By New Deal Democrat
February data started out with unchanged vehicle sales, a strongly positive ISM manufacturing index, and a Chicago PMI that declined from white hot to red hot. Consumer sentiment as measured by the U. of Michigan improved.
January data included a big decline in new home sales, and unchanged construction spending, but an improvement in residential construction. House prices increased. Durable goods orders declined.
My usual note: I look at the high frequency weekly indicators because while they can be very noisy, they provide a good Now-cast 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, and then coincident indicators.
NOTE that I include 12-month highs and lows in the data in parentheses to the right.
Interest rates and credit spreads
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BAA corporate bond index 4.53% down -.07% w/w (1 yr range: 4.15 – 4.90)
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10-year treasury bonds 2.86% down -.01% w/w (2.05 – 2.93)
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Credit spread 1.67% down -.06% w/w (1.56 – 2.30)
Yield curve, 10 year minus 2 year:
30-year conventional mortgage rate
BAA Corporate bonds, having recently tied their expansion low, are now a positive. If they move above 4.65%, I will downgrade them to neutral. Mortgage rates and treasury bonds are now both negatives. The trend for these for most of 2017 was neutral. The yield curve is positive, while the spread between corporate bonds and treasuries is strongly positive.
Housing
Mortgage applications
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Purchase apps up +6% w/w
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Purchase apps up +3% YoY
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Refi down -1% w/w
Real Estate loans
Refi has been dead for some time. Purchase applications were strong almost all last year, but began to falter in December, turning neutral and then negative before turning positive again in January. They are just barely a positive this week. If they drop below +3% YoY, I will change the rating to neutral.
The growth rate of real estate loans remains neutral.
Money supply
M1
M2
Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth has fallen below 2.5% and is thus a negative.
I am downgrading real M1 to a weak positive. Although it is noisy week to week, I have been watching growth decelerate for several months. Since the beginning of last August, i.e., for the last seven months, real M1 has only grown +0.4%. All of the remaining real YoY growth is from the earlier part of last year. If real M1 YoY growth falls below 3.5% and turns negative on a 6-month basis, I will downgrade it further to neutral.
Credit conditions (from the Chicago Fed)
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Financial Conditions Index up +0.01 to -0.79
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Adjusted Index (removing background economic conditions) up +0.01 to -0.56
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Leverage subindex unchanged at -0.50
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. All three metrics presently show looseness and so are positives for the economy.
Trade weighted US dollar
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Up +0.67 to 117.81 w/w -5.9% YoY (last week) (broad) (116.74 -128.62)
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Up +0.06 to 89.95 w/w, -11.24% YoY (yesterday) (major currencies)
The US dollar appreciated about 20% between mid-2014 and mid-2015. It went mainly sideways afterward until briefly spiking higher after the US presidential election. It has been a positive since last summer.
Commodity prices
JoC ECRI
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Down -0.59 to 111.61 w/w
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Up +4.59 YoY
BBG Industrial metals ETF
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the 2016 presidential election. ECRI has decelerated enough to become neutral. On the other hand, industrial metals have been strongly positive and made a new high two weeks ago.
Stock prices S&P 500
Despite the recent 10% correction, stock prices did not make a new 3-month low and so remain positive. They made a string of new all-time highs beginning in summer 2016.
Regional Fed New Orders Indexes
(*indicates report this week)
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Empire State up +1.6 to +13.5
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Philly up +14.4 to +24.5
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*Richmond up +11 to +27
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Kansas City up +2 to +16
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*Dallas down -0.2 to +25.3
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Month-over-month rolling average: up +2 to +20
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month-over-month direction, and remains strongly positive.
Employment metrics
Initial jobless claims
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210,000 down -12,000 (new 49-year low)
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4-week average 220,500 down -4,500 (new 49-year low)
Initial claims are at 40+ year lows and so are very positive. The YoY% change in these metrics had been decelerating but is now back on its multi-year pace.
The American Staffing Association Index
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Unchanged at 94 w/w
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Up +0.7% YoY
This index was generally neutral from May through December 2016, and then positive with a few exceptions all during 2017. It was negative for over a month, but returned to being weakly positive several weeks ago.
Tax Withholding
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$200.7B for the month of February 2018 vs. $203.8B one year ago, down -$3.1B or -1.5%
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$224.7B for the last 20 reporting days vs. $213.9B one year ago, up +$10.2B or +4.8%
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20-day rolling average adjusted for tax cut [+$4 B]: up +$14.2B or +6.9%
With the exception of the month of August and late November, this was positive for almost all of 2017.
In February, this declined substantially, as the recent tax law changes affect income tax withholding. Based on Treasury Dept. estimates, this is roughly $4 billion over a 20-day period, so I am using that for a temporary adjustment this year, during which we have to take this measure with a big grain of salt.
Oil prices and usage
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Oil down -$2.04 to $61.54 w/w, up +18.1% YoY
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Gas prices down -0.01 to $2.55 w/w, up $0.23 YoY
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Usage 4-week average up +3.8% YoY
The price of gas bottomed 2 years ago at $1.69. With the exception of July, prices generally went sideways with a slight increasing trend in 2017. Usage turned negative in the first half of 2017, but has almost always been positive since then.
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.
Consumer spending
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Johnson Redbook up +3.3 YoY
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Goldman Sachs Retail Economist -0.1% w/w, +2.3% YoY
Both the Goldman Sachs and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017.
Transport
Railroad transport
Shipping transport
Rail had been generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. Since the beginning of this year, carloads have usually been negative, while intermodal (mainly imports) has been positive.
Harpex made multi-year lows in early 2017, then improved, declined again, and then improved yet again to recent highs. BDI traced a similar trajectory, and made 3-year highs near the end of 2017. 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
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Up +1.8% w/w
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Up +0.7% YoY
Steel production improved from negative to “less bad” to positive in 2016, and with the exception of early summer, remained generally positive in 2017. Except for this week and one earlier week, it has been negative since the beginning of this year.
SUMMARY:
Among the long leading indicators, spreads are positive, as are the more leading Chicago Fed Financial Conditions Indexes, joined this week by corporate bonds. Purchase mortgage applications are very weakly positive, joined this week by real M1. Growth in real estate loans is neutral. Treasuries, mortgage rates, refinance applications, and real M2 are all negative.
Among the short leading indicators, industrial metals, the regional Fed new orders indexes, spreads, financial leverage, the US dollar, jobless claims, stocks, and gas prices and usage all remain positive. Staffing is weakly positive. Oil prices and the ECRI commodity index are neutral.
Among the coincident indicators, positives included consumer spending, the TED spread, the Baltic Dry Index and Harpex, joined this week (weakly) by steel. LIBOR remains negative. Rail remains mixed. With a preliminary adjustment for the recent tax cut, tax withholding improved to positive on a 20-day rolling basis this week.
The February coincident rough patch abated somewhat this week. The short-term forecast remains very positive. The long-term forecast remains weakly positive, as deterioration in M1 was offset by an improvement in corporate bonds. If there is any further deterioration, I will downgrade this to neutral.
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