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, 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
July reports started out with a good headline job report, with evidence of significant weakness in manufacturing and goods-producing jobs generally. The ISM manufacturing index declined slightly, but remained in positive territory. The Chicago regional index did turn negative. Consumer confidence as measured by the University of Michigan was unchanged, but as measured by the Conference Board spiked higher.
June reports included positive personal income and spending, and a decline in construction spending. Factory orders rose.
In the rear view mirror, the employment cost index rose q/q in Q2, but decelerated YoY.
Long leading indicators
Interest rates and credit spreads
- BAA corporate bond index 4.07%, down -.15% w/w (1-yr range: 4.15-5.29) (NEW EXPANSION LOW)
- 10-year Treasury bonds 1.85%, down -.22% w/w (1.99-3.24) (NEW ONE YEAR LOW)
- Credit spread 2.22%, up +.07% w/w (1.56-2.48)
- 10 year minus 2 year: 0.14%, down -0.17% w/w (0.04-1.30)
- 10 year minus 3 month: -0.21%, down -0.16% w/w (-0.28 - 1.00)
30-Year conventional mortgage rate (from Mortgage News Daily)
- 3.77%, down -.14% w/w (3.79-5.05) (NEW ONE YEAR LOW)
BAA Corporate bonds and Treasury bonds turned positive last week, and this week got even more positive. In particular, that corporate bonds fell to a new expansion low is extremely bullish for the next year or more. The spread between corporate bonds and Treasuries is negative. After briefly turning positive, the 2- vs. 20-year yield curve has reverted to neutral this week (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 3-month spread, which is close to its most negative reading of this expansion. Mortgage rates are well below 4.2% (1/2 of the way to their post-Brexit low), so they are very positive.
Mortgage applications (from the Mortgage Bankers Association)
- Purchase apps -3% w/w to 254 (214-281) (SA)
- Purchase apps 4 wk avg. -3 to 265 (SA)
- Purchase apps YoY +6% (NSA)
- Purchase apps YoY 4 wk avg. +6% (NSA)
- Refi apps -0.1% w/w (SA)
*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted
Real Estate Loans (from the FRB)
- Up +0.2% w/w
- Up +3.3% 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 recently caused a spike upward in refi, but it has returned to negative.
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, then rebounded to positive, last week went back to neutral, and back to positive this week.
- +0.8% w/w
- +1.1% m/m
- +3.6% YoY Real M1 (-0.7 to 4.1)
- +0.4% w/w
- +0.5% m/m
- +3.4% YoY Real M2 (0.9-3.3)
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 two weeks ago. 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 last two months real M1 has been positive.
Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via Factset.com)
- Q2 2019 estimated (23%) + actual (77%), up +0.95 to 41.10, up +5.9% q/q, down -4.1% 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 previous two quarters together, until at least 100 companies have actually reported (which they now have). Unlike last week, this week the Q2 actual results declined from the most recent estimates. Because the q/q rebound has now risen to more than half of the decline from the Q4 peak, this rating improves from neutral to positive.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index down -.02 (looser) to -0.86
- Adjusted Index (removing background economic conditions) down -.02 (looser) to -0.70
- Leverage subindex up +.01 (less loose) to -0.41
The Chicago Fed's Adjusted Index's real break-even 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$
- Up +0.23 to 127.82 w/w, +2.7% YoY (last week) (broad) (115.19-129.20)
- Up +0.10 to 98.11 w/w, +3.1% YoY (major currencies)
The US$ briefly spiked higher after the US presidential election. Both measures had been positives 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. Within the past two months, both of improved to neutral.
Bloomberg Commodity Index
- Down -1.51 to 77.23 (76.27-91.94)
- Down -9.0% YoY
Bloomberg Industrial metals ETF (from Bloomberg)
- 111.60, down -2.59 w/w, down -6.8% 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. Industrial metals had briefly improved enough to be scored neutral for two weeks in the past four, but returned to negative this week.
Stock prices S&P 500 (from CNBC)
- Down -3.1% to 2932.05
At the end of 2018, stocks' rating became negative. This year, they have made repeated new 3-month and several all-time highs, and thus their rating is positive.
Regional Fed New Orders Indexes
(*indicates report this week)
- Empire State up +10.5 to -1.5
- Philly up +10.6 to +18.9
- Richmond down -16 to -18
- Kansas City down -7 to -2
- *Dallas up +1.8 to +5.5
- Month-over-month rolling average: up +1 to +1
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 to just above zero. June raised the rating back to positive, but July is back to neutral.
Initial jobless claims
- 215,000, up +9,000
- 4-week average 213,000, down -1,500
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, despite some challenging YoY comparisons.
Temporary staffing index (from the American Staffing Association)
- Unchanged at 93 w/w
- Down -3.7% 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 since early February. It had been improving a little, but this week fell back to its worst YoY reading so far this year.
Tax Withholding (from the Dept. of the Treasury).
- $210.9 B for the month of July 2019 vs. $192.5 last year, up +18.4 or +9.6%
- $210.9 B for the last 20 reporting days vs. $196.1 B one year ago, up +$14.8 B or +7.5%
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 down -$0.97 to $55.20 w/w, down -13.3% YoY
- Gas prices down -$.03 to $2.72 w/w, down -$0.13 YoY
- Usage 4-week average down -1.3% YoY
After bottoming in 2016, generally prices went sideways with a slight increasing trend in 2017 and 2018. While at the end of last year, prices plummeted, oil rose to up YoY, before declining recently. Gas prices may also have made their seasonal high for this year over a month ago. Usage was positive YoY during most of 2016, but has oscillated between negative and positive for the last several months. This week it was negative again for the second week in a row.
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.
- Johnson Redbook up +4.5% YoY
- Retail Economist up +0.6% w/w, up +2.3% YoY
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, but reverted to neutral again for the last two weeks. 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.
Railroads (from the AAR)
- Carloads down -3.5% YoY
- Intermodal units down -5.3% YoY
- Total loads down -4.4% YoY
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 Coast ports. By contrast, truck traffic is still (very slightly) 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 earlier this year turned negative. In the past two months, it rebounded enough to be neutral, and now is positive. BDI traced a similar trajectory, and made three-year highs near the end of 2017, and again at midyear 2018, before declining all the way back to negative. In the past two weeks it has made repeated three-year highs.
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)
- Up +0.6% w/w
- Up +2.5% 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 its recent range over 10% YoY, and was neutral, and has been varying between neutral and positive since. For the past eight weeks, it has been neutral.
Summary And Conclusion
Among long leading indicators, corporate bonds, purchase mortgage applications, mortgage rates, the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex, real M1 and real M2, and real estate loans are positives, rejoined by corporate profits and Treasuries this week. The yield curve is neutral or negative, depending on the maturity. Mortgage refinancing is negative.
Among the short leading indicators, stock prices, the Chicago National Conditions Index, gas and oil prices, and initial claims are positives. The US$ and the regional Fed new orders indexes are neutral. The spread between corporate and Treasury bonds, general commodities, industrial commodities, gas usage, and temporary staffing are negative.
Among the coincident indicators, one measure of consumer spending, tax withholding, Harpex, BDI, and the TED spread are positive. A second measure of consumer spending and steel are neutral. Rail and LIBOR are negative.
The nowcast remains positive. The short-term forecast, which has been very volatile recently, and two weeks ago was briefly positive, since then has been slightly negative. But the big action has been in the long leading indicators, especially interest rates, which have now turned very positive. If Q2 corporate profits increase in the 2nd GDP report in three weeks, as they have in S&P corporate earnings, almost certainly I will go off recession watch.
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.