Weekly High-Frequency Indicators: Long-Term Forecast Turns Negative For The Second Time In 3 Weeks

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by: New Deal Democrat

Summary

High-frequency indicators can give us a nearly up-to-the-moment view of the economy.

The metrics are divided into long leading, short leading, and coincident indicators.

The nowcast continues to be very positive. The short-term forecast (less than one year out) also is positive.

For the second time in three weeks, the long-term forecast has turned negative. It had been positive since 2009, before turning neutral three months ago.

I won't go on Recession Watch unless the long-term weakness persists for at least one month straight and is confirmed in monthly data.

Purpose

I look at the high-frequency weekly indicators because while they can be very noisy, they provide a good nowcast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available. They also are an excellent way to "mark your beliefs to market." In general, I go in order of long leading indicators, then short leading indicators, then coincident indicators.

A Note on Methodology

Data is presented in a "just the facts, ma'am" format with a minimum of commentary so that bias is minimized.

Where relevant, I include 12-month highs and lows in the data in parentheses to the right. All data taken from St. Louis FRED unless otherwise linked.

A few items (e.g., Financial Conditions indexes, regional Fed indexes, stock prices, the yield curve) have their own metrics based on long-term studies of their behavior.

Where data is seasonally adjusted, generally it's scored positively if it's within the top third of that range, negative in the bottom third, and neutral in between. Where it's not seasonally adjusted, and there are seasonal issues, waiting for the YoY change to change sign will lag the turning point. Thus I make use of a convention: Data is scored neutral if it is less than half as positive/negative as at its 12-month extreme.

With long leading indicators, which by definition turn at least 12 months before a turning point in the economy as a whole, there's an additional rule: Data is automatically negative if, during an expansion, it has not made a new peak in the past year, with the sole exception that it's scored neutral if it's moving in the right direction and is close to making a new high.

Recap of monthly reports

House prices as measured by the Case Shiller report continued to rise. Personal income and spending both rose, in nominal and real terms. The Chicago PMI report was very positive, although less so than in the previous two months. Its new orders component, however, rose. Consumer confidence as measured by the University of Michigan declined, as measured by the Conference Board, rose. In both cases the expectations components were weaker than for present conditions.

In the rear view mirror, in Q2 corporate profits rose.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 4.76% up +.04% w/w (1-yr range: 4.15 - 4.94)
  • 10-year treasury bonds 2.87% up +.06% w/w (2.05 - 3.11)
  • Credit spread 1.89% down -0.02% w/w (1.56 - 2.30)

Yield curve, 10-year minus two-year:

  • 0.23%, up +0.04% w/w (0.18 - 1.30)

30-Year conventional mortgage rate (from Mortgage News Daily)

  • 4.66%, up +0.03% w/w (3.84 - 4.79)

BAA Corporate bonds remain neutral. If these go above 5%, they will become a negative. Mortgage rates and treasury bonds are still both negatives. The spread between corporate bonds and treasuries is above 1.85%, and remains neutral. The yield curve, at +0.25%, is back to neutral.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps down -1% to 230 w/w (225 - 262)
  • Purchase apps four-week average, down -1% to 231
  • Purchase apps YoY up +3%, four-week year-over-year average down -0.25%
  • Refi apps down -3% w/w

Real Estate Loans (from the FRB)

  • Up +0.3% w/w to 4366
  • Up +3.3% YoY ( 2.7 - 6.5) (re-benchmarked, adding roughly +0.5% to prior comparisons)

Refi has been dead for some time. Purchase applications were strong almost all last year, began to falter YoY in late December, but rebounded during spring, ultimately making new expansion highs. Since then it has gradually declined, turning neutral, and for the third week in a row, negative.

With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. If it falls below +3.25%, it will become neutral.

Money supply

M1

  • -0.4% w/w
  • +0.4% m/m
  • -0.7% YoY Real M1 (-0.7 - 6.9) NEW EXPANSION LOW

M2

  • +0.1% w/w
  • +0.4% m/m
  • +1.0% YoY Real M2 (0.9 - 4.1)

Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth has fallen below 2.5% and is thus a negative. For the first time since this expansion began, Real M1 turned negative this week (although interestingly, it is positive on a six-month basis).

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index down -0.01 to -0.87
  • Adjusted Index (removing background economic conditions) down -.01 to -0.68
  • Leverage subindex down -.01 to -0.31

The Chicago Fed's Adjusted Index's real breakeven point is roughly -0.25. In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. All three metrics presently show looseness and so are positives for the economy. Two months ago, the leverage subindex turned up to near neutral, but has faded towards positive again since.

Short leading indicators

Trade weighted US$

  • Down -0.43 to 125.45 w/w +5.9% YoY (last week) (broad) (116.42 -128.62)
  • Down -0.05 to 95.09 w/w, +2.46% YoY (yesterday) (major currencies)

The US dollar briefly spiked higher after the US presidential election. Both measures had been positives since last summer, but recently the broad measure turned neutral, followed more recently by the measure against major currencies, which has risen above 5% YoY and is thus negative.

Commodity prices

Bloomberg Commodity Index

  • Down -0.19 to 83.74 (82.00 - 91.94)
  • Down -1.09% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 118.13 down -2.04 w/w, down -9.47% YoY (112.03 - 149.10)

Commodity prices surged higher after the 2016 presidential election. Industrial metals had been strongly positive and recently made a new high, but have declined so much in the past two months that they turned negative. They were joined this week by the overall index.

Stock prices S&P 500 (from CNBC)

  • Up +0.9% w/w 2901.52 (new all-time high intraweek)

After being neutral for several months by an ever-so-slight margin, stock prices made a new three-month high on June 12 and have continued the positive run, ultimately rising to new all-time highs this week.

Regional Fed New Orders Indexes

(*indicates report this week)

The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month-over-month direction. It has generally been very positive for most of this year. It has cooled from white-hot to red-hot to simply positive in the last two months.

Employment metrics

Initial jobless claims

  • 213,000 up +3,000
  • Four-week average 212,250 down -1,500 (NEW 48 year record low)

Initial claims made yet another 40-year-plus lows, including this week, and so are very positive. The YoY% change in these metrics had been decelerating but is now back on its multi-year pace.

Temporary staffing index (from the American Staffing Association)

  • Up +1 to 100 w/w
  • Up +3.7% YoY

This index was generally neutral from May through December 2016, and then positive with a few exceptions all during 2017. It was negative for over a month at the beginning of this year, but returned to a positive since then and in the last month, very positive.

Tax Withholding (from the Dept. of the Treasury)

  • $158.3 B for the last 20 reporting days vs. $157.7 B one year ago, up +$0.6 B or +0.4%
  • 20-day rolling average adjusted for tax cut (+$4 B): up +$4.6 B or +2.9%

With the exception of the month of August and late November, this was positive for almost all of 2017. It has generally been negative since the effects of the recent tax cuts started in February.

I have discontinued the intra-month metric for the remainder of this year, since the kludge to guesstimate the impact of the recent tax cuts makes it too noisy to be of real use.

I have been adjusting based on Treasury Department estimates of a decline of roughly $4 billion over a 20-day period. Until we have YoY comparisons, we have to take this measure with a big grain of salt.

Oil prices and usage (from the E.I.A.)

  • Oil up +1.31 to $69.91 w/w, up +50.8% YoY
  • Gas prices up +$0.01 to $2.83 w/w, up $0.43 YoY
  • Usage four-week average down -1.5% YoY

The price of gas bottomed 2 1/2 years ago at $1.69. Generally prices went sideways with a slight increasing trend in 2017. Usage turned negative in the first half of 2017, but has almost always been positive since then before turning negative in the last month. The YoY change went back above 40% recently, so the rating has turned negative.

Bank lending rates

  • 0.263 TED spread down -0.015 w/w
  • 2.10 LIBOR up +0.04 w/w (tied for expansion high)

Both TED and LIBOR rose in 2016 to the point where both were usually negatives, with lots of fluctuation. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions. The TED spread was generally increasingly positive in 2017, while LIBOR was increasingly negative. This year the TED spread has whipsawed between being positive or negative, most recently positive.

Coincident indicators

Consumer spending

  • Johnson Redbook up +5.1% YoY
  • Goldman Sachs Retail Economist down -0.5% w/w, up +3.1% YoY

Both the Goldman Sachs and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017 and have remained positive this year. Recently they have been exceptionally positive.

Transport

Railroads (from the AAR)

  • Carloads up +1.8 YoY
  • Intermodal units up +6.0% YoY
  • Total loads up +3.9% YoY

Shipping transport

Rail was generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. After some weakness in January and February this year, rail has been positive ever since.

Harpex made multi-year lows in early 2017, then improved, declined again, and then improved yet again to recent highs, and then declined somewhat again. BDI traced a similar trajectory, and made three-year highs near the end of 2017, and at midyear hit multiyear highs, but has declined in the last two months.

I'm 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.

Steel production (from the American Iron and Steel Institute)

  • Down -0.3% w/w
  • Up +5.1% YoY

Steel production improved from negative to "less bad" to positive in 2016 and with the exception of early summer, remained generally positive in 2017. It turned negative in January and early February, but with the exception of three weeks recently has been positive since then.

Summary And Conclusion:

Among the coincident indicators, positives include consumer spending, rail, steel, the TED spread, the Baltic Dry Index, and tax withholding. Harpex has declined enough to become at neutral. LIBOR remains the sole negative.

Among the short leading indicators, the regional Fed new orders indexes, the Chicago National Conditions Index, jobless claims, stock prices, and staffing are all positive. Gas prices, one measure of commodities, one measure of the US dollar, and the spread between corporate and Treasury bonds are neutral. Oil prices and the broad trade weighted US dollar are negative. Industrial metals have been negative, and this week they were joined by the overall index of commodities.

Thus the nowcast remains very positive, with consumer spending particularly positive. The short-term forecast also remains quite positive, with jobless claims, stock prices, and manufacturing new orders as standouts.

Very much to the contrary, in the last month three of the long leading indicators have deteriorated enough to change from positive to neutral or neutral to negative, and a fourth is less than 0.1% away. The sole remaining positives are the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex, and real estate loans. Corporate bonds remain neutral. Several weeks ago they were joined by the yield curve. Treasuries, refinance applications, mortgage rates, and real M2 all remain negative, plus purchase mortgage applications for the third week in a row, and joined for the first time this week by real M1.

Thus the longer-term forecast has turned negative for the second time in the last three weeks. I continue to expect week to week volatility, as real M1, purchase mortgage applications, the yield curve, and real estate loans are all near the levels where their ratings would change. I will require two events before this translates into a "recession watch" for over 12 months later: (1) The weekly reports must remain negative consistently for at least one full month, and (2) they must be reflected in a reliable monthly measure where available.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.