Weekly High Frequency Indicators: Stagflation Knocks At The Door Of The Boom

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.
• The nowcast and short-term forecast remain extremely positive. The long-term forecast is slightly positive.
• Bottlenecks to production, i.e., supply constraints, are stagflationary. Whether they remain transitory or not will largely determine how much of a slowdown puts the brakes on our current boom.

Photo by AndreyPopov/iStock via Getty Images

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 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.

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

Recap of monthly reports

April data included sharp spikes in both CPI and PPI to 10 year+ YoY highs, but against deeply negative comparisons from April of last year. The 11-month gain was not nearly so much. Retail sales were essentially flat, and down significantly in real terms, but less than 10% of March’s huge gain was reversed. Industrial production increased modestly, but is still below January’s pandemic high. Consumer sentiment as measured by the University of Michigan declined, allegedly due to inflation worries.

March JOLTS data showed a huge jump in openings, and an increase in hires and quits, in accord with that month’s strong jobs report.

NOTE: I have discontinued comparisons with the “worst” readings since the onset of the coronavirus crisis began over one year ago, as they are no longer helpful. I will continue to post the best readings during the pandemic in parentheses following this week’s number.

Coronavirus Vaccinations

Vaccinations 7 day average: 2.09m/day, unchanged/day w/w

Total Vaccinations: 266.6m, up +14.6m w/w

At least 1 dose administered: 155.3m, up 4.9m w/w (59.1% of population age 18+)

Fully vaccinated: 120.3m, up +9.4m (46.1% of population age 18+)

At the current rate, it will take 2.5 more months to vaccinate the entire US population age 18 or over (about 210 million people, or 420m doses). The seven-day average of vaccinations has dropped by 1.3 million/day over the past four weeks.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 3.70%, up +0.16% w/w (1-yr range: 3.13-5.15)
• 10-year Treasury bonds 1.63%, up +0.06% w/w (0.52-1.74)
• Credit spread 2.07%, up +0.10% w/w (1.91-4.31) (new 1 year low)

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

Yield curve

• 10 year minus 2 year: +1.48%, up +0.05% w/w (0.12 - 1.58)
• 10 year minus 3 month: +1.62%, up +0.06% w/w (-0.20 - 1.72)
• 2 year minus Fed funds: +0.10%, unchanged w/w

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

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

• 3.14%, up +0.12% w/w (2.75-3.45)

Corporate bonds spiked to near five-year highs early in 2020, but subsequently made a series of multi-decade lows. Several weeks ago, they increased to the middle of that range, and so changed to neutral, but despite this week’s increase, have declined back to positive.

Treasury bonds yields have recently made 1 year highs, and are near the middle of their five-year range. Typically it takes a 1% or more increase in rates to substantially impact the housing market. They have exceeded that limit, they are negative. Mortgage rates briefly turned neutral, but have declined back to positive.

The spread between corporate bonds and Treasuries turned very negative last March, but bounced back, and remains positive now. Meanwhile two of the three measures of the yield curve are "extremely" positive, while the Fed funds vs. 2 year spread is neutral.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps up +1% w/w to 277 (184-349) (SA) ( high Jan 22)
• Purchase apps 4 wk avg. down -1 to 283 (SA) (341 high Jan 29)
• Purchase apps YoY +13% (NSA)
• Purchase apps YoY 4 wk avg. +32% ((NSA))
• Refi apps up +3% w/w (SA)
• Refi apps YoY -12% w/w (SA)

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

(Graph at here. )

Real Estate Loans (from the FRB)

• Down -0.1% w/w
• Down -1.1% YoY (-1.3 - 5.2)

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

Purchase mortgage applications made repeated new decade highs late last year. Between higher mortgage rates and likely weather related issues, they cratered briefly in February, but have rebounded. With applications back below 290, their rating changes back from neutral to negative. Refi is also down substantially from recent highs, to 12 month+ lows, and is also enough to turn them negative.

From 2018 until late in 2020 real estate loans with few brief exceptions stayed positive. In the past several months they turned neutral, and two months ago turned negative.

Money supply

The Federal Reserve has discontinued this weekly series. Data is now only released monthly. March data was released last week:

• M1 m/m up +1.5%, YoY up +365%
• M2 m/m up +1.3%, YoY up +24.2%

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet at p. 24)

• Q1 2021 91% actual + 9% estimated, up +0.26 to 48.34, up +14.2% q/q

FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. The "neutral" band is +/-3%. I also average the previous two quarters together, until at least 100 companies have actually reported.

With the big upturn in Q1, earnings are now solidly positive.

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

• Financial Conditions Index up +.01 ( less loose) to -0.70 (0.33 - -0.71)
• Adjusted Index (removing background economic conditions) down -.01 ( looser) to -0.56 (0.64 - -0.79)
• Leverage subindex unchanged (loose) at -0.32 (0.66 - -0.36)

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. In early April 2020 all turned negative, but both the adjusted and un-adjusted indexes quickly rebounded to positive, and have remained so since. Leverage is now positive as well.

Short leading indicators

Trade weighted US$

• Down -1.09 to 111.29 w/w, -9.4% YoY (last week) (broad) (111.29 - 126.47) (new one year low) (Graph at Trade Weighted U.S. Dollar Index: Broad, Goods and Services
• Up +0.12 to 90.33 w/w, down -10.0% YoY (major currencies) (graph at link) (89.68 -102.82)

Both measures of the US$ were negative for two months right after the pandemic started in 2020. In late spring both of improved to neutral, and then positive since last August.

Commodity prices

Bloomberg Commodity Index

• Down -1.75 to 91.98 (58.87-93.73)
• Up +50.1% YoY (Best: +51.2% May 7)

(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch )

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

• 158.60, down -4.24 w/w (88.46-162.84)
• Up +67.3% YoY (Best +69.0% May 7)

Both industrial metals and the broader commodities indexes were negative in much of 2019, but rebounded considerably since April 2020. Both total and industrial commodities are now extremely positive.

[Note: The PPI for all commodities is up over 11% YoY, the highest YoY increase in 40 years except for August 2008. But only 5.7% above March 2019.]

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

• Down -1.4% to 4173.85

There have been repeated all time highs, so this metric is positive.

Regional Fed New Orders Indexes

(*indicates report this week) (no reports this week)

• Empire State up +17.8 to +26.9
• Philly down -2.2 to +36.0
• Richmond unchanged at +10
• Kansas City down -8 to +29
• Dallas up +8.0 to +38.5
• Month-over-month rolling average: up +2 to +28

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. By last June these had already rebounded all the way to positive. They pulled back in November and December, but have sharply rebound since, and are very positive now.

Employment metrics

Initial jobless claims

• 473,000, down -34,000 w/w (Best 473,000 this week)
• 4-week average 534,000, down -28,250 w/w (Best 534,000 this week)

(Graph at St. Louis FRED)

New claims made a pandemic low in November, rose through a month ago, and have since essentially leveled off. They are still above their worst levels of the Great Recession. After briefly weakening this winter to negative, they gradually reverted to neutral and then positive, and are now very positive.

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

• Up +1 to 94 w/w
• Up +55.5% YoY (Best +55.5% this week)

This index turned negative in February 2019, worsened in the second half of the year, and plummeted beginning in March 2020. It gradually improved to “less awful,” then neutral 6 months ago, and positive since February. It is almost exactly even with its reading at this time in 2019.

Tax Withholding (from the Dept. of the Treasury)

• $211.1 B for the last 20 reporting days vs. $163.6 B one year ago, up +$47.5 B or +29.0% (Best +37.6% April 30)

YoY comparisons turned firmly negative in the second week of April. The comparative YoY readings, except for one week, have generally improved to less than 1/2 of their worst, making this indicator neutral. This report has been positive since the beginning of 2021. Unfortunately, like many other reports, the YoY comparisons are temporarily much less reliable. They should become more reliable again once we get into June.

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

• Oil up +$0.59 to $65.41 w/w, up +95.2% YoY
• Gas prices up +$0.07 to $2.96 w/w, up $1.11 YoY
• Usage 4-week average up +41.3% YoY (Best +67.5% April 30)
• Usage 4-week down -3.8% vs. 2019 (Best -3.8% this week)

(Graphs at This Week In Petroleum Gasoline Section - U.S. Energy Information Administration (EIA))

Oil prices and gas prices are now both solidly in the upper portion of their five-year range, and so have turned into a slight negative. Usage turned very negative in April 2020, but since rebounded by much more than half since its low point, and so has become neutral. The YoY comparisons earlier this year were near the -10% YoY range. YoY comparisons will not become useful again until June. Usage has improved to better than 8.5 million, so has become positive.

Bank lending rates

• 0.1480 TED spread down -0.0060 w/w (0.12-1.92) (graph at link)
• 0.1010 LIBOR up +0.0050 w/w (0.0951-1.70) (graph at link)

TED was above 0.50 before both the 2001 and 2008 recessions. Since early 2019 the TED spread has remained positive, except the worst of the coronavirus downturn. Both TED and LIBOR have declined far enough after that to turn back positive.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Down -0.78 to +11.45 w/w (Best +12.30 April 29)

In the 5 years before the onset of the pandemic, this Index varied between +.67 and roughly +3.00. Just after the Great Recession, its best comparison was +4.63. The big positive number this week is in comparison to the pandemic shutdown one year ago. This metric will become more meaningful once we get into the third quarter.

Restaurant reservations YoY (from Open Table)

• May 6 -19%
• May 13 -14% (Best -14% this week)

The comparisons gradually improved each week from spring into summer, enough so that they turned neutral. In late autumn and winter there was a retrenchment, enough to change the rating to negative, but in the past three months there has been a recovery back to neutral, and for the past six weeks very slightly to positive.

Consumer spending

• Johnson Redbook up +13.3% YoY (Best +14.2% May 7)

Last April the bottom fell out in the Redbook index. It has remained positive almost without exception since the beginning of this year.

Transport

Railroads (from the AAR)

• Carloads up +27.6% YoY (Best +27.2% May 7)
• Intermodal units up +26.3% YoY (Best +38.3% April 23)
• Total loads up +26.9% YoY (Best +32.3% April 23)

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

Shipping transport

• Harpex up +60 to 1837 (412-1837) (new 10 year high) Harper Petersen & Co
• Baltic Dry Index down -135 to 3077 (393-3212) (graph at link)

Since the pandemic started, rail carloads have turned positive several times, including this week. Intermodal has generally been positive for several months. Total rail carloads has also been generally positive for about four months. Total rail traffic is slightly lower (by about 1%) 2019’s pre-pandemic levels.

Harpex declined to a new one year low earlier this year, then improved gradually. In the past month it has repeatedly spiked to new multi-year highs. BDI traced a similar trajectory, making new three year highs into September 2019, then declining to new three year lows at the beginning of February. In summer the BDI improved enough to warrant changing its rating from negative to neutral, and for a few weeks to positive. Early this year it fell back to neutral, but needless to say now is very positive.

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 ( American Iron and Steel Institute)

• Down -0.8% w/w
• Up +45.1% YoY

The bottom in production fell out in April. There has been slow but continuing improvement since then, and finally three months ago it improved enough to be rated neutral. Since the end of March, against terrible comparisons, it has been positive.

Summary And Conclusion

There were no ratings changes this week.

YoY comparisons now are of relatively little use, as they compare against the initial lockdown periods. As much as possible I'm relying on seasonally adjusted measurements, or comparisons with 2019, which are either still negative, or else slightly positive.

Among coincident indicators, everything - the un-adjusted Chicago Fed Financial Index, the TED spread, LIBOR, Redbook consumer spending, tax withholding, Harpex, rail traffic, the BDI, restaurant reservations, steel, and the Fed Weekly Economic Index - continues to be positive. There are no neutrals or negatives.

Among the short leading indicators, staffing, stock prices, the regional Fed new orders indexes, weekly jobless claims, the US dollar both broadly and against major currencies, industrial and total commodities, gas usage, and the spread between corporate and Treasury bonds are positives. Gas and oil prices are negative (whereas big positive YoY comparisons in commodities generally mean strength, in gas prices they mean that consumers are going to be "relatively" pinched).

Among the long leading indicators, purchase mortgage applications, refinancing, US Treasuries, and real estate loans are negatives. Mortgage rates, two out of three measures of the yield curve, the Adjusted Chicago Financial Conditions Index and Leverage subindex, corporate bonds, and corporate profits are positives. The two-year Treasury minus Fed funds yield spread is neutral. As a result, the long term forecast is still positive.

The very positive coincident and short leading indicators suggest strong growth will likely continue for several more quarters.

The question is whether supply bottlenecks and price surges will create overheating followed by a stall or worse next year. Another way to look at this is by analogy to the artificially created gas shortages of the 1970s. When there's a supply constraint among one or more basic commodities, prices increase. Either the inflation must be accepted, or it must be deterred by demand destruction, i.e., creating a recession. If the bottleneck, and inflation, only last a few months, it's no big deal. If they go on for e.g., a year, there is a significant problem.

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.