Growth Rate Continues to Level Off

by: Prieur du Plessis

The latest smoothed annualized growth rate of the ECRI Weekly Leading Indicator of 4.1% published last week marked the 7th week of moderation since its recent high of 7.7% in April. The decline from 4.9% in the previous week was in line with most of the variables I use and which seem to explain the growth in the ECRI WLI fairly accurately. (Please note that I do not have knowledge of the proprietary ECRI WLI constituents and simulate the Index based purely on my own research.)

The smoothed annualized growth rates of the S&P 500 (from 22.5% to 20.7%), the 10-year bond yield (from 6.9% to 3.1%) and the Economist Metals Index (from 19.5% to 16.5%) all eased during the week. In contrast, the smoothed annualized growth rate of initial jobless claims improved from -4.9% to -5.9%.

Sources: Dismal Scientist; Plexus Asset Management.

By closing at 1,270 last week the S&P 500‘s growth rate moderated further to 17.4% from 20.7%.

Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.

The closing yield of 2.97% on the 10-year Bond Index means that the growth rate fell to -0.3% compared to the previous week’s 3.1% and points to contraction.

Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.

My estimate for last week’s closing level of the Economist Metals Index also points to a further moderation in growth to 14.3% from 16.5% previously.

Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.

If I assume that initial jobless claims remained unchanged at the previous week’s 427 000, the smoothed annualized growth rate of initial jobless claims has increased from -5.9% to -3.9%.

On balance, I therefore expect last week’s smoothed annualized growth rate of the ECRI WLI (to be published on Friday) to come in at approximately 3.5%.

Sources: Dismal Scientist; I-Net Bridge; Plexus Asset Management.

The longer-term outlook?

To me the S&P 500 is the most important factor in determining where the growth rate of the ECRI WLI is heading. Assuming the stock market declines by 0.8% per week, the historical relationship with the ECRI WLI indicates that the smoothed annualized growth rate of the WLI may hit negative territory as soon as the first week of July. If the S&P 500 maintains its current level, the WLI’s move into negative territory will be postponed until the end of July. For the smoothed annualized growth rate to stay positive, albeit marginally, the S&P 500 needs to rise steadily at a rate of approximately 0.8% per week in the coming weeks.

I am of the opinion that the growth rate of the ECRI WLI may just surprise the bears, especially in light of how oversold the US stock market is. But only time will tell.