Monthly Business Conditions July 2023

In July 2023, AIER's monthly business situation underwent various changes. The leading indicator rose slightly from 71 to 79, but the near match indicator remained at 75, his June 2023 level. The lagging indicator turned from a slight contraction to neutrality, rising from 42 to 50.

AIER Business Conditions Monthly (5 years)

AIER Monthly Business Conditions (1985 – Present)

Leading indicators (79)

It rose from 71 in June 2023 to 79 in July, the leading indicator's highest level since June 2021 (79).

In July 2023, 8 out of 12 leading indicators rose, 3 met the criteria of being flat or neutral, and 1 fell. Increases included the University of Michigan Consumer Expectations Index (11.1 percent), U.S. heavy truck sales (8.2 percent) and debit balances. Customer Securities Margin Accounts (4.2%), U.S. New Unemployment Insurance Claims (2.4%), Conference Board New Manufacturing Orders, Consumer Goods and Materials U.S. Leading Index, and 500 Stock Leading Index (1.3%) 3.7%, respectively), new U.S. private housing starts (1.3%), and adjusted retail and food service sales (1%). U.S. average weekly work hours (all employees, manufacturing), the Conference Board's new orders for capital goods, excluding aircraft, by U.S. manufacturing, and the U.S. Census Bureau's inventory-to-sales ratio (total business) are neutral/ There was no change. The 1-10 year Treasury spread narrowed by 10.2%.

Near match (75) and lagging indicator (50)

The approximate match index remained at 75 from the previous month. For almost three years since October 2020, the Near Match Index has shown varying degrees of expansion, with an average value of 83, except for a sharp drop to 50 in January 2023.

Of the six components of the roughly coincident index, four expanded, one was neutral, and one declined. U.S. industrial production rose 0.6% from June to July, and U.S. nonfarm payrolls rose 0.9%. The Conference Board's index of matched sales for manufacturing and trade and personal income excluding transfer payments increased (0.8% and 0.4%, respectively), but current consumer confidence fell by 1.5%. The US labor force participation rate remains unchanged.

With the exception of a value of 66 in March 2023, the lagging indicator has been in neutral to slightly contracting territory since January, ranging from 33 to 50.

The six components of the lagging indicator were evenly divided into ascending and descending releases. The 30-day average yield rose 4.3%, the Conference Board's U.S. Lagging Average Unemployment Duration rose 0.5%, and the Census Bureau's U.S. Private Construction Expenditures (Nonresidential) rose 0.5% in July. The declines were in Core CPI (2.1%), US Manufacturing and Trade Inventories (0.2%), and Conference Board US Lagging Commercial Loans (0.5%).

discussion

AIER's monthly business indicators have told three different stories since the beginning of the year. One is that the leading indicators are gaining strength as they trend upward from 21 in December 2022 to 79 in July 2023. The other is that expansion is slowing, as evidenced by the near-concordance index falling from 92 in February to 75 in the past three months (May). , June 2023, and now he July). Also, during the same period, the lagging indicator fluctuated between his February low of 33 and March high of 66, indicating the overall neutrality of the component. Although the degree of correlation between the three is likely to trend in roughly parallel fashion, the apparently contradictory measurements suggest that economic trends may be influenced not only by unprecedented pandemic policy measures but also by the intervening period of recovery that followed. shows evidence of continued disorientation.

In June and July 2023, based on unexpectedly strong second-quarter U.S. GDP numbers and positive data on U.S. employment, consumer activity, nonresidential capital investment growth, and continued disinflation. The prediction of a soft landing attracted buying. But recent data suggests those predictions are premature at best. The labor market is cooling rapidly, and there is growing evidence that major employer numbers are overstating the strength of the U.S. job market. Monthly salary estimates also tend to be revised downwards as employment activity declines.

(Although the period covered by this report has passed, we now know that the U.S. U-3 unemployment rate rose from 3.5 percent to 3.8 percent between July and August 2023.)

Additionally, in late August, the U.S. Bureau of Labor Statistics (BLS) announced the completion of an interim re-benchmarking of the National Current Employment Statistics. Initial results of this revision indicate that U.S. nonfarm payrolls are overstated by approximately 306,000 people (0.2%) as of March 2023. This is roughly double the historical average for other similar revisions and is the fourth largest on record. (Details of the process and associated revisions are provided here.) This means not only overstated employment numbers, but also upward revisions in sectors such as government jobs, public works, and construction ( The latter is driven in part by government spending on infrastructure (and subsidies for nonresidential capital investment), which reveal the sources of growth in specific parts of the U.S. economy. (A discussion of the breakdown of US GDP in the second quarter, particularly the disproportionate contribution of non-residential capital investment, can be revisited here.)

Although hourly wages have risen over the past few years since the pandemic ended, much of the benefit of that upward trend has been eroded by both inflation and the trend of gradually decreasing average weekly work hours.

U.S. Average Civilian Employee Gross Hourly Wage and U.S. Average Weekly Work Hours Private Nonfarm Payroll (both NSA), 2021 – Current

Additionally, a sharp increase in workers reporting both full-time and part-time work and holding two full-time jobs since the end of the pandemic has also added pressure on consumers. It's implied. Additionally, these statistics may be an underestimate as many side jobs are done informally with unreported income.

US Multiemployers, Total and US Multiemployers, Primary FT/Secondary FT (both SA), 2003 – Current

While growing slack in the US labor market and de facto wage declines are contributing to deflationary trends, the outlook for continued consumer strength (which accounted for nearly half of US GDP performance in the second quarter) is Bad result. Pandemic savings have nearly been depleted, and 30-day default rates for auto and consumer loans are near pre-pandemic highs. Credit card default rates are now higher than pre-COVID-19 levels.

U.S. Federal Reserve Board delinquency rates for all bank credit cards, U.S. Federal Reserve delinquency rates for all consumer loans, Capital One Auto Finance 30-day delinquency rates, 2018 – Current

The average interest rate on credit card balances is now at a record high of 20.63%, up from 16.34% in March 2022, when the Federal Reserve began its tapering campaign. During this period, credit card debt balances increased from about $860 billion to more than $1 trillion. Unlike previous cycles where credit card debt remained flat or increased slightly when the Fed raised interest rates by more than 1-2%, the federal funds rate increased by more than 10x while total credit card debt increased by 16.3%. increased.

Federal Funds Target (Moderate) and Federal Deposit Insurance Corporation Credit Card Balances, 1995–Present

Mortgage rates (15-year fixed and 30-year fixed) have more than doubled since the end of the pandemic.

Bankrate.com US Home Loans 15 and 30 Year Fixed Rates, 2021 – Current

Many retailers, especially large discounters such as Dollar General, are reporting second-quarter earnings headwinds. A few weeks ago, LendingClub Corporation released the 25th edition of its new reality check, Paycheck to Paycheck, which “examined the impact of non-essential spending on consumers' spending management and ability to save.” . The survey results (details can be found here) are based on his July 2023 survey responses and include the following estimates:

Approximately 61% of U.S. consumers live paycheck to paycheck
About one-fifth of U.S. consumers struggle to pay their bills
16 million U.S. consumers (10 percent of the payroll population) claim frivolous spending is the main reason their personal finances are constrained

Elsewhere, a year-long study of more than 8,000 consumers reported:

Nearly one-third of Americans skip meals due to financial concerns
Americans believe that food inflation is more than 22% year over year, but the BLS reports an inflation rate of 7.1%.
62 percent of Americans ages 18 to 44, 72 percent of families, and 75 percent of U.S. consumers would struggle to pay for an unexpected $400 expense.

Summarizing the social science experience with caution: in addition to the increasing financial strain on many Americans, the US job market is weakening and the continued robustness of consumption is in doubt. I'm saying that. The impending restart of student loan payments in October 2023 is likely to exacerbate these trends and, if sufficiently harmful, could prompt new attempts at political intervention.

It is still possible that the buoyancy provided by government spending through the bipartisan Infrastructure Act, the Suppression of Inflation Act, CHIPS, and the Science Act will keep the U.S. economy from sliding into a “statutory” recession. But consumer tensions, manufacturing contraction, rising energy prices, the risk of excessive Fed tightening, and other developing trends tend to be less manipulable. The prediction that the US will fall into recession on or before September 2024 holds true.