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Weekly High Frequency Indicators: The Big Issue Remains - Worries About Producer Weakness Spreading To Consumers

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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.

In 2019, the long-term forecast has turned increasingly positive.

But the very volatile short-term forecast, while neutral this week, remains problematic.

Consumer spending remains the most positive “hard” metric.

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 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, and 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

November data included a decline in durable goods orders, but a slight increase in “core” orders. New home sales rose from a downwardly revised October, but were slightly lower than September’s expansion high.

IMPORTANT NOTE: For all series where a graph is available, I have provided a link to where the relevant graph can be found.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 3.87%, down -0.01% w/w (1-yr range: 3.73-5.29)
  • 10-year Treasury bonds 1.87%, down -0.05% w/w (1.47-3.24)
  • Credit spread 2.00%, up +0.04% w/w (1.56-2.48).

(Graph at FRED Graph | FRED | St. Louis Fed )

Yield curve

  • 10 year minus 2 year: +0.29%, unchanged w/w (-0.01-1.30)
  • 10 year minus 3 month: +0.31%, down -0.03% w/w (-0.44 - +1.00)
  • 2 year minus Fed funds: +0.04%, down -0.02 (-1.0% required for recession signal)

(Graph at FRED Graph | FRED | St. Louis Fed )

30-year conventional mortgage rate (from Mortgage News Daily) (graph at link)

  • 3.82%, down -0.01% w/w (3.46-5.05)

BAA Corporate bonds and Treasury bonds turned positive several months ago. In particular, that corporate bonds recently fell to yet another new expansion low is extremely bullish into Q3 2020. The spread between corporate bonds and Treasuries, after one week being negative, is back to neutral. One measure of the yield curve neutral, while two are more than +0.25%, and so have turned positive. Mortgage rates are still not too far from their post-Brexit low, so they remain positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps -5% w/w to 251 (214-281) (SA)
  • Purchase apps 4 wk avg. down -5 to 264 (SA)
  • Purchase apps YoY +5% (NSA)
  • Purchase apps YoY 4 wk avg. -3% (NSA)
  • Refi apps -5% w/w (SA)

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

(Graph here)

Real Estate Loans (from the FRB)

  • Down -0.4% w/w
  • Up +3.8% YoY (2.7-6.5)

(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed)

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. This week they score neutral, but this is probably a one week artifact of seasonality. Meanwhile, lower rates once again caused a spike upward in refi, returning it 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, then rebounded to positive and has generally stayed there since. For two weeks declined back to negative, but recently returned to positive.

Money supply

M1

  • +0.6% w/w
  • +1.6% m/m
  • +6.4% YoY Real M1 (-0.7 to 6.4) New one year high

M2

  • +0.5% w/w
  • +0.5% m/m
  • +5.6% YoY Real M2 (0.9-5.9)

(Graph at FRED Graph | FRED | St. Louis Fed)

In 2018 and early this year, real M1 turned neutral and very briefly negative. Real M2 growth fell below 2.5% almost all of last year and earlier this year, and so was rated negative. In the past six months, both have continued to improve and for the past few months, both have turned and remained positive.

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet) (no report this week)

  • Q3 2019 actual earnings, unchanged w/w at 42.18, up +1.7% q/q, down -1.6% from Q4 2018 peak
  • Q4 2019 estimated earnings, down -0.02 to 40.83, down -3.2% q/q, down -4.8% from Q4 2018 peak

(Graph: P. 27 here)

I initiated coverage of this metric earlier this year 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.

Using the above method, the average of Q3 and Q4 earnings is -3.3% off the peak, and so this metric turns from positive to negative.

Credit conditions (from the Chicago Fed) (graph at link)

  • Financial Conditions Index down -1 (looser) to -0.79
  • Adjusted Index (removing background economic conditions) up +3 (less loose) to -0.58
  • Leverage subindex unchanged (loose) at -0.34

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 earlier this year, but is now back to close to its least loose reading from one year ago. In the past, an inverted yield curve has led to a contraction in lending — but not this time, according to these measures (as opposed to the Senior Loan Officer Survey, which did show a slight contraction in Q3).

Short leading indicators

Trade weighted US$

Both measures of the US$ had been positives in the summer of 2018, but by last autumn, the broad measure turned neutral, followed more recently by the measure against major currencies. As of roughly nine months ago, both were negative. In late summer, both of improved to neutral on a YoY basis. The measure against major currencies took a major spill recently. After one week positive (a lower $ is an economic positive), it turned back to neutral one week ago, but rebounded to positive again this week.

Commodity prices

Bloomberg Commodity Index

  • Up +0.96 to 81.35 (76.07-91.94)
  • Up +4.9% YoY

(Graph at Bloomberg Commodity Index)

Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)

  • 115.89, up +0.01 w/w, up +5.0% YoY (107.87-123.18)

Commodity prices surged higher after the 2016 presidential election. Both industrial metals and the broader commodities indexes declined to very negative last year. Industrial metals improved enough to be scored neutral recently. They returned to positive two weeks ago.

Stock prices S&P 500 (from CNBC) (graph at link)

  • Up +0.6% to 3240.02 (New all time high)

At the end of 2018, stocks' rating became negative. This year, they have made repeated new 3-month and all-time highs.

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 2018, but cooled beginning late last year. All this year it has been waxing and waning between positive and flat — until one week ago, when it turned negative.

Employment metrics

Initial jobless claims

  • 222,000, down -12,000
  • 4-week average 228,000, up +2,500

(Graph at FRED Graph | FRED | St. Louis Fed )

In November 2018, initial claims briefly spiked, and did so again at the end of January (probably connected to the government shutdown). They made new 49-year lows in April. The numbers have weakened recently. The 4 week average is more than 10% higher than its expansion low, and the monthly average looks likely to be slightly higher YoY as well. Thus this metric shifts from neutral last week to weakly negative.

Temporary staffing index (from the American Staffing Association) (graph at link)

  • Unchanged at 96 w/w
  • Down -5.0% YoY

Beginning in November 2018, this index gradually declined to neutral in January and has been negative since February. Since the beginning of the third quarter has progressively had its worst YoY readings since 2016 (but has rebounded YoY slightly in the past month), and finally exceeded them to the downside two months ago.

Tax Withholding (from the Dept. of the Treasury)

  • $218.9B for the last 20 reporting days vs. $207.7B one year ago, up +$11.7B or +5.4%

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 +$1.33 to $61.67 w/w, up +28.7% YoY
  • Gas prices down -$.01 to $2.53 w/w, up +$0.21 YoY
  • Usage 4-week average up +0.3% YoY

(Graphs at This Week In Petroleum Gasoline Section)

After bottoming in 2016, generally prices went sideways with a slight increasing trend in 2017 and 2018. Prices fell sharply late last year and bottomed at the beginning of this year. Two weeks ago they went higher YoY. If they turn higher by more than 40% YoY, they will be an economic negative. For now they are neutral. Gas prices made their seasonal high for this year in spring. Usage was positive YoY during most of 2016, but has oscillated between negative and positive for the last several months. It has been positive for the past five weeks.

Bank lending rates

  • 0.420 TED spread up +0.030 w/w (graph at link)
  • 1.80 LIBOR up +0.04 w/w (graph at link)

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. This week is positive again. Johnson Redbook fell sharply at the beginning of this year before improving to positive beginning in spring and remaining there since.

Transport

Railroads (from the AAR)

  • Carloads down -11.5 YoY
  • Intermodal units down -9.5% YoY
  • Total loads down -10.5% YoY

(Graph at Railfax Report - North American Rail Freight Traffic Carloading Report)

Shipping transport

In 2018, rail, after some weakness in January and February, 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. In the last several months, the YoY comparisons have generally been even worse.

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 few months, it rebounded all the way back to 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 three months, it made repeated three-year highs, before backing off in the past month, enough to be scored 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)

  • Up +1.2% w/w
  • Up +0.3% 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 had been varying between neutral and positive since. In the summer, it varied between neutral and negative, but for two months has been almost exclusively negative.

Summary And Conclusion

Among the long leading indicators, corporate bonds, Treasuries, all measures of the yield curve, 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 all positives. Mortgage refinancing is neutral, joined this week (probably due to seasonality) by purchase mortgage applications. After a rebound of several quarters, however, corporate profits have returned to negative.

Among the short leading indicators, the Chicago Financial Conditions Index, commodities, gas usage and stock prices are positive. The US$, oil and gas prices and the spread between corporate and Treasury bonds are neutral. Temporary staffing, the Fed new orders indexes, and initial jobless claims are negative.

Among the coincident indicators, both measures of consumer spending, tax withholding, Harpex, steel, and the TED spread are positive. The Baltic Dry Index is neutral. Rail and LIBOR are negative.

The long leading forecast remains positive. The short-term forecast returns to neutral from negative this week. The coincident indicators are positive. I continue to watch whether weakness in the producer sector spreads out to affect consumers, in particular via the Regional Fed new orders indexes and initial jobless claims. This coming week monthly vehicle sales data will be particularly important.

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.