H1 2016 Forecast: The Deflationary Slowdown Bottoms

Includes: RINF, SPY, UUP
by: Hale Stewart

My method of forecasting is pretty simple. In fact, so simple, I call it the K.I.S.S. method. Even though the LEI is the statistic most denigrated by Wall Street forecasters, it has the inconvenient habit of being right more often than the highly paid punditocracy, especially at turning points.

Since I'm not a highly paid Wall Street pundit, I simply rely upon the LEI for the short term, and several methods of looking at long leading indicators for the second half of the year.

Because this year's situation is unusually complex, I am only discussing the first half of this year in this post. I will wait for Q4 GDP before I discuss the second half.

So, first let's look at the Conference Board's Index of Leading indicators, which forecasts growth about 6-8 months out:

The third quarter of 2015 featured no positive readings whatsoever. On top of that, I have recently suggested that the trade weighted US$ should be included as a short leading indicator, with a weight given of +/-0.1 for each +/-1% change in the value of the dollar. Since the US$ has been slowly trending higher over the last 6 months, this suggests to me that this winter we can expect a definite rough patch that probably has already started. With the readings for the final 3 months of 2015 firmly positive so far, by late spring we should be seeing a rebound.

The two most important symptoms of the 2015 deflationary pulse look like they may be bottoming.

First, here is a long view of the trade weighted US$:

While it isn't a perfect correlation, an abatement in the increase in the US$ of less than 5% has coincided with the end of the last two recessions.

Now, here is a daily update through yesterday. I have marked the index price as of January 23rd of last year:

Barring another surge in the next week, the US$ is going to be up less than 5% YoY.

Now, let's take a look at commodity prices. The data on this goes back over a century! Which means it captures the deflationary era from the 1920s-40s. Note that with the exception of the 1929-32 "Great Contraction," when the YoY% loss in commodities improved significantly off its bottom, that was coincident with the bottom of the deflationary recessions:

Now here is the modern deflationary era:

Unless you think oil is falling to $10/barrel or some such, the likelihood is that the deflationary pulse in commodities is abating. Prices may continue to fall, but most likely at a lesser rate. That would coincide with what the LEI is telling us.

In conclusion, I suspect that the global trade-induced deflationary slowdown in the US economy is going to abate by the second quarter.

New Deal Democrat, XE.com

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