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
August data included less positive than expected industrial production, capacity utilization, and retail sales. Consumer sentiment about both the present and future as measured by the University of Michigan rose slightly. Housing permits and starts declined month over month, but remained at high levels compared with the past 10 years. Single family permits made a new 10+ year high. Partly as a result, the Index of Leading Indicators rose for the fourth month in a row, albeit at a decelerating rate.
Note: For many indicators, I have added the week of the worst reading since the coronavirus crisis began in parentheses following this week’s number. The first indication of bottoming will be when these comparisons get “less worse,” and a bottom will probably be in when the comparison improves by about 1/2).
Long leading indicators
Interest rates and credit spreads
- BAA corporate bond index 3.34%, down -0.03% w/w (1-yr range: 3.12-5.18)
- 10-year Treasury bonds 0.69%, up +0.02% w/w (0.54-2.79)
- Credit spread 2.65%, down -0.05% w/w (1.96-4.31)
(Graph at FRED Graph | FRED | St. Louis Fed)
- 10 year minus 2 year: +0.56%, up +0.02% w/w (-0.04-0.67)
- 10 year minus 3 month: +0.61%, up +0.05% w/w (-0.04-0.70)
- 2 year minus Fed funds: +0.09%, up +0.01% w/w
(Graph at FRED Graph | FRED | St. Louis Fed)
30-Year conventional mortgage rate (from Mortgage News Daily) (graph at link)
- 3.04%, up +0.17% w/w (2.81-4.63)
Corporate bonds fell to an expansion low late in 2019, but also spiked to near five-year highs early this year. In the past five months, bonds bounced back into positive territory, and now have made repeated multi-decade lows.
The spread between corporate bonds and Treasuries turned very negative in March, but has also bounced back significantly. Two of the three measures of the yield curve remain solidly positive, while the Fed funds vs. two-year spread is neutral. Mortgage rates are also extremely positive.
Mortgage applications (from the Mortgage Bankers Association)
- Purchase apps down -1% w/w to 317 (184-326) (SA)
- Purchase apps 4 wk avg. up +2 to 315 (SA)
- Purchase apps YoY +6% (NSA) (Worst: -35% on 4/18)
- Purchase apps YoY 4 wk avg. +27% (NSA)
- Refi apps -4% w/w (SA)
*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted
Real Estate Loans (from the FRB)
- Down -0.1% w/w
- Up +3.8% YoY (2.8-5.2)
Purchase mortgage applications had been solidly positive in late 2019 and early this year. When the crisis started, they reverted back to negative. Since then, they have rebounded to new decade highs. Refi has also improved from neutral to positive.
With the exception of several weeks in 2019, real estate loans have generally stayed positive for the past several years.
- -0.2% w/w
- -0.9% m/m
- +37.5% YoY Real M1 (-0.1 to 40.8)
- +0.6% w/w
- +1.0% m/m
- +22.7% YoY Real M2 (2.0-24.9)
(Graph at FRED Graph | FRED | St. Louis Fed)
In 2019, both M1 and M2 improved from negative to neutral and ultimately positive. Fed actions to combat the economic crash amplified that.
Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet at p. 23)
- Q2 2020 actual up +.01 to 28.22, down -15.3% q/q, down -34.1% from Q4 2018 peak
- Q3 2020 estimated up +.17 to 32.87 w/w, up 16.5% q/q, down -23.3% from Q4 2018 peak
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.
Averaged together, Q2 and Q3 earnings are almost unchanged from Q1, so this indicator has changed from negative to neutral.
Credit conditions (from the Chicago Fed) (graph at link)
- Financial Conditions Index up +0.03 (less loose) to -0.48
- Adjusted Index (removing background economic conditions) down -0.12 (looser) to -0.82
- Leverage subindex unchanged (tight) at +0.34
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, all turned negative. In the past four months, there has been a rebound turning both the adjusted and unadjusted indexes at first neutral and now positive.
Trade weighted US$
Both measures of the US$ were negative early in 2019. In late summer, both improved to neutral on a YoY basis. Against major currencies, it has recently fluctuated between positive and neutral. It is very positive now. The broad measure also turned slightly positive last week.
Bloomberg Commodity Index
- Up +1.41 to 72.97 (58.87-83.08)
- Down -8.2% YoY (Worst: -26.0% on April 25)
Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)
- 119.73, up +1.84 w/w (88.46-124.03)
- Down -3.0% YoY (Worst: -23.6% on April 11)
Both industrial metals and the broader commodities indexes declined to very negative into 2019, although there has been a considerable bounce in the past three months. This has been enough to move both of them to neutral, and three weeks ago to move industrial metals to positive for one week before going back to neutral.
Stock prices S&P 500 (from CNBC) (graph at link)
There have been repeated recent three-month highs until three weeks ago, so this metric 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. In April the average was even more negative than at its worst reading of the Great Recession. It rebounded by more than half in May, and at the end of June, it rebounded all the way to positive.
Initial jobless claims
- 860,000 down -33,000 w/w (Worst: 6.867 M on April 4)
- Four-week average 912,000 down -61,000 w/w (Worst: 5.786 M on April 25)
(Graph at FRED Graph | FRED | St. Louis Fed)
The pace of new claims has slowed to 1/8 of its record 19 weeks ago. Continuing claims turned down 15 weeks ago from their worst readings. The employment picture remains much “less awful” than in April, even if the trend is flattening. The recent pandemic lows confirm the rating change on this metric back to positive.
Temporary staffing index (from the American Staffing Association) (graph at link)
- Up +1 to 77 w/w
- Down -19.1% YoY (Worst: 36.3% on May 28)
This index turned negative in February 2019, worsened in the second half of the year, and plummeted beginning in March. It has gradually been becoming “less awful” over the past four months.
Tax Withholding (from the Dept. of the Treasury)
- $183.9 B for the last 20 reporting days vs. $196.9 B one year ago, down -$13.0 B or -6.6% (Worst: -16.0% on July 3)
YoY comparisons turned firmly negative in the second week of April. In the past six weeks the comparative YoY readings have generally improved to less than 1/2 of their worst loss. As a result this indicator is neutral.
Oil prices and usage (from the E.I.A.)
- Oil up +$3.38 to $40.87 w/w, down -22.7% YoY
- Gas prices down -$0.03 to $2.18 w/w, down -$0.37 YoY (Worst: -$1.12 on May 1)
- Usage 4-week average down -8.7% YoY (Worst: -43.7% on May 1) (gas usage has plateaued at between -8% to -10% YoY for the past 9 weeks)
(Graphs at This Week In Petroleum Gasoline Section)
At the beginning of this year, prices went higher YoY, but since abruptly turned lower, thus they turned positive. Gas prices remain very low, relatively speaking. Usage turned very negative at the beginning of April, but has since rebounded by much more than half since its low point, and so has become neutral.
Bank lending rates
- 0.140 TED spread down -0.01 w/w (0.14-1.51) (graph at link)
- 0.160 LIBOR up +0.01 w/w (0.13-2.50) (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. After being whipsawed between being positive or negative in 2018, since early 2019 the TED spread remained positive. It briefly turned negative during the worst of the coronavirus downturn, but both TED and LIBOR have declined far enough to turn back positive.
Prof. Geoffrey Moore included net formations minus bankruptcies as measured by Dun & Bradstreet among his 11 short-leading indicators. The five-week average of this statistic cuts down on most of that noise while retaining at least a short-leading signal that appears to turn 1-3 months before the cycle.
This turned negative YoY in March as soon as coronavirus turned into a real issue. But by 12 weeks, it had turned back positive.
St. Louis FRED Weekly Economic Index
Restaurant reservations YoY (from Open Table)
- Sept 10 -53%
- Sept 17 -45%
With the reopening of restaurants in some States, the comparisons gradually improved each week, through three weeks ago. For one week it was neutral, then for two weeks back to negative, and as of about one month ago rose again to neutral.
In April the bottom fell out below the Retail Economist reading, followed a few weeks later by Redbook. Redbook turned positive for two weeks before turning neutral last week. I am watching sales for signs that the cutoff of special unemployment aid at the end of July is having a negative impact. The signs at this point are slightly negative.
Reporting of the Retail Economist chain store sales index has been discontinued.
Railroads (from the AAR)
- Carloads down -15.2% YoY (Worst: -30.2% on May 22)
- Intermodal units down -5.0% YoY (Worst: -22.4% on May 1)
- Total loads down -9.9% YoY (Worst: -39.4% on May 8)
Since January 2019, rail has been almost uniformly negative, and worsened beginning late in the year. YoY comparisons worsened in April, but have gotten “less awful” since, and in the past month, intermodal turned positive. Total rail carloads have also improved by more than 50% from their worst readings, so they have turned from negative to neutral.
Harpex made new three-year highs in mid-2019 and remained near those highs until the beginning of this year, before declining to a new one-year low several months ago. It has improved enough as of this week to be positive. 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. Nine weeks ago, the BDI improved enough to warrant changing its rating from negative 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 (from the beginning American Iron and Steel Institute)
- Up 2.2% w/w
- Down -19.0% YoY (Worst: -39.4% on May 8)
The YoY comparison in production was generally positive early this year, but in March, it turned negative again. The bottom fell out in April. There has been slow but continuing improvement in the several months, and finally this week it has improved enough to be rated neutral.
Summary And Conclusion
The nowcast remains the decisive time frame, at its reading is determined by the (lack of) progress against the pandemic.
Among the coincident indicators, the unadjusted Chicago Fed Financial Index, the TED spread, and LIBOR are positive. Total rail and intermodal loads, restaurant reservations, Harpex, Redbook consumer spending, and tax withholding are all neutral, joined this week by steel. Rail carloads are the only remaining negative.
Among the short-leading indicators, gas and oil prices, business formations, stock prices, the regional Fed new orders indexes, initial jobless claims, both measures of the US$, and both measures of commodities are positives. The spread between corporate and Treasury bonds and gas usage are neutral. Temporary staffing is negative.
Among the long-leading indicators, corporate bonds, Treasuries, mortgage rates, two out of three measures of the yield curve, real M1 and real M2, real estate loans, and purchase mortgage applications and refinancing, and the Adjusted Chicago Financial Conditions Index are all positives. Corporate profits and the two-year Treasury minus Fed funds yield spread are neutral. The Chicago Financial Leverage subindex is the sole negative.
All three time frames are now positive.
To reiterate my overall outlook, over the next six months, the coronavirus, and the reactions of the Administration (both present and possibly new in January), the Congress, and the 50 governors to the coronavirus are going to be the dispositive concerns. Nevertheless, by late next summer – especially if there is a reasonably effective vaccine – I expect the economy to be firmly in expansion. In the meantime, consumer spending is the single most important metric, as I expect it to be strongly impacted by the termination of Congressional emergency aid. It has turned negative, but not strongly so at this point.
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.