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 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'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
February data included a flatline on jobs, but a big decrease in un- and under-employment rates as government employees returned to their jobs. The ISM non-manufacturing index remained strongly positive.
January housing starts and permits both improved, although single family housing permits fell to a 16-month low.
December construction spending declined, and residential spending is now down YoY. New home sales rose to a six-month high.
In the rear-view mirror, Q4 productivity and unit labor costs both rose.
Long leading indicators
Interest rates and credit spreads
- BAA corporate bond index 4.89% down -.06% w/w (1-year range: 4.15 - 5.29)
- 10-year Treasury bonds 2.63% down -.13% w/w (2.44 - 3.24)
- Credit spread 2.26% up +.07% w/w (1.56 - 2.46)
Yield curve, 10-year minus two-year:
- 0.17%, down -.04% w/w (0.04 - 1.30)
30-year conventional mortgage rate (from Mortgage News Daily)
- 4.45%, down -0.12% w/w (4.43 - 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 are still below 4.6% and so are neutral, as is the yield curve. Note that I will not change Treasury ratings to positive unless they fall below 4.25%, which is 1/2 of the way to their post-Brexit low.
Mortgage applications (from the Mortgage Bankers Association)
- Purchase apps -3% w/w to 243 (214 - 268) (SA)
- Purchase apps 4 wk avg. 241 ((SA))
- Purchase apps YoY +1% ((NSA))
- Purchase apps YoY 4 wk avg. +0.25% ((NSA))
- Refi apps -2% w/w ((SA))
*(SA) =seasonally adjusted, (NSA) = not seasonally adjusted
Real Estate Loans (from the FRB)
- Down less than -0.1% w/w
- Up +3.4% 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 positive, before turning negative again in December. With lower rates this year, in most weeks applications have been positive YoY, and this week the rating changed from negative to neutral.
With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. It is above +3.25%, and so went back from neutral to positive.
- -0.5% w/w
- -0.5% m/m
- +1.6% YoY Real M1 (-0.7 - 3.8)
- +0.1% w/w
- -0.1% 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 two months both M1 and M2 have turned positive.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index up +.02 (less loose) to -0.85
- Adjusted Index (removing background economic conditions) up +.02 (less loose) to -0.67
- Leverage subindex up +.01 (less loose) to -0.30
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 dollar
- Down -0.77 to 126.56 w/w, +7.2% YoY (last week) (broad) (115.19 -129.13)
- Down -0.09 to 96.37 w/w, +8.1% YoY (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. As of roughly one month ago, both are negative.
Bloomberg Commodity Index
- Down -0.50 to 80.47 (76.27 - 91.94)
- Down -8.5% YoY
Bloomberg Industrial metals ETF (from Bloomberg)
- 120.30 down -1.50 w/w, down -10.3% YoY (106.51 - 149.10)
Commodity prices surged higher after the 2016 presidential election. Both industrial metals, and the broader commodities indexes both declined to very negative in the past year. Industrial metals had improved enough to be scored neutral for one week, but are back to negative.
Stock prices S&P 500 (from CNBC)
- Down -2.1% to 2743.07
Stock prices last made a new all-time high at the end of September last year. As of the end of 2018, having not made a new high in three months, while having made a new 52-week low on Christmas Eve, their rating changed to negative. In the past week they have made several new three-month highs. With both three-month highs and lows in the last three months, their rating is now neutral.
Regional Fed New Orders Indexes
(*indicates report this week) (no reports this week)
- Empire State up +4.0 to +7.5
- Philly down -25.4 to -4.1
- *Richmond up +30 to +19
- *Kansas City down -11 to -10
- *Dallas down -4.7 to +6.9
- Month-over-month rolling average: up +3 to +4
The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. It was "very" positive for most of last year. Since last summer it gradually cooled to weakly positive. Last week, it declined to neutral. This week it recovered enough to be a weak positive again.
Initial jobless claims
- 223,000 down -2,000
- Four-week average 226,250 down -2,750
Initial claims had generally been very positive for over a year. In November they briefly spiked, and did so again at the end of January, the worst of which was probably connected to the government shutdown. They have recovered somewhat in the last four weeks.
They have declined enough to go back to (very weakly) positive. If claims were to rise more than 12% above its low and/or remain negative YoY for two months in a row, it would become a negative.
Temporary staffing index (from the American Staffing Association)
- Unchanged at 93 w/w
- Down -1.1% 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 three months it gradually declined, turning neutral in late January and finally turning negative for the last four weeks.
Tax Withholding (from the Department of the Treasury)
- $228.7 B for the last 20 reporting days vs. $216.4 B one year ago, up +12.3 B or +5.7%
With the exception of the month of August and late November, this was positive for almost all of 2017. It was generally negative last year once the effects of the tax cuts started in February.
I have been now phased out the tax law adjustments. Straight YoY comparisons should be valid again. This week they are a positive.
Oil prices and usage (from the E.I.A.)
- Oil up +$0.25 to $56.02 w/w, down -0.4% YoY
- Gas prices up +$.03 to $2.42 w/w, down -$0.14 YoY
- Usage four-week average down -1.9% YoY
The price of gas bottomed three years ago at $1.69. Generally prices went sideways with a slight increasing trend in 2017 and 2018. At the end of last year, however, prices 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, then positive again for two weeks, before turning negative again for the past two weeks.
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. Early last 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.
- Johnson Redbook up +4.2% YoY
- Retail Economist up +0.3% w/w, up +2.3% YoY
Both the Retail Economist and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017 and remained positive all last year. The Retail Economist measure decelerated in the past few months, and after being neutral twice in the last month, it is back to (a very weak) positive. Johnson Redbook has fallen sharply from briefly being 9%+ YoY three weeks ago. If it falls to 3.5% or below, it will rate a neutral, but for now is still positive.
Railroads (from the AAR)
- Carloads down -5.5% YoY
- Intermodal units down -0.7% YoY
- Total loads down -3.0% YoY
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 January, but during February it generally declined to neutral or negative. It was negative again this week.
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 mid-year 2018 hit multi-year highs. Since then it declined all the way to negative but has rebounded up to neutral.
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)
- Up +1.0% w/w
- Up +5.9% 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. For three weeks the YoY comparison abruptly declined to less than 1/2 of it recent range over 10% YoY, and were neutral, but this week returned to being positive.
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 and mortgage rates are neutral, joined this week by purchase mortgage applications. Treasuries, corporate bonds, and refinance applications are negative.
Among the short leading indicators, positives include the Chicago National Conditions Index, the Fed new orders indexes, and oil and gas prices (note that I'm weighting the benefit to consumers more than the distress to the Oil Patch). Initial jobless claims are also back to positive. Stock prices are neutral. Both measures of the US dollar, the general commodity index, the spread between corporate and Treasury bonds, industrial metals, gas usage, and temporary staffing are negative.
Among the coincident indicators, consumer spending, tax withholding, steel, and the TED spread are positive. Harpex improved to neutral. LIBOR, the Baltic Dry Index, and rail are negative.
As anticipated, some of the series have rebounded as the effects of the government shutdown wear off. The long-term forecast has returned to being slightly positive. The short-term forecast remains negative. The nowcast has also returned to being slightly positive.
I'm watching to see if the long leading indicators bottom. In the meantime, the question for this year remains if we have merely a slowdown or actually fall into a recession. For now, slowdown remains more likely, but much depends on government policies in the months ahead.
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.