Weekly High Frequency Indicators: Neutral In All Time Frames

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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.

This week all three time frames are essentially neutral.

This is at slight variance with my best model, which while less timely, includes several less noisy and probably better measures.

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 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, 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, and 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

January data included continued positivity in the ISM services index, and a decline in motor vehicle purchases.

Factory orders declined in a delayed November report.

The senior loan officer survey for Q4 of last year indicated a slight tightening of loan criteria, and continued decreased demand for borrowing.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 4.96% down -.05% w/w (1-yr range: 4.15-5.29)
  • 10-year Treasury bonds 2.64% down -.05% w/w (2.44-3.24)
  • Credit spread 2.32% unchanged w/w (1.56-2.46)

Yield curve, 10-year minus 2-year:

  • 0.17%, unchanged w/w (0.04-1.30)

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

  • 4.48%, up +0.05% w/w (4.06-5.05)

BAA Corporate bonds and Treasury bonds are negative. The spread between corporate bonds and Treasuries has risen above 2.10%, and so is also negative. Mortgage rates fell below 4.6% and so are neutral, as is the yield curve.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps -5% w/w to 246 (214-268)
  • Purchase apps YoY -2% (NSA)
  • Refi apps +0.3% w/w (SA)

*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted

Real Estate Loans (from the FRB)

  • Down -0.1% w/w
  • Up +3.3% YoY (2.7-6.5)

Refi has recently been at or near 20-year lows, although with a decline in mortgage rates, had a nice pop. Purchase applications made new expansion highs last spring. During summer they declined through neutral to negative, then rose into positivity, before turning negative again in December. With lower rates, for three weeks, applications had surged to positive YoY, bringing this indicator back up to positive. In the last two weeks, it returned to neutral.

With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. It went back above +3.25%, and so went back from neutral to positive.

Money supply

M1

  • Unchanged w/w
  • +0.2% m/m
  • +1.2% YoY Real M1 (-0.7 to 3.8)

M2

  • +0.4% w/w
  • +0.4% m/m
  • +2.6% YoY Real M2 (0.9-3.1)

Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth fell below 2.5% earlier this year and has thus been rated negative. Real M1 briefly turned negative about two months ago, then rebounded, then was negative for two weeks. In the last month both M1 and M2 increased significantly and are thus securely positive.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index up +.03 (less loose) to -0.78
  • Adjusted Index (removing background economic conditions) down -.01 (looser) to -0.58
  • Leverage subindex unchanged at -0.34

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. Late last year, the leverage subindex turned up to near neutral, then turned more positive.

Short leading indicators

Trade weighted US$

  • Down -0.37 to 126.50 w/w, +9.5% YoY (last week) (broad) (115.19-129.13)
  • Up +1.12 to 96.53 w/w, +6.8% YoY (major currencies)

The US$ 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. As of three weeks ago, both are negative.

Commodity prices

Bloomberg Commodity Index:

  • Down -0.92 to 80.07 (76.27-91.94)
  • Down -6.51% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 119.12, up +1.23 w/w, down -9.8% YoY (106.51-149.10)

Commodity prices surged higher after the 2016 presidential election. Both industrial metals and the broader commodities indexes declined to very negative in the past year. This week, however, industrial metals improved enough to be scored neutral.

Stock prices S&P 500 (from CNBC)

  • Up less than +0.1% to 2,707.88

After being neutral for several months, stock prices made a new three-month high in mid-June and rose to a number of new all-time highs until three months ago. Having not made a new high in three months, while having made a new 52-week low a month and a half ago, the rating has changed to negative.

Regional Fed New Orders Indexes

(*indicates report this week) (no reports this week)

(Chicago PMI new orders also decelerated this week, but remained very strong).

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 was *very* positive for most of this year. More recently it has cooled to simply positive in the last several months, and has continued cooling some more so far this month. It is now only weakly positive.

Employment metrics

Initial jobless claims:

  • 234,000, down -19,000
  • Four-week average 224,750, up +4,500

Initial claims, with the exception of several months ago - and this week! - have been very positive for over a year. This week's sharp jump was probably connected to the government shutdown, particularly via contractors.

Temporary staffing index (from the American Staffing Association)

  • Up +3 to 93 w/w
  • Up +0.5% YoY

This index was positive with a few exceptions all during 2017. It was negative for over a month at the beginning of 2018, but returned to a positive since for most the year. In the last two months, it backed off. In the last two weeks, the YoY comparison fell below +1.5% (compared with readings over 4% in 2018), and so has turned neutral.

Tax Withholding (from the Dept. of the Treasury):

  • $205.0 B for the last 20 reporting days vs. $206.7 B one year ago, down -1.7 B or -0.8%
  • 20-day rolling average adjusted for tax cut [prorated at .75 of +$4 B]: up +$1.3 B or +0.6%

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 tax cuts started in February of last year. This week it was mixed.

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. This week, I have begun to phase out this adjustment over a four-week period, after which YoY comparisons should be valid again.

Oil prices and usage (from the EIA)

  • Oil down -$0.87 to $52.71 w/w, down -6.0% YoY
  • Gas prices down -$.01 to $2.25 w/w, down -$0.39 YoY
  • Usage four-week average up +1.5% YoY

The price of gas bottomed almost three years ago at $1.69. Generally prices went sideways with a slight increasing trend in 2017. In the last two months, however, prices have plummeted. This is a negative for the oil patch, but a positive for consumers, so the rating changes from neutral to positive. Usage was positive YoY during most of 2018, but turned negative again in the last two months, before turning positive again this week.

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. Earlier this year the TED spread has whipsawed between being positive or negative, but more recently was very positive. It has risen again recently, but is still positive.

Coincident indicators

Consumer spending

  • Johnson Redbook up +5.7% YoY
  • Retail Economist down -1.5% w/w, up +2.6% YoY

Both the Retail Economist and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017 and have remained positive this year. A few months ago both were exceptionally positive, but the Retail Economist measure decelerated some since then, and this week, had the lowest YoY rating it has had during this entire expansion.

Transport

Railroads (from the AAR)

  • Carloads down -8.4% YoY
  • Intermodal units down -9.6% YoY
  • Total loads down -9.1% YoY

Shipping transport:

Rail was generally positive during 2017 with the exception of some of autumn. In 2018, after some weakness in January and February, it remained positive until autumn, when it weakened precipitously, probably due to tariffs. It rebounded strongly in the last month, until the last two weeks.

Harpex made multi-year lows in early 2017, and after oscillating improved to new multi-year highs earlier this year, but has now fallen enough to rate negative. BDI traced a similar trajectory, and made three-year highs near the end of 2017, and at midyear hit multiyear highs, but has since declined all the way to negative now.

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)

  • Down -1.7% w/w
  • Up +8.3% YoY

Steel production was generally positive in 2017. It turned negative in January and early February of 2018, but with the exception of three weeks recently has been positive since then.

Summary And Conclusion

Among the long leading indexes, Real M1 and M2, real estate loans, the Chicago Fed Adjusted Financial Conditions Index and the Leverage subindex are positives. The yield curve, mortgage rates, and purchase mortgage applications are neutral. Treasuries, corporate bonds, and refinance applications are negative.

Among the short leading indicators, the regional Fed new orders indexes, the Chicago National Conditions Index, and oil and gas prices are all positive, as is gas usage (note that I am weighting the benefit to consumers more than the distress to the Oil Patch). Staffing is neutral, joined this week by industrial metals and initial jobless claims. Both measures of the US$, the general commodity index, the spread between corporate and Treasury bonds, and stock prices are negative.

Among the coincident indicators, consumer spending, steel, and the TED spread are positive. Tax withholding is mixed. LIBOR, rail, the Baltic Dry Index, and Harpex are all negatives

Essentially all three time frames this week are neutral. Some of this, particularly with regard to short leading and coincident indicators, may be lingering effects of the government shutdown.

A special note about this in view of my going on "recession watch" based on another model I use. While these "weekly indicators" have the virtue of being very timely, there are a few sectors they miss, particularly corporate profits, for which there is no substitute for the quarterly data. Further, purchase mortgage applications are also noisier and less accurate than, in particular, single family housing permits. Also I prefer measuring credit conditions by the quarterly senior loan officer survey, in which banks directly tell the Fed what they are doing, vs. the Chicago Fed indexes, which are indirect measures. So we trade timeliness for more accuracy (in my opinion of course).

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.