Summary
AIER’s Leading Indicators Index fell to a new cycle low of 25 in September from 29 in August. The latest result is the fourth consecutive month below the neutral 50 threshold and, excluding the lockdown recession in 2020, matches the lowest level since the recovery from the recession of 2008-2009. The September reading is consistent with broadening weakness in the economy and significantly elevated risks for the outlook.
Recent data has, on balance, suggested that economic activity is slowing significantly. Industrial activity as well as manufacturing-sector surveys were soft, suggesting weak growth and rising concerns about future demand. Real new orders for capital goods were likewise soft, trending essentially flat in recent months. None of these data suggest an imminent collapse. On the other hand, housing activity has fallen sharply despite an uptick in the latest month, and homebuilder sentiment is plunging. For the labor market, the August jobs report showed slow growth in private payrolls and a jump in the unemployment rate. The August Job Openings and Labor Turnover report indicated the number of job openings in the private sector fell sharply and layoffs rose. Finally, real core retail sales rose slowly through August, and September unit auto sales remained depressed.
Persistently elevated rates of price increases have resulted in an aggressive Fed tightening cycle. Both weigh on consumer and business attitudes, increase uncertainty, and restrain growth in activity. The longer elevated rates of price increases continue and the higher the Fed raises interest rates, the higher the probability that a vicious cycle of declining economic activity and contracting labor demand will begin to dominate the economy. Overall, the outlook remains highly uncertain. Caution is warranted.
AIER Leading Indicators Index Falls to 25 in September, Signaling Major Risks
In the latest update, the AIER Leading Indicators index fell to a new cycle low of 25. The September result is down 67 points from the March 2021 high of 92. Excluding the lockdown recession of 2020, matches the lowest level since the recovery from the 2008-2009 recession. In recent business cycles, the Leading Indicators Index has fallen into the twenties-range five times since 1985. In four of those instances, a recession followed within about 12 months. The exception was in 1995 when no recession was declared, but real GDP growth slowed significantly. With the latest reading falling farther below the neutral 50 threshold, the AIER Leading Indicators Index is signaling broadening economic weakness and significantly elevated outlook risks.
Three leading indicators changed signal in September. The initial claims for unemployment insurance indicator changed from a neutral trend to an unfavorable trend. As noted in previous reports, weekly initial claims had begun a rising (unfavorable) trend in mid-March. Though initial claims have started to decline again, an uptrend (unfavorable) is in place. Overall, initial claims remain very low by historical measures.
The real new orders for consumer goods indicator weakened from a positive trend to a neutral trend in September. Given the poor performance of real core retail sales and rising inventories, it’s not surprising to see new orders fade.
Partially offsetting the weakening in the initial claims for unemployment indicator and the real new orders for consumer goods indicator was an improvement in the unit heavy truck sales indicator. One month after weakening to a neutral trend, the total heavy truck unit sales indicator reversed course, rising to a favorable trend. Heavy truck unit sales remain relatively high by historical comparison though they are below prior peaks.
The three indicators that changed signals this month were the same three that changed signals last month. It is not unusual for an indicator to fluctuate around inflection points, suggesting that the signals from each indicator may be volatile in coming months. Among the 12 leading indicators, just two remained in a positive trend in September while eight were trending lower, and two were trending flat or neutral.
The Roughly Coincident Indicators index held steady in September, coming in at 67 for the third consecutive month. Before July, the indicator posted a 75 in June, 83 in May, and a perfect 100 in April. Two indicators had offsetting changes last month. The real personal income excluding transfers indicator fell from a positive trend to a neutral trend while the Conference Board Consumer Confidence in the Present Situation indicator improved from a negative trend to a neutral trend.
In total, three roughly coincident indicators – nonfarm payrolls, employment-to-population ratio, and industrial production, were trending higher in September while one – the real manufacturing and trade sales indicator – was in a negative trend, and two – the Conference Board Consumer Confidence in the Present Situation indicator and the real personal income excluding transfers indicator – were in flat or neutral trends. Given the weakening in the AIER Leading Indicators Index, it would not be surprising to see declines in the Roughly Coincident Index in the coming months.
AIER’s Lagging Indicators index declined to 67 in September after holding at 83 for seven consecutive months. Two indicators changed trend for the month. The composite short-term interest rates indicator and the 12-month change in the core Consumer Price Index indicator both fell from positive trends to neutral trends. In total, three indicators – the duration of unemployment indicator, the real manufacturing and trade inventories indicator, and the commercial and industrial loans indicator – were in favorable trends, the composite short-term interest rates indicator and the 12-month change in the core Consumer Price Index indicator were neutral, and one indicator, real private nonresidential construction, had an unfavorable trend.
Overall, the AIER Leading Indicators Index fell farther below neutral in the latest month, signaling broadening economic weakness and sharply elevated levels of risk for the outlook. The economy is facing significant headwinds from elevated rates of price increases and an aggressive Fed tightening cycle. For now, the preponderance of data suggests slowing growth or mild contraction but no collapse (except for housing). Particularly important for the outlook is the strength of the labor market. A deeper and sharper contraction becomes more probable if significant declines begin to occur. Fed policy is likely to be a key factor in the progression of the labor market. Furthermore, the fallout from the Russian invasion of Ukraine and periodic lockdowns in China continue to boost uncertainty. Caution is warranted.
September Manufacturing-Sector Survey Suggests Weakening Activity and Less Intense Price Pressures
The Institute for Supply Management’s Manufacturing Purchasing Managers’ Index fell to 50.9 percent in September, barely above the neutral 50 level. September is the 28th consecutive reading above fifty, but the lowest since May 2020.
Several key component indexes were also close to or below neutral in September, including the new orders index, the production index, the new export orders index, the prices-paid index, and the supplier deliveries index. According to the report, “The U.S. manufacturing sector continues to expand, but at the lowest rate since the pandemic recovery began. Following four straight months of panelists’ companies reporting softening new orders rates, the September index reading reflects companies adjusting to potential future lower demand.”
The new orders index fell by 4.2 points to 47.1 percent in September, the third reading below neutral in the last four months. The result suggests orders contracted again in September. The new export orders index, a separate measure from new orders, remained below neutral at 47.8 percent versus 49.4 percent in August. The latest reading is the second consecutive month below neutral.
The Backlog-of-Orders Index came in at 50.9 percent versus 53.0 percent in August, a 2.1-point fall. This measure has pulled back from the record-high 70.6 percent result in May 2021 but has been above 50 for 27 consecutive months. The index suggests manufacturers’ backlogs continue to rise, but the pace is quite weak.
The Production Index registered a 50.6 percent result in September, gaining 0.2 points from August. The index has been above 50 for 28 months but remains very close to neutral.
The Employment Index fell sharply in September, falling back below the neutral threshold. The 48.7 percent reading suggests payrolls contracted in the manufacturing sector in September. The report states, “Labor management sentiment shifted in September, with a higher number of panelists’ companies pausing hiring through hiring freezes and allowing attrition to reduce employment levels. Turnover rates eased, with 28 percent of comments citing backfill and retirement issues, a decrease from 33 percent in August.” Among the six big sectors in the survey, only two reported expanded payrolls in September.
The Bureau of Labor Statistics’ Employment Situation report for September is due on Friday, October 7, and expectations are for a gain of 250,000 nonfarm payroll jobs, including the addition of 20,000 jobs in manufacturing.
Customer inventories in September are still considered too low, with the index coming in at 41.6 percent, up 2.7 points from August (index results below 50 indicate customers’ inventories are too low). The index has been below 50 for 72 consecutive months. Insufficient inventory is a positive sign for future production.
The supplier deliveries index registered a 52.4 percent result in September, down 2.7 points from August and the lowest reading since December 2019. The index was at 78.8 percent in May 2021. The easing trend over the past 16 months suggests delivery lead times are slowing at a much slower rate.
The index for prices for input materials sank again, dropping another 0.8 points to 51.7 in September and is the sixth consecutive monthly decline. The index is down from 87.1 percent in March 2022 and is at the lowest level since June 2020. The result suggests price pressures have eased significantly. The report notes, “This is the second consecutive month the Prices Index registered below 60 percent, a level not seen since August 2020 (59.5 percent), and this is also the lowest reading since June 2020 (51.3 percent). Over the past six months, the index has decreased 35.4 percentage points, including a combined 26-percentage point plunge in July and August.” The report adds, “The slowing in price increases is being driven by continued (1) relaxation in the energy markets, (2) softening in the copper, steel, aluminum and corrugate markets and (3) continuing sluggishness in chemical and plastics demand. Notably, 28.1 percent of respondents reported paying lower prices in September, compared to 26.7 percent in August.”
The manufacturing sector is showing clear signs of weakness though not collapse. Risks remain elevated due to the impact of inflation, an aggressive Fed tightening cycle, and continued fallout from the Russian invasion of Ukraine.
Industrial Output Fell, but Manufacturing Output Rose Slightly in August
Total industrial production decreased 0.2 percent in August after increasing 0.5 percent in July. Over the past year, total industrial output is up 3.7 percent.
Total industrial capacity utilization decreased 0.2 points to 80.0 percent from 80.2 percent in July. The August utilization is above the long-term (1972 through 2021) average of 79.6 percent but well below the highs of the 1970s when it was above 88 percent.
Manufacturing output – about 74 percent of total output – posted a modest 0.1 percent gain for the month, the second consecutive increase and fourth in the last six months but also the smallest over that period. From a year ago, manufacturing output is up 3.3 percent.
Manufacturing utilization was unchanged at 79.6 percent, holding above its long-term average of 78.2 percent. However, it remains well below the 1994-95 high of 84.7 percent.
Mining output accounts for about 16 percent of total industrial output and was unchanged last month following three strong monthly gains. Over the last 12 months, mining output is up 8.4 percent.
Utility output, typically related to weather patterns and about 10 percent of total industrial output, fell 2.3 percent, with natural gas up 0.6 percent but electric down 2.9 percent. From a year ago, utility output is down 1.6 percent.
Among the key segments of industrial output, energy production (about 27 percent of total output) fell 0.4 percent for the month with gains in oil and gas well drilling unable to offset declines in primary energy production, consumer energy products, converted energy products, and commercial energy products. Total energy production is still up 4.7 percent from a year ago.
Motor-vehicle and parts production (slightly under 5 percent of total output), one of the hardest-hit industries during the lockdowns and post-lockdown recovery, fell 1.4 percent after a surge of 3.2 percent in July. From a year ago, vehicle and parts production is up 10.2 percent.
Total vehicle assemblies rose to 10.48 million at a seasonally-adjusted annual rate. That consists of 10.16 million light vehicles and 0.31 million heavy trucks. Within light vehicles, light trucks were 8.38 million while cars were 1.78 million. Assemblies have risen sharply from the lows but remained at the bottom of their prior typical range.
The selected high-tech industries index gained 0.3 percent in August and is up 5.8 percent versus a year ago. High-tech industries account for just 2.1 percent of total industrial output.
All other industries combined (total excluding energy, high-tech, and motor vehicles; about 66 percent of total industrial output) was unchanged in August. This important category is 2.6 percent above August 2021.
Overall, industrial output was little changed in August. Manufacturing output gained despite ongoing labor shortages and turnover, rising costs and shortages of materials, and logistics and transportation bottlenecks.
Real Nondefense Capital-Goods Orders Remain in a Flat Trend
New orders for durable goods fell 0.2 percent in August, following a 0.1 percent fall in July and a 2.3 percent jump in June. Total durable-goods orders are up 9.2 percent from a year ago. The August decline puts the level of total durable-goods orders at $272.7 billion, a still-high result by historical comparison.
New orders for nondefense capital goods excluding aircraft, or core capital goods, a proxy for business equipment investment, jumped 1.3 percent in August after increasing 0.7 percent in July and 1.0 percent in June. Orders are up 7.3 percent from a year ago, with the level at $75.6 billion, a new record high.
However, rapid price increases have had an impact on capital goods orders. In real terms, after adjusting for inflation, real new orders for durable goods fell 0.6 percent in August following a 0.7 percent decline in July. Real new orders for nondefense capital goods – one of AIERs leading indicators – sank 3.2 percent after a 2.0 percent gain in July. Real new orders for capital goods are trending flat over the past year with the August level about equal to the mid-2021 level. Furthermore, real new orders for durable goods and real new orders for nondefense capital goods remain below their January 2000 level.
Five of the seven major categories shown in the durable-goods report posted a gain in August, in nominal terms. Among the individual categories, electrical equipment and appliances led with a 1.0 percent increase, followed by computers and electronic products with an 0.8 percent rise, primary metals orders with a 0.4 percent gain, machinery orders up 0.3 percent, and all other durables adding 0.2, percent.
On the downside for the major categories, transportation equipment fell 1.1 percent, and fabricated metals orders declined by 0.7 percent. Within the transportation equipment category, nondefense aircraft sank 18.5 percent following a 12.1 percent jump in July, defense aircraft jumped 31.2 percent, and motor vehicles and parts were up 0.3 percent. Every major category shows a gain in nominal dollars from a year ago.
Durable-goods orders have posted a strong recovery from the lockdown recession measured in nominal-dollars. However, after adjusting for price increases, real orders for durable goods are rising at a very slow trend growth rate. Nominal new orders for capital goods are also growing briskly but in real terms, the trend is flat.
New Single-Family Home Sales Jump in August, but Headwinds Intensify
Sales of new single-family homes bounced higher in August, jumping 28.8 percent to 685,000 at a seasonally-adjusted annual rate from a 532,000 pace in July. The August gain was only the second increase in the last eight months, leaving sales down 18.4 percent from the December 2021 level and 33.9 percent from the August 2020 post-recession peak. August sales are close to the 50-year average selling rate.
However, the surprising result is unlikely to be sustained in the coming months. The National Association of Home Builders’ Housing Market Index, a measure of homebuilder sentiment, fell again in September, coming in at 46 versus 49 in August. That is the ninth drop and the second month below the neutral 50 threshold. The index is down sharply from recent highs of 84 in December 2021 and 90 in November 2020.
According to the report, “In another sign that the slowdown in the housing market continues, builder sentiment fell for the ninth straight month in September as the combination of elevated interest rates, persistent building material supply chain disruptions and high home prices continue to take a toll on affordability.” The report adds, “In another indicator of a weakening market, 24% of builders reported reducing home prices, up from 19% last month. Builder sentiment has declined every month in 2022. Due to tightening monetary policy, mortgage rates increased above 6% last week, the highest level since 2008, which is pricing buyers out of the market. In this soft market, more than half of the builders in our survey reported using incentives to bolster sales, including mortgage rate buydowns, free amenities and price reductions.”
All three components of the Housing Market Index fell again in August. The expected single-family sales index dropped to 46 from 47 in the prior month, the current single-family sales index was down to 54 from 57 in August, and the traffic of prospective buyers index sank again, hitting 31 from 32 in the prior month.
In August, sales of new single-family homes were up in all four regions. Sales in the Northeast, the smallest region by volume, rose 66.7 percent, sales in the South, the largest by volume, rose 29.4 percent, sales in the West increased 27.5 percent, and sales in the Midwest rose 16.7 percent for the month. Over the last 12 months, sales were down in two of the four regions, led by a 24.0 percent fall in the West while sales were off by 21.9 percent in the Northeast. Gains from a year ago were seen in the South (10.4 percent) and in the Midwest (5.0 percent).
The median sales price of a new single-family home was $436,800, down from $466,300 in July (not seasonally adjusted), putting the 12-month average price at a record high $435,000. Meanwhile, 30-year fixed rate mortgages were 6.29 percent in late September (and around 5.13 percent in late August), up sharply from a low of 2.65 percent in January 2021. The combination of high prices and rising mortgage rates reduces affordability and squeezes buyers out of the market.
The total inventory of new single-family homes for sale rose 0.4 percent to 461,000 in August, the highest since March 2008. That puts the months’ supply (inventory times 12 divided by the annual selling rate) at 8.1, down 22.1 percent from July, but 24.6 percent above the year-ago level. Inventory and the months’ supply remain very high by historical comparison. The high level of prices, elevated inventory, and surge in mortgage rates should continue to weigh on housing activity in the coming months and quarters. However, the median time on the market for a new home remained very low in August, coming in at 1.7 months versus 2.4 in July.
Private-Sector Job Openings Fell Sharply in August
The latest Job Openings and Labor Turnover Survey from the Bureau of Labor Statistics shows the total number of job openings in the economy dropped to 10.053 million in August, down from 11.170 million in July.
The number of open positions in the private sector decreased to 9.037 million in August, down from 10.065 million in July. August was the fourth decline in the last five months and the lowest level since June 2021.
The total job openings rate, openings divided by the sum of jobs plus openings, fell to 6.2 percent in August from 6.8 percent in July while the private-sector job-openings rate fell to 6.5 percent from 7.2 percent in the previous month. The August result for the private sector is the lowest since April 2021.
The industries with the highest openings are education and health care (1.885 million), professional and business services (1.872 million), trade, transportation, and utilities (1.638 million), and leisure and hospitality (1.405 million). The highest openings rates were in leisure and hospitality (8.2 percent), professional and business services (7.7 percent), and education and health care (7.1 percent).
The number of private-sector quits ticked higher in August, coming in at 3.937 million, up from 3.850 million in July. Leisure and hospitality led with 956,000 quits followed by trade, transportation, and utilities with 867,000 quits, and by professional and business services with 682,000.
The private-sector quits rate held at 3.0 percent in August. The private-sector quits rates for the last two months are the lowest since May 2021 and 0.4 percentage points below the record high of 3.4 percent in November 2021.
Private-sector layoffs and discharges increased in the latest month, rising to 1.375 million, up from 1.317 million in July. The trend in layoffs and discharges may be higher since hitting a low of 1.183 million in December 2021. The private-sector layoffs and discharge rate also rose in August, coming in at 1.1 percent, the highest since September 2021.
The number of job seekers (unemployed plus those not in the labor force but who want a job) per opening ticked up slightly in August, rising to 1.137 in August from 0.954 in July (a record low). Before the lockdown recession, the low was 1.409 in October 2019.
The job openings data provide additional evidence suggesting the economy is weakening. While the low number of available workers per opening implies the labor market remains tight, the deterioration at the margin is a warning sign.
Real Core Retail Sales Fell in August, Trend Growth Is Weak
Total nominal retail sales and food-services spending rose 0.3 percent in August following a 0.4 percent decrease in July. From a year ago, retail sales are up 9.2 percent and remain well above the pre-pandemic trend.
Nominal retail sales excluding motor vehicle and parts dealers and gasoline stations – or core retail sales – rose 0.3 percent in August, matching the 0.3 percent gain in July. From August 2021 to August 2022, core retail sales are up 7.6 percent. As with total retail sales, core retail sales remain well above the pre-pandemic trend.
However, these data are not adjusted for price changes. In real terms (adjusted using the CPI), real total retail sales were up 0.2 percent in August following a 0.4 percent decrease in July, a 0.3 percent drop in June, and a 0.6 percent decline in May. From a year ago, real total retail sales are up 0.8 percent versus a ten-year annualized growth rate of 2.5 percent from 2010 through 2019. As with nominal retail sales, real retail sales remain well above their pre-pandemic trend, but since March 2021, they have been trending essentially flat.
Real core retail sales posted a 0.3 percent decline in August after declining less than 0.1 percent in July. Over the last twelve months, real core retail sales are up 1.2 percent versus a ten-year annualized growth rate of 2.2 percent from 2010 through 2019. While real total retail sales have been trending flat recently, real core retail sales have been trending higher at a rate of 1.2 percent per year.
Categories were generally higher in nominal terms for the month, with eight up and five down in August. The gains were led by motor vehicles and parts retailers, up 2.8 percent for the month, followed by miscellaneous retailers (1.6 percent), building materials, gardening equipment and supplies (1.1 percent), and food services and drinking places (1.1 percent).
Gasoline spending led the decliners with a 4.2 percent drop. However, the average price for a gallon of gasoline was $4.21, down 11.8 percent from $4.77 in July, suggesting price changes more than accounted for the drop. Other declines came in furniture and home furnishings (-1.3 percent), nonstore retailers (-0.7 percent), and health and personal care stores (-0.6 percent).
Overall, nominal total and core retail sales remain well above trend. However, rising prices are still providing a significant boost to the numbers. In real terms, total retail sales rose slightly following three consecutive declines and have been trending flat since March 2021. Real core retail sales posted a second consecutive monthly decline but appear to have a modest upward trend, though the growth rate is well below its pre-pandemic pace.
Unit Auto Sales Improved in September but Remained Weak
Sales of light vehicles totaled 13.5 million at an annual rate in September, up from a 13.1 million pace in August. The September result was a 2.9 percent increase from the prior month and the third decrease in the last four months. It was the sixteenth consecutive month below the 16 to 18 million range, averaging just 13.53 million over that period. Weak auto sales are largely a result of component shortages that have limited production, resulting in plunging inventory and surging prices.
Breaking down sales by the origin of assembly, sales of domestic vehicles increased to 10.64 million units versus 10.34 million in August, a rise of 2.9 percent, while imports rose to a 2.85 million rate from 2.78 in August, a rise of 2.6 percent. Domestic sales had generally been in the 13 million to 14 million range in the period before the pandemic, averaging 13.3 million for the six years through December 2019. The domestic share came in at 78.9 percent in September versus 78.8 in August.
Within the domestic light-vehicles category, domestic car sales were 2.09 million in September versus 1.99 million in August, a gain of 5.0 percent. Domestic light truck sales were 8.55 million versus 8.35 million in the prior month, an increase of 2.4 percent. That puts the domestic light truck share of total domestic auto sales at 80.4 percent.
Domestic assemblies increased in August, coming in at 10.48 million at a seasonally adjusted annual rate. That is up 0.9 percent from 10.38 million in July but still below the 10.8 million average pace for the three years through December 2019.
Component shortages, especially computer chips, continue to restrain production for most manufacturers, creating scarcity for many models and leading to lower inventory and higher prices. Ward’s estimate of unit auto inventory came in at 120,300 in August, up from 96,900 in July, its highest level since August 2021. The Bureau of Economic Analysis estimates that the inventory-to-sales ratio rose to 0.665 in August, up from 0.511 in July and the highest level since August 2021.
The average consumer expenditure for a car fell to $32,379 in August, down 2.8 percent from July. However, the average consumer expenditure on a light truck rose to $49,985 from $49,488 in July, up 1.0 percent for the month and a new record high.
As a share of disposable personal income per capita, average consumer expenditures on a car fell to 57.80 percent versus 59.63 in July while the average consumer expenditure on a light truck as a share of disposable personal income per capita was 89.23 percent versus 88.63 percent in July.
