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 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.
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 is scored positively if it is within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it is 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 1/2 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 is 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 is scored neutral if it is moving in the right direction and is close to making a new high.
Recap of monthly reports
August data included another good rise in industrial production and capacity utilization, and a small increase in retail sales. Producer prices declined, and consumer prices increased as expected. As a result, real retail sales actually declined slightly. The preliminary report on consumer confidence by the University of Michigan showed increases for both present conditions and future outlook near or at expansion highs.
The July JOLTS report included a new high in job openings, an expansion high in the quits rate, a tie for the expansion high in total separations, and increases but not new expansion highs/lows in hires and layoff and discharges. Meanwhile, wholesale sales were flat while inventories rose.
Long leading indicators
Interest rates and credit spreads
- BAA corporate bond index 4.84%, up +.03% w/w (1-yr range: 4.15 - 4.94)
- 10-year treasury bonds 3.00%, up +.06% w/w (2.05 - 3.11)
- Credit spread 1.84%, down -.03% w/w (1.56 - 2.30)
Yield curve, 10-year minus 2-year:
- 0.21%, down -.02% w/w (0.18 - 1.30)
30-Year conventional mortgage rate (from Mortgage News Daily)
- 4.71%, up +0.05% 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 back below 1.85%, and so turned positive. The yield curve is less than 0.25%, so is neutral.
Mortgage applications (from the Mortgage Bankers Association)
- Purchase apps up +1% to 234 w/w (225 - 262)
- Purchase apps YoY up +4%
- Purchase apps 4-week avg. up +2 to 232, 4-week YoY avg. up +2%
- Refi apps down -6% w/w (18-year low)
Real Estate Loans (from the FRB)
- Down -0.1% w/w to 4,366
- Up +3.5% 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, then negative for three weeks, and up to neutral again for the past two weeks.
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.
- +3.7% w/w (Not a misprint!!!)
- +2.8% m/m
- +4.8% YoY Real M1 (-0.7 - 6.9)
- Unchanged w/w
- +0.6% m/m 14247 vs. 14164
- +1.3% 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. Several weeks ago, for the first time since this expansion began, Real M1 turned negative, but has since rebounded strongly.
This week's spike in M1 was among the 5 biggest ever, the other four being during the financial crisis and the week after the 9/11 attacks. Most of these were taken back the next week, but we will see. I actually spoke to someone at one of the regional Feds who assured me the spike was not due to Hurricane Frances, since the data comes from the week that ended August 31, but he was not sure what had caused it.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index down -0.01 to -0.86
- Adjusted Index (removing background economic conditions) down -.02 to -0.71
- Leverage subindex down -.01 to -0.34
The Chicago Fed's Adjusted Index's real break-even 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$
- Up +0.33 to 126.52 w/w, +8.4% YoY (last week) (broad) (116.42 -128.62)
- Down -0.41 to 94.97 w/w, +3.37% 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. (Note that import prices went down in August, and I am anticipating further pressure on some developing countries, as well as a worsening effect on the US' international balance of payments.)
Bloomberg Commodity Index
- Down -0.13 to 82.46 (82.00 - 91.94)
- Down -3.10% YoY
Bloomberg Industrial metals ETF (from Bloomberg)
- 115.16, down -0.17 w/w, down -8.32% 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 recently that they have turned negative, joined for the second week by the overall index. This is a pretty good sign of *global* weakness.
Stock prices S&P 500 (from CNBC)
- Up +1.1% w/w 2,904.98
After being neutral for several months by an ever-so-slight margin, stock prices made a new 3-month high on June 12 and have continued the positive run, ultimately rising to new all-time highs several weeks ago.
Regional Fed New Orders Indexes
(*indicates report this week) (no reports this week)
- Empire State down -1.1 to +17.1
- Philly down -21.5 to +9.9
- Richmond up +3 to +25
- Kansas City down -12 to +9
- Dallas up +0.6 to +23.9
- Month-over-month rolling average: up +1 to +17
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month-over-month direction (but not this month!) 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.
Initial jobless claims
- 204,000, up +1,000
- 4-week average 208,000, down -1,500 (48-YEAR LOW)
Initial claims made yet another 40+ year lows, 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)
- Unchanged at 100 w/w
- Up +3.6% 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)
- $181.5B for the last 20 reporting days vs. $183.0B one year ago, down -$1.5B or -0.8%
- 20-day rolling average adjusted for tax cut [+$4B]: up +$2.5B or +1.4%
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 intramonth 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 Dept. 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 +1.08 to $68.92 w/w, up +40.6% YoY
- Gas prices up +$0.01 to $2.83 w/w, up $0.15 YoY
- Usage 4-week average up +1.3% 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 slightly negative and then flat in the last two months. The YoY change went back above 40% recently, so the rating has turned negative.
Bank lending rates
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.
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.
Railroads (from the AAR)
- Carloads up +2.6 YoY
- Intermodal units up +5.8% YoY
- Total loads up +4.1% YoY
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 3-year highs near the end of 2017, and at midyear hit multiyear highs, but has declined in the last two months.
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.
Steel production (from the American Iron and Steel Institute)
- Up +0.5% w/w
- Up +9.8% 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, tax withholding, and the Baltic Dry Index. 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, joined this week by the spread between corporate and Treasury bonds. Gas prices and one measure of the US dollar are neutral. Oil prices, the broad trade weighted US dollar, and as of this week, the commodities indexes are negatives.
Several of the long leading indicators continue to fluctuate between positive, neutral, and negative. This week the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex and real estate loans are positives. Corporate bonds remain neutral, as are the yield curve and purchase mortgage applications. Treasuries, refinance applications, mortgage rates, and real M2 all remain negative.
The nowcast remains strongly positive. The short-term forecast is also positive, although a little less strongly than recently. Twice in the last 5 weeks the longer-term forecast turned negative, but was positive again this week. As I showed graphically earlier this week, five long leading indicators are 'on the cusp' have decelerated to near points where their reading changes, but as M1 showed this week, no trend should be assumed to continue in the future.
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.