of which tends to ripple through the economy over an extended period of time. This includes houses and vehicles, of course, but also includes real retail sales per capita and the personal savings rate. Once consumers feel their budgets sufficiently "stretched," they begin to pull back on certain types of spending more or less in order.

Producer-led recessions, like 2001 (and the first two quarters of 2008) tend to be shallow. In particular, in 2001, consumers pretty much sailed through.  If it weren't for the 9/11 attacks, and the "China shock" on employment that continued at least into 2003, it is doubtful it would have been considered a recession at all, despite the carnage on Wall Street and in tech-related businesses.

Finance-led recessions are on odd duck. Probably the best example is 1981-82, when the Fed jacked up interest rates to 20% to break the back of inflation. While intense, it also reversed quickly as soon as financial conditions eased.  The year 1983, for example, showed nearly half of the entire aggregate real wage growth of the entire 1980s expansion, nearly 10%.

Precisely because they center on consumers, consumer-led recessions tend to be more severe and with wider impacts.

In this post I want to focus on the long leading consumer indicators -- because with one exception possibly all of them have peaked. The list includes:

1. housing measures, most particularly permits, and even more particularly (because of  the minimum of noise) single family permits, but also real residential investment as a share of GDP.

2. vehicle sales. These typically peak at least 3 quarters before the onset of recession, although they can peak long before that.

3. the personal savings rate. Typically somewhere between 1/4 and 3/4 the way through an expansion, this declines by at least 2%, indicating that consumers are allowing their budget to become "more stretched."

4. real retail sales per capita.  This peaks on average about 12 months before the onset of a recession.

Let's look at each.

Here are housing permits, and single family permits:

Here are new home sales:

Here is real residential investment as a share of GDP:

All of these have backed off from peaks last winter.

Here is motor vehicle sales (h/t Bill McBride):

These peaked a year ago.  I would consider any reading under 16.0 million a cause for real concern. We're not quite there, and Hurricane Harvey at least is going to play havoc with that number for months to come.

Here is the personal savings rate:

We have had the 2% decline in the past year. If history is a guide, consumers have very little room left to absorb any further "shocks."

Finally, here is real retail sales per capita:

This has continued to rise to new highs.  As I wrote several days ago in my "prequel" to this post,  while a very weak correlation, this is consistent with the last 5 business cycles, where it peaked either at the same time as or with a several quarter lag on 4 of 5 occasions as vehicle sales.

Where these consumer series,, not to mention corporate profits, go from here is by no means certain.  Housing in particular is sensitive to interest rates, which may turn lower YoY beginning in November.

But as of now, 3 of the 4 types of long leading consumer indicators are off peaks, as are the producer indicators. The economy continues to be buoyed by plentiful and easy money and credit.

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