Weekly High Frequency Indicators: Little Movement, But Manufacturing On Knife's Edge

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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.

There was little movement among the indicators in all timeframes this week.

That being said, manufacturing growth has slowed to essentially zero, and could easily head south if trade wars continue.

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 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's 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's 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 is moving in the right direction and is close to making a new high.

Recap of monthly reports

June reports started out with an outright negative Chicago PMI report, the first since January 2017. Consumer expectations also declined in both the University of Michigan and Conference Board’s consumer confidence measures, although the present conditions did improve in the former’s case.

May reports included a decline in new home sales, although they are still above recent lows. Durable goods orders also declined, although the “core” measure improved. Retail and wholesale inventories increased. Real personal income and spending both increased.

The April FHFA housing price index increased both monthly and as measured YoY. By contrast, the Case-Shiller index decelerated further YoY.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 4.32% down -.07% w/w (1-year range: 4.15 - 5.29)
  • 10-year Treasury bonds 2.01% down -.05% w/w (1.99 - 3.24)
  • Credit spread 2.31%, down -.02% w/w (1.56 - 2.48)

Yield curve

  • 10 year minus 2 year: 0.25%, down -.04% w/w (0.04 - 1.30)
  • 10 year minus 3 month: -0.10%, down -0.05% w/w

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

  • 3.81%, up +0.01 w/w (3.79 - 5.05)

BAA Corporate bonds and Treasury bonds remain neutral. The spread between corporate bonds and treasuries is negative. The two- vs. 20-year yield curve also is neutral (unlike many other treasury spreads). While I dislike cherry picking, the fact remains that this spread has been an anomaly this year. As a result I have also included the 10-year minus three-month spread. Note that I will not change corporate ratings to positive unless they fall below 4.25%. Mortgage rates are below 4.2%, (1/2 of the way to their post-Brexit low), so they have returned to positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps -1% w/w to 268 (214 - 281) (SA)
  • Purchase apps 4 wk avg. +1 to 267 ((SA))
  • Purchase apps YoY +9% (NSA)
  • Purchase apps YoY 4 week average +6% ((NSA))
  • Refi apps +3% w/w ((SA))

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

Real Estate Loans (from the FRB)

  • Up +0.2% w/w
  • Up +3.5% YoY ( 2.7 - 6.5)

Purchase applications generally declined from expansion highs through neutral to negative from the beginning of summer to the end of 2018. With lower rates this year, their rating has climbed back to positive. Meanwhile, lower rates once again have caused a spike upward in refi, which this week improves to neutral.

With the re-benchmarking of the last year, the growth rate of real estate loans turned from neutral to positive. For two weeks it fell back below +3.25%, and so went back from positive to neutral, but has rebounded to positive.

Money supply

M1

  • -0.5% w/w
  • +1.9% m/m
  • +3.3% YoY Real M1 (-0.7 - 4.1)

M2

  • +0.2% w/w
  • +1.1% m/m
  • +2.8% 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% almost all last year, and has with few exceptions stayed below that benchmark, before rising above it this week. It thus improves from negative to neutral. Real M1 briefly turned negative about four months ago. Both real M1 and M2 then improved all the way to positive for one month, then M1 was roughly zero YoY for one week. For the six weeks real M1 has been positive.

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet.com)

  • Q1 2019 actual, unchanged w/w at 38.80, down -6.1% Q4 2018
  • Q2 2019 estimated at 40.43, up +4.2% q/q, down -5.7% from Q4 2018 peak

I initiated coverage of this metric recently on an experimental basis. FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. Based on the preliminary results, I have expanded the “neutral” band to +/-3% as well as averaging the two quarters together, until at least 100 companies have actually reported. Because the rebound is less than half of the decline from the Q4 peak, I'm scoring the Q2 estimates as neutral.

Credit conditions (from the Chicago Fed)

  • Financial Conditions Index down -.01 (looser) to -0.83
  • Adjusted Index (removing background economic conditions) unchanged (loose) at -0.67
  • Leverage subindex up +0.01 (less loose) to -0.46

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

  • Up +0.20 to 128.69 w/w, +3.9% YoY (last week) (broad) (115.19 -129.20)
  • Unchanged at 96.21 w/w, +1.7% YoY (major currencies)

The US dollar briefly spiked higher after the US presidential election. Both measures had been positive last summer, but by last autumn the broad measure turned neutral, followed more recently by the measure against major currencies. As of roughly eight months ago, both were negative. As of four weeks ago, the measure against major currencies weakened enough to score neutral, followed two weeks ago by the broad index.

Commodity prices

Bloomberg Commodity Index

  • Up +0.81 to 79.65 (76.27 - 91.94)
  • Down -8.9% YoY

Bloomberg Industrial metals ETF (from Bloomberg)

  • 113.12 Up +2.07 w/w, down -13.0% 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 briefly improved enough to be scored neutral for one week, but both are back to very negative, implying a lot of weakness in global trade.

Stock prices S&P 500 (from CNBC)

  • Down -0.3% to 2941.76

At the end of 2018, stocks’ rating became negative. This year, they have made repeated new three-month and several all-time highs, and thus their rating is positive.

Regional Fed New Orders Indexes

(*indicates report this week)

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. For five weeks it alternated between neutral and weakly positive, then in April turned solidly positive. It slipped back in May and now is just above zero. Note that the Chicago PMI also was reported Friday morning just barely negative. In any event, the rating is neutral.

Employment metrics

Initial jobless claims

  • 227,000 up +11,000
  • Four-week average 221,250 up +2,500

Initial claims had generally been very positive in 2017 and 2018. 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 made new 49 year lows in the three weeks just before Easter, probably due to residual seasonality. The overall trend is still weakly positive, by a very slim margin.

Temporary staffing index (from the American Staffing Association)

  • Unchanged at 94 w/w
  • Down -2.6% 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 for most of the rest of the year. In the last five months it has gradually declined, turning neutral in January and then negative - and until four weeks ago increasingly so - since early February.

Tax Withholding (from the Dept. of the Treasury)

  • $198.1 B for the last 20 reporting days vs. $182.3 B one year ago, up +$15.8 B or +8.7%

This was generally negative last year once the effects of the tax cuts started in February 2018. Straight YoY comparisons have become valid again since this February, and with the exception of one week, have been positive.

Oil prices and usage (from the E.I.A.)

  • Oil up +$0.45 to $58.07 w/w, down -10.4% YoY
  • Gas prices down -$.02 to $2.65 w/w, down -$0.18 YoY
  • Usage four-week average up +2.1% YoY

The price of gas bottomed over three years ago at $1.69. Generally prices went sideways with a slight increasing trend in 2017 and 2018. While at the end of last year, prices plummeted, oil rose up YoY, before declining in the past month. Gas prices may also have made their seasonal high for this year a few weeks ago. Usage was positive YoY during most of 2016, but has oscillated between negative and positive for the last several months. This week once again it was positive.

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. After being whipsawed between being positive or negative last year, this year it has remained positive.

Coincident indicators

Consumer spending

Both the Retail Economist and Johnson Redbook Indexes were positive all during 2018. The Retail Economist measure decelerated earlier this year, turning neutral, but improved enough to score positive in April and May. It has been varying between neutral and weakly positive, as it was this week. Johnson Redbook did fall sharply at the beginning of this year, and varied between being positive or neutral for several months before improving to positive several months ago.

Transport

Railroads (from the AAR)

  • Carloads down -4.0% YoY
  • Intermodal units down -7.5% YoY
  • Total loads down -5.8% YoY

Shipping transport

In 2018 rail, 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 since then it has turned almost uniformly negative, suggesting that the trade war with China is having a major impact. Rail traffic in the western US is likely also impacted by the widening of the Panama Canal, which has allowed ships to bypass West Coast ports and proceed directly to Gulf and East Cost ports. By contrast, truck traffic is still positive YoY; the trend there is neutral to slightly positive.

Harpex made multi-year lows in early 2017, and after oscillating improved to new multi-year highs earlier in 2018, but recently enough to rate negative. In the past month it has rebounded enough to be neutral. BDI traced a similar trajectory, and made three-year highs near the end of 2017, and at midyear 2018 hit multiyear highs. Since then it declined all the way to negative, but has improved enough again to rate neutral.

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 -0.7% w/w
  • Up +3.2% 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. Recently the YoY comparison abruptly declined to less than 1/2 of it recent range over 10% YoY, and was neutral, and has been varying between neutral and positive since. For the past four weeks it has been neutral.

Summary And Conclusion:

Among long leading indicators, purchase mortgage applications, mortgage rates, the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex, real estate loans, and real M1 and real M2 are positives. Mortgage refinancing, the yield curve, corporate bonds and treasuries are neutral. Corporate profits are negative.

Among the short leading indicators, stock prices, the Chicago National Conditions Index, gas and oil prices, gas usage, and initial claims are positives. The US dollar and the regional Fed new orders indexes are neutral. The general commodity index, the spread between corporate and Treasury bonds, industrial metals, and temporary staffing are negative.

Among the coincident indicators, consumer spending, tax withholding, and the TED spread are positive. Harpex, the BDI, and steel are neutral. Rail and LIBOR are negative.

The overall long-term forecast continues to be positive. The short-term forecast is neutral. The nowcast is weakly positive. What the Fed does with rates, and what the Administration does with trade wars, remain crucial.

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.