Turning Points For The Coming Week Of July 1-5

by: Hale Stewart
Summary

Corporate profits were lower in the first quarter and are projected to be lower in 2Q19.

A large number of leading indicators are soft with the yield curve inversion being the most prominent.

Two coincidental indicators (industrial production and payroll employment growth) are softer.

The purpose of the Turning Points Newsletter is to look at the long-leading, leading, and coincidental indicators to determine if the economic trajectory has turned from expansion to contraction - to see if the economy has reached a "Turning Point."

My recession probability remains at 20% for the next 6-12 months. There are nine long-leading, leading, and coincidental indicators that are soft. The breadth of the data is enough to warrant a great deal of concern going forward.

Long-Leading Indicators

Last week, the BEA reported that corporate profits decreased in the 1A19:

Corporate profits decreased 2.6 percent at a quarterly rate in the first quarter of 2019 after decreasing 0.4 percent in the fourth quarter of 2018.• Profits of domestic nonfinancial corporations decreased 4.9 percent after increasing 1.0 percent.• Profits of domestic financial corporations increased 0.3 percent after decreasing 5.6 percent.• Profits from the rest of the world increased 1.5 percent after increasing 0.4 percent

Here's a chart of the data:

After a long run of increases starting in late 2014, the number decreased for the first time last quarter (left chart). The right chart shows the Y/Y percentage increase declined substantially last quarter. While their respective data sets are smaller than that of the BEA, both Zacks and FactSet are reporting lower projected 2Q19 profits.

Leading Indicators

Various leading indicators are softer, starting with new orders for consumer durable goods (top charts) and business equipment (bottom charts):

The left charts show the absolute numbers while the right charts show the Y/Y percentage increases. The consumer durable numbers in the top charts have dropped sharply over the last few months which is reflected in the Y/Y data. While up modestly in the last report, business equipment spending (bottom two charts) is modestly lower since peaking in mid-2018; the Y/Y percentage number continues to trend lower.

Building permits have been trending lower since the beginning of 2018. (Also see this post from the St. Louis Fed which shows that a number of housing metrics are behaving in a manner similar to that which preceded the last recession).

The average weekly hours of production workers are at its lowest level in the last five years. Businesses cut hours first because it allows them to keep their workers while still cutting costs.

It's looking more and more likely that the 4-week moving average of initial unemployment claims is bottoming for this cycle.

However, the yield curve remains the main reason supporting my 20% recession probability call:

The chart above multiplies the 10-year/3-month spread by -1 so that increases are contractions. The curve inverted recently.

Several measures of the belly of the curve have been inverted for a while now. The left chart shows the difference between the 10-, 7-, and 5-year and the 3-month bill, while the right chart shows the difference between the 7-, 5-, 3-, and the 1-year. The left chart contracted in late March while the right chart contracted at the end of last year. Both also continue to trend lower.

Coincidental Indicators

Let's start with payroll employment:

The total monthly gain has softened over the last four months. This should be surprising: note the weaker readings in July and September.

Industrial production has been trending lower since the 3Q18. Let's look a little deeper into this data:

Final products have decreased in four of the last six months; non-industrial supplies are off in three of the last six, as is material production. Manufacturing has contracted in three of the last six months and printed at 0 in a fourth.

No one indicator above supports a recessionary call. But the breadth of the data - not only in amount of across the various indicator categories - warrants caution.

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.