The Week In Review: More Confirmation Of The Slowing Economy

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by: Steven Hansen
Summary

Most of the data released this week has slowed from the previous release.

My favorite indicator - the Chicago Fed National Activity Index (CFNAI) - significantly slowed.

GDP was a mixed bag - depending on how you sliced the data; you could think it was good. It was better than I expected.

The missing data, delayed due to the government shutdown, is rolling out, mostly confirming what we were forecasting all along, a slowing US economy. Two important data sets released this week were the 4Q2018 GDP and the Chicago Fed National Activity Index (CFNAI) (aka the super coincident index).

CFNAI

The Chicago Fed National Activity Index aggregates a weighted average of 85 indicators drawn from four broad categories of data: 1) Production and income; 2) employment, unemployment, and hours; 3) personal consumption and housing; and 4) sales, orders, and inventories. It has a reasonable track record of tracking GDP.

What makes this index worthy is that it is released much earlier than GDP, and IMO provides a better understanding of the main street economy than GDP.

Notice that the CFNAI:

  • Has dropped to levels not seen since 3Q2017,
  • that the current downtrend began in 3Q2018, and
  • the trends continue until they don't.

There is no current indication a recession is waiting in the wings. Interestingly the major element causing the decline this month was production and income.

GDP

Real GDP declined in 4Q2018 to 2.6% from 3Q2018's 3.4%. Breaking down the GDP:

Breakdown 2.6 % 4Q2018 Breakdown 3.4% 3Q2018 Comment
Consumption of goods and services +1.9 % +2.4 % Here is the evidence of economic slowing - a slowing of consumer spending. The major factor was slower spending for services.
Trade balance -0.2 % -2.0 % Exports are added to GDP while imports are subtracted. When one looks at the raw numbers, exports were up from 3Q2018 and imports were slightly more, so the trade balance worsened $15.5 million. This is such a small number, and this is why trade had no major effect on GDP in 4Q2018.
Fixed investment +0.8 % +2.5 % The main reason for the decline was a reduction in inventories. The inventory number jumps around wildly between quarters.
Federal spending +0.1 % +0.4 % Obviously Federal spending was light because of the government shutdown. Most of the spending will have been caught up in 1Q2019, so this ends up being a transfer between quarters.

Economic Releases This Past Week

The Econintersect Economic Index for March 2019 insignificantly declined and remains below territory associated with normal expansions. The question remains whether this downward trend will continue. Note our index is built on data sets which were not affected by the government shutdown - and it is most likely that other recent economic forecasts you have seen fudged the missing data. A forecast with fudged data is simply a guesstimate.

The following table summarizes the more significant economic releases this past week. For more detailed analysis, please visit our landing page which provides links to our complete analyses.

Other Economic Release Summary For This Week

Release Potential Economic Impact Comment

January Chicago Fed National Activity Index

Confirms a slowing economy

The economy's rate of growth declined based on the Chicago Fed National Activity Index (CFNAI); the three-month moving (3MA) average declined, and the economy slowed to the historical trend rate of growth. The problem with this month's release is that the government shutdown affected the data.

December Wholesale Trade Indicates a slowing economy

The headlines say wholesale sales declined month-over-month with inventory levels worsening and elevated. Our analysis shows a deceleration of the rate of growth for the rolling averages.

This sector's growth continues to trend down. This sector is contracting if one inflation adjusts the data.

Inventory levels this month are at recessionary levels.

December Housing Starts n/a

The nature of this industry normally has large variations from month to month (mostly due to weather), so the rolling averages are the best way to view this series, and it shows the rate of growth for permits improving and rate of growth for completions now slowing.

Overall, 2018 permits and completions were higher than 2017.

We consider this report little changed relative to last month.

December Case-Shiller Home Price Index n/a

The non-seasonally-adjusted S and P CoreLogic Case-Shiller home price index's (20 cities) year-over-year rate of home price growth was unchanged at 4.7%. The index authors stated "Even at the reduced pace of 4.7% per year, home prices continue to outpace wage gains of 3.5% to 4% and inflation of about 2%. A decline in interest rates in the fourth quarter was not enough to offset the impact of rising prices on home sales."

February Chemical Activity Barometer Slowing trend continues

The Chemical Activity Barometer reading was essentially flat in February following three months of decline. The cumulative drop was 1.0 percent - still well below the 3.0 percent threshold for a recession signal.

December Manufacturing Sales Slowing trend continues

US Census says manufacturing new orders improved month-over-month. Our analysis shows the rolling averages declined, and the year-over-year rate of growth declined from last month.

According to the seasonally-adjusted data, there was a general weakness in most areas except civilian aircraft. The data in this series is noisy, so I would rely on the unadjusted three-month rolling averages which declined.

Remember the headline numbers are not inflation adjusted, and when inflation is factored in, there is little YoY growth.

January Pending Home Sales n/a

The National Association of Realtors' (NAR) seasonally-adjusted pending home sales index remains in contraction, but with less year-over-year contraction. Our analysis also shows improvement in the year-over-year contraction.

The data is very noisy and must be averaged to make sense of the situation. The long-term trends continue to be downward. Note that the downward trend of home sales began in mid-2015, and unlike the NAR's optimism, we see no upturn for home sales in 2019.

4Q2018 GDP Indicating a slowing economy?

The advance [and second] estimate of fourth quarter 2018 Real Gross Domestic Product (GDP) is a positive 2.6%. This growth is worse than the previous quarter's 3.4% if one looks at the quarter-over-quarter headline growth. Year-over-year growth improved modestly, so one could also say economic growth was better.

Headline GDP is calculated by annualizing one quarter's data against the previous quarter's data. A better method would be to look at growth compared to the same quarter one year ago. For 4Q2018, the year-over-year growth is now 3.1% - up from 3Q2018's 3.0% year-over-year. So one might say that the rate of GDP growth improved 0.1% from the previous quarter.

December / January Personal Income and Expenditure Slowing economy on spending

The headline data for December and January shows continued relatively good growth in income, although January by itself shows poor growth. Expenditures showed poor growth (no January data was released for spending).

Looking at the inflation-adjusted three-month trend rate of growth, disposable income growth rate trend improved while consumption's growth rate declined.

Real Disposable Personal Income is up 2.9% year-over-year, and real consumption expenditures are up 2.2% year-over-year.

So it follows if you are making more but spending less. The savings rate is 7.6% for December (last month it was revised from 6.0% to 6.1%).

Surveys Generally indicating a slowing economy

Dallas Fed Manufacturing declined, but remains in positive territory, with new orders again declining and unfilled orders marginally improving (and in expansion). This report should be considered somewhat worse than last month.

Conference Board Consumer Confidence had been on a multi-year upswing which ended in 4Q2018. The latest Conference Board Consumer Confidence Index's headline number is 131.4 (1985 = 100), up from 121.7 in January. The current volatility is showing uncertainty by consumers.

Richmond Fed Manufacturing Survey subcategory's new order growth improved, but backlog remains in contraction. This survey was stronger compared to last month.

Kansas City Fed manufacturing has been one of the more stable districts, and its index is now well below the range seen in the last 12 months - and this month it is barely positive. Note that the key internals declined with new orders in contraction and backlog remaining deeply in contraction. This is a much worse report than last month.

ISM Chicago index climbed and is in the upper range of values seen since the Great Recession. This month's gain was last matched in February 2017 and surpassed only by the 12.5 point hike recorded in January 2016. All the other services declined or very near values seen the previous month, but the Chicago survey went the other direction and is an outlier.

The ISM Manufacturing survey declined, but continued in expansion. The key internals were mixed. The Markit PMI Manufacturing Index remained in positive territory and also declined.

The final University of Michigan Consumer Sentiment for February came in at 93.8, up from the preliminary February reading of 91.2, and up from the January final of 91.2, but significantly lower than the December final of 98.3.

Weekly Rail Counts Definitely not positive news Rail so far in 2019 has changed from a reflection of a strong economic engine to no growth. The economic intuitive components of rail are in contraction.

This week, the data is mostly showing a slowing economy - but still there is little to indicate that a recession is waiting in the wings.

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. I have no business relationship with any company whose stock is mentioned in this article.