By New Deal Democrat
In the rear view mirror, Q2 GDP increased a weak +1.2%, while Q2 employment costs increased (a boon for workers). July data started with another solid Chicago PMI report. Monthly June data included an increase in new home sales and house prices, and declines in both consumer confidence measures and a negative durable goods report.
My usual note: I look at the high frequency weekly indicators because while they can be very noisy, they provide a good Now-cast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available. They are also an excellent way to "mark your beliefs to market."
In general, I go in order of long leading indicators, then short leading indicators, and then coincident indicators.
Interest rates and credit spreads
- 4.19% BAA corporate bonds down -.06%
- 1.52% 10-year treasury bonds down -.07%
- 2.67% credit spread between corporates and treasuries up +.01%
Yield curve, 10-year minus 2-year:
- 0.79%, down -.07% w/w
30-year conventional mortgage rate:
- 3.37%, down -.07% w/w
Yields on corporate bonds and treasuries both made new lows two weeks ago, strongly suggesting that the expansion will continue at least one more year. On the other hand, mortgages have failed to make a new low for over 3 years, thus turning yellow (caution or neutral vs. positive) as a recession indicator. Spreads remain neutral. Yields are still normally positive, although they continue to tighten.
- Purchase applications -3% w/w
- Purchase applications up +12% YoY (affected by 4th of July week)
- Refinance applications down -15% w/w
Real Estate loans
- Unchanged w/w
- +6.3% YoY 4026 vs. 3767
Mortgage applications had been awful for several years, before turning up early last year in response to very low rates. Purchase applications are very positive, while refinancing was moving more sideways with a slight positive trend earlier this year before spiking in the last month in response to low rates.
Real estate loans have been firmly positive for nearly 3 years.
- -1.0% w/w
- +0.3% m/m
- +5.9% YoY Real M1
- +0.3% w/w
- +0.4% m/m
- +6.0% YoY Real M2
Real M1 decelerated markedly in January to the point where it was a very weak positive, and has fluctuated since then. Real M2 also decelerated, but has been more firmly positive. Both have been very positive for the last three months.
Trade weighted US dollar
- Unchanged w/w, up +3.6% YoY (one week ago) (Broad)
- Down -1.84 to 95.54 w/w, down -1.8% YoY (yesterday) (major currencies)
The US dollar appreciated about 20% from July 2014 through spring 2015, and has gone more or less sideways with a slight positive trend since then. l consider a YoY change of 5% or higher a negative. The broad measure is again neutral this week, and against major currencies positive.
- Down -0.96 to 93.62 w/w
- Down -2.50 YoY
BBG Industrial metals ETF
- 101.11 up +0.57 w/w
Commodity prices as measured by industrial metals appear to have bottomed last November. ECRI and oil subsequently turned up as well. Both have come back well over 50% from their most negative readings last autumn. This is enough to turn them all the way back to positive.
Stock prices S&P 500
- Down -0.1% w/w (down -0.1% from all-time high)
By making a new all-time high one week ago, stock prices have become a positive.
Regional Fed New Orders Indexes
(*indicates report this week)
- Empire State up -12.7 to -1.9
- Philly up +14.8 to +11.8
- *Richmond up +32 to +15
- *Kansas City unchanged at -5
- *Dallas up +6 to -8
- Month-over-month rolling average: +8 to +2
I inaugurated coverage of these indexes as an experiment to see if they helped forecast the ISM new orders index, which is an excellent short leading indicator for sales and industrial production roughly by 6 months. In May and June, there was a serious divergence between the two, but this month the regional indexes have become on balance positive.
Initial jobless claims
- 266,000 up +13,000
- 4-week average 256,500 down -1,250
Initial claims remain well within the range of a normal economic expansion, as does the 4-week average.
The American Staffing Association Index
- Up +2 to 93 w/w
- Down -0.21 YoY
This index turned negative in May 2015, getting as bad as -4.30% late last autumn. Since the beginning of the year it has been progressively "less bad" and for 5 of the last 8 weeks was positive. The July 4 seasonality is finally over, and this week the index is neutral.
- $167.2 B 19 reporting days into July vs. $158.0 B one year ago, up $9.2 B or +5.8%
- $172.2 B for the last 20 reporting days vs. $132.5 B one year ago, up $32.5 B or +23.3%
Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, while still positive, since August 2015. In February, I said I would need this series on the 20-day basis to decline to less than +2% YoY for me to think it has reached a turning point, and it did so for 3 weeks in a row, briefly becoming a major red flag. April collections ran positive, and May strongly so. June was poor. July was been quite positive again.
- Oil down -$2.80 to $41.44 w/w
- Gas prices down -$.05 to $2.18 w/w
- Usage 4-week average up +2.6% YoY
The price of gas bottomed this winter at $1.69. Usage turned briefly negative at the beginning of the year, but has been positive ever since. Gas prices probably made their summer high 6 weeks ago.
Bank lending rates
Both TED and LIBOR were already rising since the beginning of last year to the point where both have usually been negatives, although there were some wild fluctuations. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions. TED has now reached that level, and LIBOR almost so.
- Johnson Redbook up +0.6% YoY
- Goldman Sachs down -0.1% w/w, up +1.6% YoY
- Gallup daily consumer spending 14-day average $98, up +$7 YoY
Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat since the beginning of last November. Gallup was very positive this week, but JR and GS were very weak.
- Carloads down -8.7% YoY
- Loads ex-coal down -3.6% YoY
- Intermodal units down -1.7% YoY
- Total loads down -5.3% YoY
Rail traffic turned negative and then progressively worse in pulses throughout 2015. Rail loads became "less worse" in January and showed continued improvement until going over the proverbial cliff in March. They have been trending incrementally less awful except for the July 4 week. They are close to the point where I will change the reading to neutral.
After rising briskly last spring, both the BDI and Harpex recently declined again to new multi-year lows. BDI has improved enough since then to score a neutral, while Harpex has recently resumed a slight decline. I am wary of reading too much into price indexes like this, since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.
- Down -2.5% w/w
- Down -2.7% YoY
Until spring 2014, steel production had generally been in a decelerating uptrend. It then gradually rolled over and got progressively worse in pulses through the end of 2015. This year it started out as "less worse" and turned positive several months ago, but for the last 6 weeks has turned negative again.
With one exception, all long leading indicators are either positive or neutral. Interest rates for corporate bonds, treasuries, the yield curve, real money supply, real estate loans, purchase mortgage applications, and mortgage rates are positive. Refinance applications are neutral. Since corporate and treasury interest rates made new lows, this resets the long leading indicator clock so far as they are concerned. On the other hand, mortgage rates still have not made new lows for over 3 years, so this remains a big negative in the longer term forecast.
Short leading indicators are all also either positive or neutral. Commodities across the board have improved so much that they are now a positive. Stock prices are positive. The US dollar against major currencies is positive, and against all currencies neutral. Jobless claims, oil and gas prices, and usage, all remain very positive. Only the spread between corporates and treasuries is a straightforward neutral.
The story is completely different with the coincident indicators. Temp staffing is neutral. Consumer spending, as measured by Goldman Sachs and Johnson Redbook, is weakly positive, steel remains negative. Shipping and bank rates remain negative. Rail is also still negative, although only weakly so. Only Gallup consumer spending is an unambiguous positive.
With one exception, the long and short leading indicators are either positive or neutral, while with one exception, the coincident indicators with the exception are negative or neutral. The most significant moves were bank lending rates, becoming a more serious negative, and rail, on the verge of turning at least neutral.
This coming week, in addition to the jobs report, I will be especially interested in ISM manufacturing to see if the shallow industrial recession is more certainly behind us, and motor vehicle sales, which after housing are the most critical aspect of consumer spending.