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By New_Deal_democrat May 15, 2018 8:48 am
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Long leading indicators: On the cusp

For the last 9 years, with periods of greater or lesser concern, I have remained resolutely positive about the economy. For the record, as of now, I still am.

But one thing that is different now is just how many of the long leading indicators, while still positive, are on trajectories to turn neutral or even negative generally by next winter. I've been making passing notes of these in my "Weekly Indicators," but it's worthwhile to take a more extended look at them.

1. Long term interest rates


Several of these are already negative.  Here are the 10 year Treasury and mortgage interest rates, measured since their first big bottom in spring 2013: 

Both of these are at the top of their ranges. Treasuries have not made a new low in almost 2 years, and mortgages for over 5 years.

Further, mortgage rates have risen by .8% in the last 8 months. If they were to continue in that trend for another 8 months, they would be at 5.35% a full 2% above their lows for this expansion. Even with the demographic tailwind, that would probably be enough to cause the housing market to roll over.

Similarly, BAA corporate bond rates are at the midpoint of their 5 year range:


They are already neutral. Another 0.15% rise to over 5% would make them a negative.

2. The yield curve

These are being done to death by all variety of commentators. The spread between the 2 year and 10 year bond has narrowed by nearly 0.6% in the last 10 months:

If this trend continues, the yield curve will invert by next March.

3. Housing as a share of GDP

I was a little surprised when Bill McBride reported this as a positive last month. The difference is that I compared real GDP for housing vs. real total GDP, (red in the graph below) while he reported nominal-to-nominal (blue). Since housing has its own deflator, which was really high in Q1, my metric was negative. But it really doesn't matter much:

Whether slightly rising or slightly falling, as a share of GDP housing has basically stalled. The "real" measure peaked several quarters earlier than the nominal measure in the late 1990s. If the deceleration continues, it is going to roll over in the next several quarters.

4. Real M1

Real M2 has already turned into negative for the economy, which occurs when it is less than +2.5% YoY. Real M1 is also decelerating:

Regardless of which of the recent peaks we measure from, on its current trajectory it is likely to turn from positive to neutral by this autumn, and negative within the next year.

It would be wrong to make the assumption that the current trajectories of any or all of these indicators will continue. In fact, projecting current trends forward is the biggest mistake most people make. But nevertheless, *if current trends do continue,* we could wake up by the end of next winter with virtually all of the long leading indicators being negative.

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