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By New_Deal_democrat April 1, 2015 10:05 am
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The long leading indicators: 1st quarter 2015 update

Back in January I forecast growth throughout 2015 subject to the caveat that I needed to see 4th Quarter GDP (for private residential spending and corporate profits) before extending that forecast definitively through the 4th quarter of this year.

Now that the first quarter of 2015 has passed, let's update that forecast.  To begin with, we can simply rely on the Conference Board's Index of Leading Indicators, which are more weighted towards the short term, for the next 6 months.  Here they are:

While their pace of growth has slowed, they forecast continuing growth through the 3rd quarter, confirming what the long leading indicators told us last year.

Now let's look out through the 1st quarter of 2016.

First of all, I am not relying on the yield curve, which, while positive, has not been reliable during times of deflation.  Currently the CPI is actually in a slight deflation.

So let's turn to the 4 long leading indicators identified by Prof. Geoffrey Moore, the founder of ECRI, together with the housing metric highlighted by UCLA Prof. Edward Leamer.

Moore's first metric was corporate bonds.  Recessions typically do not happen until at least one year after corporate bond yields fail to make a new low:

BAA corporate bonds did make a new low in January. AAA rated corporate bonds did not.  This is equivocal.  Of import, mortgage rates also have not made a new low:

Since 1982, consumer refinancing at lower mortgage rates has been an important driver of increased middle/working class spending. When mortgage rates have not made a new low for 3 years, the stimulus from refinancing has generally been exhausted, and there is increased risk of a recession.  That 3 year period will end in December of this year.

Moore's next metric was housing permits.  Below I display them together with real private residential spending as a share of GDP, Prof. Leamer's significant measure, which he indicates has on average peaked 5 quarters before the onset of a recession:

Housing as a share of GDP growth peaked in Q3 2013, 6 quarters ago. Housing permits peaked in November 2014.  Again, we have an equivocal reading depending on how housing is measured.

Moore's next metric was corporate profits deflated by unit labor costs.  These were just reported in the final revision to 4th quarter GDP.  I am also including the monthly measure of deflated proprietor's income, which while slightly less reliable, tends to move in the same direction as corporate profits:

Corporate profits declined in Q4 2014 from their peak in Q3.  Proprietors' real income declined in January and February from a December peak, suggesting that 1st quarter corporate profits will also decline.  Again, we have an equivocal reading.

Moore's final metric was real money supply.  Here are both M1 and M2:

Money supply is the one unequivocal positive.

Recently I identified real personal consumption expenditures for durable goods as having been a reliable long leading indicator.  See:  http://community.xe.com/blog/xe-market-analysis/durable-goods-purchases-...

Here too there has been a recent decline from a November 2014 high:

One last measure I wanted to mention is real per capita retail sales.  These also have a long track record of peaking at least one year prior to any recession:

These also peaked in November.

In summary, with the exception of real money supply and BAA rated corporate bonds, none of the long leading indicators have established a new high in the first quarter of 2015.  A recession in the 4th quarter appears very unlikely, although it cannot be ruled out.  The jury is completely out on 2016 at this point.

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