- XE Contributor
Monthly data for April included a decline in industrial production and capacity utilization, declining producer, import, and export prices, an increase in business inventories, and a decline to 6 months lows in consumer sentiment about both the present and the future. Retail sales were flat, although in real terms they probably increased slightly. Job opening and quits data was mixed.
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. The indicators will confirm a trend or indicate a switch in trend well before monthly and quarterly reports.
I have identified the overly strong US dollar as the primary culprit behind the shallow industrial recession, so let's start there:
Trade-weighted US Dollar
- -0.73 w/w
I am going to track the broad trade-weighted US dollar at least temporarily. The US$ appreciated from a low of 101.67 last July 1 to a high of 117.92 on March 13, an increase of 16% in less than 9 months! Since then, the US$ has retreated by -3.6%. This only takes us back to mid-February, when US industrial production was already getting killed. Last October, just before the November industrial peak, the US$ was weighted at 106, so we have a long way to go before some sort of equilibrium is restored.
Interest rates and credit spreads
- 4.97% BAA corporate bonds up +0.15% (1 year high)
- 2.23% 10 year treasury bonds up +0.05%
- 2.74% credit spread between corporates and treasuries up +0.10%
30 year conventional mortgage rate from Mortgage News Daily
- 3.93%, up +0.06% w/w (low was 3.35% in December 2012)
Interest rates for BAA corporate bonds made a 50+ year low 13 weeks ago. This was not confirmed by AAA corporate bonds. After a possible once-in-a-lifetime low of 1.47% in July 2012, Treasuries rose to over 3% in late 2013, then fell through 2014 and into 2015, where they had hovered at or below 2% before yields broke out to the upside in the last two weeks. Spreads widened in recent months, a warning of near-term weakness, and had wobbled back and forth near the neutral 2.50% range before breaking decisively negative last week, and even moreso this week.
Mortgage rates are now in the upper half of their 12 month range, but in the bottom half of their 5 year range. They have not made a new low in over two years.
Based on the benchmarks I laid down last week, this makes corporate bonds neutral, while treasuries remain positive, and mortgage rates just barely positive.
- Johnson Redbook +2.1% YoY
- Gallup daily consumer spending 14 day average at $89, down -$7 YoY
The Gallup report, which had been barely positive to outright negative since the beginning of this year, had three weeks in a row of excellent YoY comparisons, the best in 2015 to date, before turning negative last week and even moreso this week against more challenging YoY comparisons.
In the second half of 2014, Johnson Redbook was between +3.5% to +5%. It has fallen out of that range in 14 of the last 16 weeks. It has been slowly improving in the last few weeks.
Railroad transport from the AAR
- -21,600 carloads down -7.9% YoY
- -6,500 carloads ex-coal down -3.5% YoY
- +10,200 intermodal units up +3.8% YoY
- -14,700 total loads down -2.3% YoY
- Harpex up +7 to 627 (4 year high)
- Baltic Dry Index up +51 to 634
Rail traffic fell off a cliff 9 weeks ago. Intermodal traffic quickly turned positive again, but domestic carloads, led by coal (for export) have remained generally negative. After declining sharply for several months, making a 3 year low in mid-February, the BDI rebounded mildly and then has plauteaued. Meanwhile, Harpex (container shipping) has turned up sharply this year, making almost continual new 4 year highs. In the longer term, shipping rates bottomed about 3 years ago and have been in a slow and variable uptrend since, although the Baltic index did break that to the downside in the recent skid.
Steel production from the American Iron and Steel Institute
- -2.7% w/w
- -10.5% YoY
Steel production over the last several years had generally been in a decelerating uptrend. Since spring 2014, it turned mixed, and then cliff-dived three months ago. This is due to weak foreign economies and an overly strong dollar. It had gotten "less worse" YoY in the last few weeks, but worsened this week.
- Down -0.32 to 103.68 w/w
- Down -19.96 YoY
BBG Industrial metals ETF
- 125.02 down -1.55
Commodity prices as measured by ECRI remain close to their recent new low. This is still probably due to international weakness, and mainly about oil. Industrial metals generally declined in the last 3 years, then made and retested a low in the last three months, and bounced near that bottom before a smart positive move one week ago.
Mortgage applications from the Mortgage Bankers Association:
- -0.2% w/w purchase applications
- +12% YoY purchase applications
- -6% w/w refinance applications
YoY purchase applications established a "less awful" trend in the latter part of 2014. They have turned positive for 12 of the last 13 weeks. Despite this bounce, the longer term comparisons of refinancing applications still shows them near their bottom.
Real estate loans, from the FRB H8 report:
- down -0.1% w/w
- up +4.0% YoY
Loans turned up at the end of 2011, turned down in late 2013, but have remained positive to sharply positive since April 2014.
- +2.0% w/w
- -0.4% m/m
- +7.8% YoY Real M1
- +0.2% w/w
- -0.1% m/m
- +5.5% YoY Real M2
Between actual deflation and possibly a mild European flight to safety, real YoY money supply is firmly positive. At the time of the last flight to safety (from Europe) in January 2012, YoY Real M1 made a high of about 20%, and YoY Real M2 made a high of about 10.5%. Growth in both then decelerated. Real M2 made a new 2 year low at the beginning of 2014. Both Real M1 and Real M2 improved substantially since.
Initial jobless claims
- 264,000 down -1,000
- 4 week average 271,750 down -7,750 (15 year low, near 40 year low)
Initial claims are the stars of the show for positives in the US economy. This is particularly interesting since the 10 Oil patch states had seen higher jobless claims in the last few months, but they have been overmatched by lower claims elsewhere.
The American Staffing Association Index
- Unchanged at 98
- Up +2.16% YoY.
The YoY comparison had generally been positive to strongly positive since last spring. Over a month ago, the YoY comparisons, while still positive, declined significantly. In the last three weeks we got a decent rebound.
- $83.9 B for the first 10 days of May vs. $79.5 B one year ago, up +$4.4 B or +5.5%
- $158.1 B for the last 20 reporting days ending Thursday vs. $146.7 B one year ago, up +$11.4 B or +7.8%
Beginning with the last half of 2014, virtually all readings have been positive.
Oil prices and usage
- Oil up +$0.49 to $59.96 w/w
- Gas up +$.03 to $2.69 w/w
- Usage 4 week average up +3.0% YoY
The price of gas bottomed 14 weeks ago. Oil briefly made a new low five weeks ago, but has also risen to 2015 highs since. The 2010-2013 Oil choke collar has been broken. The issue now is when and at what price we get the seasonal peak, even though gas prices have only risen about $0.67 off their January bottom. If they follow past seasonal patterns, their summer peak will be roughly $1 above their winter low.
Bank lending rates
- 0.266 TED spread unchanged w/w
- 0.1834 LIBOR up +0.031 w/w
LIBOR has risen sharply from its post-recession low set in one year ago, and the TED spread has been in an uptrend since the last the middle of 2014, rising off its November 2013 low. Both have recently made significant new highs.
Among long leading indicators, interest rates for corporate bonds changed from a positive to neutral, while treasuries and mortgage applications remained positive, although refinancing, despite a recent boomlet, remains near its multi-year bottom.. Money supply and real estate loans were positive.
The short leading indicators were extremely mixed. The contradictory big story is spreads vs. jobless claims. An upward spike in interest rates with widening spreads is a classic short leading indicator for recession, and for the second week in a row, that's what we got, and it intensified. Completely contradictorily, initial jobless claims are very near a 40 year low! Temporary staffing is still positive as well. While oil and gas prices have risen, both remain positives, as is gas usage. Industrial metals turned slightly negative.
All but two of the coincident indicators were again negative. The positives were tax withholding and container shipping. Steel production and rail transport turned "more awful" this week, although intermodal traffic remained a positive. The Baltic Dry Index is a slight negative. The disturbing uptrend in the TED spread and LIBOR is intact. Johnson Redbook consumer spending rebounded a little more but still in the low end of YoY comparisons, while Gallup's negative reading intensified against more challenging comparisons with last May.
Interestingly, ECRI published its global long leading index this week, saying the global economy was primed for an upturn. But a big part of that reason was the depreciation of almost all other currencies against the US$, which they acknowledged was a headwind for the US. Which means that the dynamic of the US economy leading the world appears to be changing. This is why the long and short leading indicators, focused on domestic US metrics, did not weaken before the coincident indicators.
The bottom line is, the US economy is in a shallow industrial recession. It is not due to the weather, nor to the West Coast ports strike. Rather, it is driven by a 16% appreciation of the US$ globally, and secondarily by the effects of the collapse of commodity prices on raw materials producers. At the moment, weakness in consumer spending in the Oil patch is outweighing consumer strength elsewhere.
The issue is, as it sinks in that the US economy has completely stalled, will the overly strong dollar weaken to a point of equilibrium? I expect it will, and the underlying past positivity of the US long leading indicators will show up in a renewal of positive US activity.
Have a nice weekend!