Weekly Indicators: Caught In The Pincers

New Deal Democrat profile picture
New Deal Democrat
3.43K Followers

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.
  • There are two dynamics - two pincers - acting on the economic indicators. On the long end, the Fed is tightening.
  • On the short end, the Russian invasion of Ukraine, and its economic fallout, are affecting commodities and credit markets.
  • As a result, the long leading forecast is neutral, and the coincident and short leading timeframes are weaker as well.

Florida Stone Crab

Juanmonino/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

February reports included housing permits, which declined slightly, and starts, which increased. The three month average of each is at new 10 year+ levels. Industrial production also increased to another post-pandemic high. Existing home sales declined to a 7 month low, while YoY price increases continued up sharply. Producer prices also increased sharply again.

NOTE: As it will have been two years since the pandemic lockdowns temporarily crashed the data by the end of this month, I anticipate discontinuing all special comparisons with 2019 and early 2020 at that point.

Coronavirus Vaccinations and Cases

At least 1 dose administered: 254.8m, up +0.4m w/w (88.2% of population age 18+)

Fully vaccinated*: 216.9m, up +0.5m (75.3% of population age 18+)

*not counting booster shots

Infections have declined back to levels last seen in late July 2021, and deaths by 60% from their Omicron peak. The 7 week average of cases has risen, however, in the last 2 days as subvariant BA.2 has increased to about 30% of all cases.

Long leading indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 4.37%, up +0.01 w/w (1-yr range: 3.13-4.37) (new 2 year high)
  • 10-year Treasury bonds 2.15%, up +0.15 w/w (1.08-2.20) (new 3 year high intraweek)
  • Credit spread 2.22%, down -0.14 w/w (1.65-4.31)

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

Yield curve

  • 10 year minus 2 year: +0.20%, down -0.06% w/w (0.20 - 1.59)(new 2 year low)
  • 10 year minus 3 month: +1.74%, unchanged w/w (-0.99 - 1.75)
  • 2 year minus Fed funds: +1.61%, down -0.05% w/w

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

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

  • 4.46%, up +0.18% w/w (2.75-4.46) (new 3 year high)

Corporate bonds failed to make a new low in 2021. Therefore their rating changed to neutral. If they should increase only .02% more, to 4.3%, that would put them in the top 1/3rd of their 5 year range, changing their rating to negative.

Treasury bonds fluctuated near the middle of their 5 year range in later 2021. Similarly, mortgage rates made an all time low during the first week of 2021. Neither made a new low since then, so their ratings also changed from positive to neutral. Mortgage rates have risen to a level about 1.5% higher than 1 year ago - and are now in the middle of their 5 year range - that is enough to put downward pressure on the housing market, so their rating has turned negative.

The spread between corporate bonds and Treasuries remains positive, but the yield curve has tightened enough that one measure has turned neutral. There were several small inversions Thursday and Friday, but the most important one (the 3 vs. 5 year yield) resolved positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps up +1% w/w to 270 (184-349) (SA)
  • Purchase apps 4 wk avg. down -3 to 258 (SA) (341 high Jan 29, low 251 Aug 20)
  • Purchase apps YoY -8% (NSA)
  • Purchase apps YoY 4 wk avg. -7.5% (NSA)
  • Refi apps down -3% w/w (SA)
  • Refi apps YoY down -49% (SA)

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

(Graph at here)

Real Estate Loans (from the FRB)

  • Up +0.2% w/w
  • Up +4.2% YoY (-0.9 - 4.0) (new 1 year high)

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

Early in 2021 purchase mortgage applications declined to 2 year lows due to higher interest rates (and probably housing unaffordability as well). Purchase apps are now back down to the lowest 1/3rd of their 52 week range, and mortgage rates have failed to make a new low in the past 12 months, so the rating has now changed to negative. Refi is near 24 month lows, so they remain negative.

From 2018 until late in 2020 real estate loans with few brief exceptions stayed positive. Earlier last year they varied between neutral and negative, but for the past several months have been positive.

Money supply

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

  • M1 m/m up +1.1%, YoY up +14.5%
  • M2 m/m up +1.1%, YoY up +12.6%

Corporate profits (Q4 actual +Q1 estimated S&P 500 earnings from I/B/E/S via FactSet at p. 26)

  • Q4 2021, down -0.07 to 55.37, up +2.8% q/q
  • Q1 2022, up +0.12 to 51.91, down -6.2% 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. Now that we are in March, the Q1 earnings enter the average. For Q4 and Q1 together, the average is -1.7%, which is within the neutral range.

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

  • Financial Conditions Index up +0.08 (less loose) to -0.35 (-0.35 - -0.72) (new 52 week high)
  • Adjusted Index (removing background economic conditions) up +0.18 (less loose) to -0.25 (-0.25 - -0.75) (new 52 week high)
  • Leverage subindex up +0.04 (less loose) to -0.25 (+0.09 - -0.39)

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. Both the adjusted and un-adjusted indexes had been positive ever since mid-2020. This week marks the first time that the Adjusted Index, at -.25, changes to neutral, as did Leverage.

Short leading indicators

Economic Indicators from the late Jeff Miller’s “Weighing the Week Ahead”

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. With this number having fallen below that threshold several months ago, this metric is negative.

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$

In early 2021, both the broad rating and the USD against major currencies turned higher YoY, and so changed to neutral. In the past few months, with the measure against major currencies usually above +5% YoY, this rating turned negative.

Commodity prices

Bloomberg Commodity Index

  • Down -3.03 to 123.36 (79.11-127.03)
  • Up +46.0% YoY (Best: +52.3% June 4)

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

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

  • 213.90, down -16.42 w/w (131.43-230.32)
  • Up +48.6% YoY (Best +69.0% May 7)

Since April 2020 both industrial metals and the broader commodities indexes rebounded sharply. Both total and industrial commodities are extremely positive, with a recent downturn in the indexes having reversed higher to new highs. In the past week alone, commodity prices increased over 10%! Although I will score them in accord with normal practice as positive, because this increase is due to a war interrupting normal trade, this needs to be taken with extra caution.

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

  • Up +6.2% to 4463.12

This index made a new another three month low intraweek, and its last high was January 3. As there have been both a new three month high and low during the past three months, this indicator is neutral. If it does not make a new high by April 3, it will switch to negative.

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. These have usually been extremely positive ever since June 2020.

Employment metrics

Initial jobless claims

  • 214,000, down -15,000 w/w
  • 4-week average 223,000, down -8,750 w/w

(Graph at St. Louis FRED)

New claims declined to repeated new pandemic lows since February 2021. The 4 week average is only back to its level at the end of November, so this metric remains positive for now. The low in the 4 week average occurred on December 25. If it fails to make a new low by March 25, it will switch to neutral.

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

  • Unchanged at 105 w/w
  • Up +14.3% YoY (Best +57.4% May 21)

This gradually improved to neutral at the beginning of 2021, and positive since February. It is about 23% higher than its reading this week in 2020.

Tax Withholding (from the Dept. of the Treasury)

  • $323.0 B for the last 20 reporting days vs. $270.7 B one year ago, up +$52.3 B or +19.3% (Best +37.6% April 30)

YoY comparisons turned positive in the beginning of 2021, and have remained that way - usually very strongly so - almost every week since. Beginning in April, these should be normally reliable again. If the YoY% change falls below 5%, I will change this to neutral.

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

  • Oil down -$4.67 to $104.76 w/w, up +87.4% YoY
  • Gas prices up +$.21 to $4.31 w/w, up $1.46 YoY (new all time high)
  • Usage 4-week average up +8.6% YoY (Best +67.5% April 30)
  • Usage down -5.5% vs. 2020 (Best +3.0% July 8)

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

Both gas and oil prices remain firm negatives, particularly with oil at new multi-year highs. I will discontinue the comparisons with 2020 in the next few weeks.

We aren’t quite at the level yet that I would consider an “oil shock.” In the first place, it hasn’t lasted long enough at these elevated rates. Also, while we are at multi-year highs, and I would expect consumers to cut back a little on other types of purchases due to the cost of filling up their fuel tank, a hallmark of an oil shock is an overreaction by consumers - and we are certainly not there yet.

Bank lending rates

  • 0.568 TED spread up +0.125 w/w (0.02 -.443) (graph at link)(10 year+ high)
  • 0.449 LIBOR up +.059 w/w (0.0753- 0.390) (graph at link) (10 year high)

TED was above 0.50 before both the 2001 and 2008 recessions. Since early 2019 the TED spread had remained positive, except the worst of the coronavirus downturn.

The increases in the past four weeks, undoubtedly due to the Russian invasion of Ukraine, have been progressively adding more stress. The TED spread turned from positive to neutral last week; this week it turns negative, and LIBOR turns from positive to neutral.

Coincident indicators

St. Louis FRED Weekly Economic Index

  • Down -0.19 to +5.06 w/w (+4.86 Jan 21 - +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. After a very positive 2021, it declined to less than half its best YoY level, thus changing to neutral.

Restaurant reservations YoY (from Open Table)

  • Mar 10 seven day average -7% YoY (Best +31% Oct 21)
  • Mar 17 seven day average -2% YoY (Worst -29% Jan 13)

The comparison year for this metric is 2019 and not 2021. Compared with the depths of the pandemic, in 2021 reservations rebounded to neutral, and even positive for a number of months, before declining back to neutral. During the Omicron tsunami they turned very negative, but in the past several weeks have improved again. This week they are neutral.

This was the very first weekly indicator to signal collapse when COVID and the ensuing lockdowns started in March 2020. Note I am now measuring its 7 day average to avoid daily whipsaws.

Consumer spending

In April 2020 the bottom fell out in the Redbook index. It has remained positive almost without exception since the beginning of this year. There was never any perceptible change at all due to either the Delta or the Omicron waves.

Transport

Railroads (from the AAR)

  • Carloads up +0.9% YoY (Best +38.2% this week)
  • Intermodal units down -9.1% YoY (Best +26.3% this week)
  • Total loads down -4.7% YoY (Best +34.0% April 23)

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

Shipping transport

  • Harpex unchanged at 4586 (1038-4586) (new multi-year high)
  • Baltic Dry Index down -130 to 2588 (1302-5650) (graph at link)

Rail carloads turned positive early in 2021, before gradually fading to negative from August through the end of the year and the beginning of this year. With carloads up but intermodal down, this indicator is a neutral.

Earlier in 2021 Harpex repeatedly rose to new multiyear highs, before leveling off in October. It declined from that peak, but in the past few weeks has increased slightly again. Meanwhile, BDI traced a similar trajectory, repeatedly making new multi-year highs. But several months ago it fell about 75%, warranting a change to negative. It has now rebounded enough to go back to 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 (American Iron and Steel Institute) (no update this week)

  • Down -1.4% w/w
  • Down -1.8% YoY

Since the end of March 2021, against terrible comparisons, this metric had been positive, typically running at a double digits higher YoY percentage growth. This week, after almost continuous deterioration, it turned negative.

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 leadingIndicators Positive Neutral Negative
Corporate bonds
10 year Treasury
10 yr-2 yr Treasury X
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. X
Leverage Index X
Totals: 5 6 3
Short LeadingIndicators 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: 8 2 4
CoincidentIndicators Positive Neutral Negative
Weekly Econ. Index
Open Table
Redbook
Rail
Harpex
BDI
Steel X
Tax Withholding
TED X
LIBOR X
Financial Cond. Index
Totals: 4 5 2

There are two separate dynamics operating on the economic indicators. One dynamic is a typical cyclical one of the Fed reacting to high inflation and low unemployment by raising rates, now that it has been convinced that inflation has not been “transitory.” The second dynamic is Russia’s invasion of Ukraine, and the world’s reaction to it.

The first dynamic is primarily acting on the long leading indicators. Thus we see bond yields rising, and yield spreads tightening. In fact, several portions of the yield curve inverted Thursday and at least intraday Friday (most notably the 5 minus 3 year spread which briefly turned negative Friday, before closing ever so slightly positive). This dynamic is also why mortgage rates are negative, and at least partially why credit conditions have tightened.

As a result, the long leading forecast has turned neutral. A recession is possible one year from now, but not that likely yet.

The short leading forecast remains positive, as do (weakly) the coincident indicators, but both have been hit by the effects of the Russian invasion of Ukraine, which has elevated risk sharply as seen in the TED spread and LIBOR, and has had a big impact on commodity prices as well.

The global economic reverberations of the Russian invasion of Ukraine, and the reactions to it, by way of sanctions, global oil supply, and also by businesses severing ties with Russia, is an exogenous event, just as the pandemic was in 2020. And just as with the pandemic in 2020, it could cause a recession without the normal procession of cyclical effects through the economy. But it is “transitory” in the sense that if and when the conflict resolves, the normal cyclical procession will reassert itself. Those cyclical processes, the other side of the pincer, continue to point towards a stall roughly at the beginning of next year.

This article was written by

New Deal Democrat profile picture
3.43K Followers
New Deal democrat As a professional who started an individual investor for almost 30 yeas ago, I quickly focused on economic cycles and the order in which they typically proceed. I have been writing about the economy for nearly 15 of those years, developing several alternate systems that include mid-cycle, long leading, short leading, coincident, lagging and long lagging indicators. I also focus particularly on their effects on average working and middle class Americans.
Follow

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.

Recommended For You

Comments (5)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.