Weekly Indicators: Uncontrolled Exponential Spread

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.
• All three time frames are positive to very positive.
• But for the first time since March 2020, we have uncontrolled exponential spread of the "Delta" variant of COVID, with cases doubling in roughly 3 weeks and all 50 states now showing increases.
• Just as in March 2020, this is likely to Bigfoot the indicators, but what happens to the economy depends on government reactions to the spread, and individual reactions both to the spread and to any renewed government restrictions as well.

Tempura/E+ 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 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.

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

June data included the biggest increase in CPI in over a decade, plus a big increase in PPI as well. Industrial production and capacity utilization both increased. Nominal retail sales increased, but real sales after inflation decreased. Consumer sentiment and expectations as measured by the U. of Michigan both decreased.

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 am continuing to post the best readings during the pandemic in parentheses after the current week's number.

Coronavirus Vaccinations and Cases

• Vaccinations 7 day average: 0.529m/day, -0.70m/day w/w
• At least 1 dose administered: 183.5m, up 2.8m w/w (67.4% of population age 18+)
• Fully vaccinated: 158.6m, up +2.3m (58.6% of population age 18+)
• New cases 7 day average: 26,448, up 10,581, or up 66.7% from one week ago

Regrettably, I have had to restart measuring the increase in new cases, now more than doubled from their low of 11,300 only 25 days ago. This is unchecked exponential spread among the unvaccinated 40%+ of the US population. I will have further comments in the conclusion section below.

Hospitalizations and deaths have also increased. Progress in newly vaccinated people has all but stopped, and full vaccinations have also slowed greatly. The 7-day average of vaccinations dropped by 3/4s from its peak in April.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 3.23%, down -0.10% w/w (1-yr range: 3.13-5.15)
• 10-year Treasury bonds 1.29%, down -0.07% w/w (0.52-1.74)
• Credit spread 1.94%, down -0.03% w/w (1.85-4.31) (new 1 year low)

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

Yield curve

• 10 year minus 2 year: +1.07%, down -0.07% w/w (0.12-1.58)
• 10 year minus 3 month: +1.25%, down -0.06% w/w (-0.20-1.72)
• 2 year minus Fed funds: +0.18%, up +0.08% w/w

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

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

• 2.97%, down -0.07% w/w (2.75-3.45)

Corporate bonds made a series of multi-decade lows in 2020. Early this year, they increased to the middle of that range, and so changed to neutral, but have declined back to positive.

Treasury bonds yields recently made 1 year highs and were near the middle of their 5 year range. Typically it takes a 1% or more increase in rates to substantially impact the housing market. After doing so for many months, a month ago they declined enough to warrant a change of rating to neutral. This week they declined further, out of the middle of their range sufficiently to warrant a change of rating to positive. Mortgage rates have varied between neutral and positive, and also declined back to positive again this week.

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 remain very positive, while the Fed funds vs. 2 year spread is neutral.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps up +8% w/w to 273 (184-349) (SA) ( high Jan 22)
• Purchase apps 4 wk avg. up +2 to 263 (SA) (341 high Jan 29)
• Purchase apps YoY -29% (NSA)
• Purchase apps YoY 4 wk avg. -18.5% (NSA)
• Refi apps up +20% w/w (SA)
• Refi apps YoY down -29% (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)

After soaring last year, purchase mortgage applications have declined to 2 year lows due to higher interest rates (and probably housing unaffordability as well). With applications below 290, their rating has changed to negative. Refi is also down substantially from recent highs, and recently made a 24 month low, and is also enough to turn them negative.

From 2018 until late in 2020 real estate loans with few brief exceptions stayed positive. Since early this year they turned neutral, and then negative.

Money supply

The Federal Reserve has discontinued this weekly series. Data is now only released monthly. May data was released three weeks ago:

• M1 m/m up +1.5%, YoY up +18.1%
• M2 m/m up +1.2%, YoY up +13.8%

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet at p. 25)

• Q2 2021 up +1.57 to 46.80, down -4.6% 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 were solidly positive. Anticipated Q2 earnings are still sufficiently negative to change the averaged reading to neutral.

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

• Financial Conditions Index unchanged (loose) at -0.71 (0.33 - -0.72)
• Adjusted Index (removing background economic conditions) unchanged (loose) at -0.54 (0.64 - -0.79)
• Leverage subindex down -0.03 (looser) to -0.25 (+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

Economic Indicators from Jeff Miller's "Weighing the Week Ahead"

• Miller Score (formerly "C-Score"): down -9 w/w to 570, down -57 m/m (544 on 5/7/21 - 3,088 on 7/24/20)
• St. Louis Fed Financial Stress Index: up +0.1273 to -.8917 (-1.0062 1 yr low on 6/11/21))
• BCIp from Georg Vrba: unchanged at 100.0 iM's Business Cycle Index (100 is max value, below 25 is recession signal)

The Miller Score is designed to look 52 weeks ahead for whether or not a recession is possible. Any score over 500 means no recession. This week's number is therefore a positive.

The St. Louis Financial Stress index is one where a negative score is a positive for the economy, and during its limited existence, has risen above zero before a recession by less than one year. Thus the present reading is also a positive for the economy.

Trade weighted US$

• Up +0.28 to 113.12 w/w, -5.4% YoY (last week) (broad) (111.02-126.47) (Graph at Trade Weighted U.S. Dollar Index: Broad, Goods and Services)
• Up +0.59 to 92.71 w/w, down -3.4% YoY (major currencies) (graph at link) (89.68-102.82)

Both measures of the US$ were negative for 2 months right after the pandemic started in 2020. In late spring 2020 both improved to neutral, and then positive since last August.

Commodity prices

Bloomberg Commodity Index

• Up +0.93 to 94.43 (58.87-94.99)
• Up +42.1% YoY (Best: +52.3% June 4)

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

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

• 157.166, up +0.20 w/w (88.46-162.84)
• Up +42.2% 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 extremely positive.

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

• Down -1.0% to 4327.16

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

Regional Fed New Orders Indexes

(*indicates report this week)

• *Empire State up +16.9 to +33.2
• *Philly down -5.2 to +17.0
• Richmond up +17 to +35
• Kansas City down -13 to +23
• Dallas up +5.9 to +26.7
• Month-over-month rolling average: up +2 to +26

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. These have been extremely positive since June 2020 with the exception of last November and December, and are still very positive although not as high as several months ago.

Employment metrics

Initial jobless claims

• 360,000, down 26,000 w/w (new pandemic low)
• 4-week average 382,500, down -14,500 w/w (new pandemic low)

(Graph at St. Louis FRED)

New claims made a pandemic low in November, rose through February, but have declined to repeated new pandemic lows since then, including this week, and are thus very positive.

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

• Unchanged at 97 w/w
• Up +41.9% YoY (Best +57.4% May 21)

This index turned plummeted beginning in March 2020. It gradually improved to "less awful," then neutral at the turn of the year, and positive since February. It is about 9% higher than its reading at this time in 2019, which included the July 4 holiday.

Tax Withholding (from the Dept. of the Treasury)

• $213.6 B for the last 20 reporting days vs. $170.4 B one year ago, up +$43.2 B or +25.4% (Best +37.6% April 30)

YoY comparisons turned firmly negative in April 2020. The report turned positive in the beginning of 2021. Unfortunately, like many other reports, the YoY comparisons have temporarily been much less reliable. They are gradually becoming more reliable again.

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

• Oil down -$3.10 to $71.50 w/w, up +69.1% YoY
• Gas prices up +$0.01 to $3.13 w/w, up $0.94 YoY (new 6 year high)
• Usage 4-week average up +9.7% YoY (Best +67.5% April 30)
• Usage unchanged vs. 2019 (Best +3.0% July 8)

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

At 6+ year highs, gas prices are a firm negative. Oil prices are also now in the upper portion of their 5 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 are gradually becoming more useful. Usage has improved to better than 8.5 million, and hit a record over 10 million this week, so is positive.

Bank lending rates

• 0.096 TED spread up +0.020 w/w (0.076-1.92) (graph at link)
• 0.089 LIBOR down -0.011 w/w (0.073-1.70) (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 precipitously, and are now very positive.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Down -1.14 to +8.59 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 recent big positive numbers were in comparison to the pandemic shutdown of March and April 2020. This metric is gradually becoming more meaningful now that we are into the third quarter.

Restaurant reservations YoY (from Open Table)

• July 8 -8%
• July 15 -3% (Best +14% July 1)

The comparison year for this metric is 2019 and not 2020. Compared with the depths of the pandemic, in the past five months there has been a recovery back to neutral, and since the beginning of spring, positive (note: a slightly negative rating YoY qualifies as positive, since the measure is the range of readings in the past year).

Consumer spending

• Johnson Redbook up +14.0% YoY (Best +19.4% July 8)

In April 2020 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 +4.3 YoY (Best +35.3% June 4)
• Intermodal units down -2.4% YoY (Best +38.3% April 23)
• Total loads up +0.6% YoY (Best +34.0% April 23)

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

Shipping transport

• Harpex up +328 to 3,024 (412-3,024) (new 10 year high) Harper Petersen & Co
• Baltic Dry Index down -208 to 3,073 (393-3,338) (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 4 months. Total rail traffic is about 15% lower than 2019's pre-pandemic levels for the same week, which did not include July 4. It is slightly "higher" than the prior week in 2019, which did include July 4.

Harpex declined to a new one year low earlier this year, then improved gradually. In the past month it has repeatedly spiked to new multiyear 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 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 (American Iron and Steel Institute) (no report this week)

• Up +0.4% w/w
• Up +41.0% YoY

The bottom in production fell out in April 2020. There was slow but continuing improvement since then, and finally five months ago it improved enough to be rated neutral. Since the end of March, against terrible comparisons, it has been positive.

Summary And Conclusion

Below are this week's spreadsheets of the long leading, short leading, and coincident readings. Check marks indicate the present reading. If there has been a change this week, the prior reading is marked with an X:

Long leading Indicators	Positive	Neutral	Negative
Corporate bonds	✓
10 year Treasury	✓
10 yr-2 yr Treasury	✓
10 yr-3mo Treasury	✓
2 Yr Treasury-Fedfunds		✓
Mortgage rates	✓
Purchase Mtg. Apps.			✓
Refi Mtg Apps.			✓
Real Estate Loans			✓
Real M1	✓
Real M2	✓
Corporate Profits		✓
Adj. Fin. Conditions Ind.	✓
Leverage Index	✓
Totals:	9	2	3

Click to enlarge

Short Leading Indicators	Positive	Neutral	Negative
Credit Spread	✓
Miller Score	✓
St. L. Fin. Stress Index	✓
US$ Broad	✓
US$ Major currencies	✓
Total commodities	✓
Industrial commodities	✓
Stock prices	✓
Regional Fed New Orders	✓
Initial jobless claims	✓
Temporary staffing	✓
Gas prices			✓
Oil prices			✓
Gas Usage	✓
Totals:	12	0	2

Click to enlarge

Coincident Indicators	Positive	Neutral	Negative
Weekly Econ. Index	✓
Open Table	✓
Redbook	✓
Rail	✓
Harpex	✓
BDI	✓
Steel	✓
Tax Withholding	✓
TED	✓
LIBOR	✓
Financial Cond. Index	✓
Totals:	11	0	0

Click to enlarge

The decline in interest rates has made the long term forecast more positive than recently while the short term forecast and coincident nowcast remain very positive. The picture painted by the indicators remains that of a supply-constrained Boom, including the inflation caused by those constrictions.

But the indicators can be swept aside by an outside force - as exemplified by the pandemic and the lockdowns instituted in response in March and April 2020. I believe I must now sound the alarm that, for the first time since then, we again have uncontrolled exponential spread of the "Delta variant" of the virus. On the one hand, this variant is more infectious than the original virus and strikes harder at younger people. On the other hand, over 1/2 of the population has been vaccinated, including 80% of the most vulnerable age group, senior citizens.

Using the UK as a bellwether, it appears likely that, if the spread continues unchecked, we will average something like 70,000 cases per day within a month, and deaths will increase back to near 1,000 per day. But while the virus - essentially a parasitic copy machine - is not difficult for specialists to model, human reactions to the virus - and human reactions to the forecasts of modelers themselves - are fiendishly difficult to model.

Today Los Angeles and Las Vegas reinstituted mask mandates. How many more restrictions will be reintroduced, and how quickly? Since the group most at risk is the group that most distrusts experts, how much will they respond? Last year panic set in in spring, in late summer, and during the winter outbreaks. At some point even without new restrictions, panic will set in sufficiently that economic activity by the 40%+ of unvaccinated Americans will slow down or reverse.

So I am sounding the alarm that the economic situation looks likely to change very rapidly. But just how quickly and how drastically it changes is almost impossible to guess.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.