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 1/3rd of that range, negative in the bottom 1/3rd, 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
August reports included positive new home sales, personal income, and durable goods orders. Personal spending, however, was essentially flat. House price gains were relatively mild. The two measures of consumer confidence diverged: U. Michigan’s rebounded, while the Conference Board’s declined.
Long leading indicators
Interest rates and credit spreads
- BAA corporate bond index 3.88%, down -.08% w/w (1-year range: 3.73-5.29)
- 10-year Treasury bonds 1.69%, down -.11% w/w (1.47-3.24)
- Credit spread 2.19%, up +0.03% w/w (1.56-2.48)
- 10-year minus 2-year: +0.02%, up +0.05% w/w (-0.01-1.30)
- 10-year minus 3-month: -0.11%, down -0.08% w/w (-0.44 – +1.00)
30-year conventional mortgage rate (from Mortgage News Daily)
- 3.75%, down -0.04% w/w (3.46-5.05)
BAA Corporate bonds and Treasury bonds turned positive five weeks ago. In particular, that corporate bonds recently fell to yet another new expansion low is extremely bullish for the next year or more. The spread between corporate bonds and Treasuries is negative. The 2- vs. 20-year yield curve is neutral. The 10-year minus 3-month spread remains negative. Mortgage rates are still not too far from their post-Brexit low, so they remain positive.
Mortgage applications (from the Mortgage Bankers Association)
- Purchase apps -3% w/w to 263 (214-281) (SA)
- Purchase apps 4-week avg. up +6 to 259 (SA)
- Purchase apps YoY +9% (NSA)
- Purchase apps YoY 4-week avg. +10% (NSA)
- Refi apps -15% w/w (SA)
*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted
Real Estate Loans (from the FRB)
- Up +0.1% w/w 4533
- 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 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 it declined back to negative, but it returned to positive this week.
- -0.4% w/w
- +1.3% m/m
- +3.4% YoY Real M1 (-0.7 to 4.3)
- +0.1% w/w
- +0.5% m/m
- +3.9% YoY Real M2 (0.9-3.9) (new 1-year high)
Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth fell below 2.5% for almost all of last year, and has with a few exceptions stayed below that benchmark until recently. As of this week, it is back above 3.0%, and so, is positive. 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)
- Q2 2019 actual earnings, unchanged at 41.47, up +6.9% q/q, down -3.3% from the Q4 2018 peak
- Q3 2019 estimated earnings, down -0.12 to 41.37, down -0.2% q/q, down -3.5% from the 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.
Because the q/q rebound has risen by more than half of the decline from the Q4 peak, this rating has improved from neutral to positive.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index down -.02 (looser) to -0.74
- Adjusted Index (removing background economic conditions) down -.11 (looser) to -0.69
- Leverage subindex up +.02 (less loose) -0.27
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 its least loose reading from one year ago. In the past, an inverted yield curve has led to a contraction in lending, so it will be important to see if this metric, which has been relentlessly positive, rolls over.
Short leading indicators
Trade-weighted US dollar
- Down -0.39 to 130.27 w/w, +3.5% YoY (last week) (broad) (115.19-131.58)
- Up +0.61 to 99.10 w/w, +4.2% YoY (major currencies) (new 1-year high)
The US dollar 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 nine months ago, both were negative. Within the past two months, both of them improved to neutral on a YoY basis.
Bloomberg Commodity Index
- Down -0.86 to 78.34 (76.07-91.94)
- Down -8.0% YoY
Bloomberg Industrial metals ETF (from Bloomberg)
- 115.36, down -1.39 w/w, down -2.8% 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 in the past year. Industrial metals have improved enough to be scored neutral recently.
Stock prices S&P 500 (from CNBC)
At the end of 2018, stocks’ rating became negative. This year, they have made repeated new 3-month and several all-time highs, most recently about two months ago, and thus, their rating is positive.
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 last year. Later last year, it gradually cooled to weakly positive. This year it has been waxing and waning between positive and flat. In July and earlier in August it was flat, but has since rebounded to positive.
Initial jobless claims
- 213,000, up +5,000
- 4-week average 212,000, down -1,000
Initial claims had generally been very positive in 2017 and 2018. They briefly spiked in November, 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. The overall trend is still weakly positive, despite some challenging YoY comparisons.
Temporary staffing index (from the American Staffing Association)
- Unchanged at 95 w/w
- Down -4.7% YoY
This index was positive with a few exceptions all through 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 for the past two months has had its worst YoY readings since 2016.
Tax withholding (from the Dept. of the Treasury)
- $194.2 billion for the last 20 reporting days vs. $185.2 billion one year ago, up +$9.0 billion, or +4.9%
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 EIA)
- Oil down -$2.23 to $58.09 w/w, down -19.3% YoY
- Gas prices up +$0.10 to $2.65 w/w, down -$0.19 YoY
- Usage 4-week average down -0.9% 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 made their seasonal high for this year four months ago. Usage was positive YoY during most of 2016, but has oscillated between negative and positive for the past several months. For the past two weeks, it turned negative again.
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.
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. It is neutral again this week. Johnson Redbook fell sharply at the beginning of this year, before improving to positive beginning in spring.
Railroads (from the AAR)
- Carloads down -8.0% YoY
- Intermodal units down -5.7% YoY
- Total loads down -6.8% YoY
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, suggesting that the trade war with China is having a major impact. In the last month, the YoY comparisons have gotten even worse. By contrast, truck traffic is 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 three 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 three months, 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)
- Down -0.1% w/w
- Down -3.1% 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. For the past several months, it has varied between neutral and negative, and it has had its most negative YoY reading this week.
Summary and Conclusion
Among the long leading indicators, corporate bonds, Treasuries, purchase mortgage applications, mortgage rates, corporate profits, the Chicago Fed Adjusted Financial Conditions Index and Leverage subindex, real M1 and real M2, and real estate loans are positives. Mortgage refinancing is neutral. The yield curve is mixed between neutral and negative.
Among the short leading indicators, stock prices, the Chicago National Conditions Index, regional Fed new orders, gas and oil prices, initial claims, and industrial commodities are positive. The US dollar is neutral. The spread between corporate and Treasury bonds, total commodities, gas usage, and temporary staffing are negative.
Among the coincident indicators, Redbook consumer spending, tax withholding, Harpex, BDI, and the TED spread are positive. Retail economist retail spending is neutral. Steel, rail, and LIBOR are negative.
The forecast across all time frames is positive, although the recently volatile short-term forecast is only weakly so. The only changes this week was Retail Economist consumer spending, which went from positive back to neutral, and RE loans, which also went from neutral to positive. I continue to watch two long leading indicators: corporate profits, which are shaky (a technical term), and now joined by the leverage credit sub-index, which has been weakening towards neutral.
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.