September's 'Real-Time' Economic Update: Majority Of Consumer-Based Indicators Have Negative Trends

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by: David Rice

Summary

As of September 14, sixteen of 19 economic indicators have been updated on the BaR Analysis Grid© with the most recent data.

This is the quickest read of the economy as is possible.

Most significantly, nearly all consumer-based economic indicators have seen a decline over the past three months.

As I demonstrated in an earlier article, the consumer related indicators on the BaR tend to show a downturn first prior to recessions.

I've come to the conclusion that the BaR Analysis Grid© takes some of the fun out of economic updates. When a headline blares that one economic indicator is signalling something ominous, the BaR keeps everything in perspective because its key value, the mean of coordinates (MoC), is relatively stable. This stability should be helpful for investors who want an accurate economic picture before making portfolio adjustments.

For the mid-September update of the BaR Analysis Grid©, all but three economic indicators have been updated. The three indicators not yet updated are existing home sales, building permits, and the Chicago Fed National Activity Index, data which will be released during the next two weeks. I could use the preliminary building permits data, but it is often subject to significant revision, so I prefer to wait for the final report.

Mid-September "real-time" update

Grid 1 shows the BaR for mid-September. Overall, there is a positive proportional rate of change, resulting in the MoC (average of all plotted points) being in the expansion quadrant. The proportional rates of change are based on three-month exponential averages. However, the most significant measure is how far the MoC is above the baseline (recession threshold). The MoC remains near its highest level, at 34.5%.

Grid 1Economic conditions

MoC over the past 12 months

Table 1 shows the MoC over the past 12 months. On the BaR, the MoC is the plotted average of the 1) Proportional Rate of Change and 2) the Percent From the Baseline. The steady decline in the Proportional Rate of Change is largely influenced by the fact that the economy is peaking. For example, vehicle sales are unlikely to go much higher, and housing sales are somewhat constrained by high prices. Further, interest rates are increasing, which will have a dampening effect on consumer spending for big ticket items. Wages are also increasing which, while providing more income to consumers, bites into profits - a step forward and a step backward for economic growth. All of this limits growth trends, minimizing movements in the Proportional Rate of Change.

Table 1Recession threshold

Consumer-based indicators soften

In Table 2, I'm using mid-September 2018, June 2018, and September 2017 Percent From Baseline values so I can calculate three-month and 12-month trends in the movement to or from the baseline.

Earlier I wrote an article (here) showing that consumer-based indicators on the BaR have been among the first to decline prior to a recession. As shown in Table 2, the indicators that have been declining over the past three months are primarily consumer related. Vehicle sales and existing home sales have had negative rates of change over the past year.

Table 2Recession threshold

As I have explained in several articles (for example, here), the indicators are cyclical, so we may see some, or most, of these indicators swing to a positive rate of change. However, since we are at the peak of the business cycle, this could be the first indication that the business cycle has aged to the point that we start to see pre-recessionary conditions.

There are a couple of cautions about the values shown in the tables. First, the Percent From Baseline values are set to a base of 100, which is determined by each indicator's maximum and minimum values over a business cycle. This can lead to larger percent increases than if such an adjustment was not made. Second, some of the economic indicators are designated as “dynamic,” meaning that if the peak is increasing, so is the baseline. For example, say an indicator in September 2017 was 10% above the baseline. Now, a year later, if we look back at that indicator it may be 7% above the baseline because the baseline has moved up. Dynamic indicators include retail sales, vehicles sales, and existing home sales.

Recession imminent?

However, with the MoC as far from the baseline as it currently is, 34.5%, there is no threat of an immediate recession. From peak to recession prior to the 2007 recession was approximately 21 months. Prior to the 2001 recession, from peak to recession was 12 months, but the MoC was at or near peak for about 6 months prior to the start of its decline. If you are not familiar with how the road to recession is tracked by the BaR, you can see that here.

BaR Analysis Grid©

If you are not familiar with the BaR, you can also read about here on the Econ P.I. website. Data sources for the BaR are shown below.

BaR Analysis Grid Sources

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.