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By New_Deal_democrat December 2, 2017 10:00 am
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Weekly Indicators: positive housing slightly outweighs real M2 downgrade to negative edition
November data started out with vehicle sales, the Chicago PMI, and ISM manufacturing indexes all cooling slightly, but still very positive. Consumer confidence improved, driven mainly by a jump in the future expectations component.
 
October data included a new expansion high in new home sales. Construction spending improved in all sectors. House prices increased, and at an accelerating rate in the Case Shiller measure. Personal income and spending increased both in nominal and real terms. The savings rate improved slightly.
 
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, then coincident indicators.

 

Interest rates and credit spreads

  • BAA corporate bond index 4.30% up +0.06% w/w (12 mo. high/low 4.90% vs. 4.23%)
  • 10 year treasury bonds 2.36% up +0.02% w/w 
  • Credit spread 1.94% up +0.04% w/w
Yield curve, 10 year minus 2 year:
  • 0.59%, up +0.01% w/w (near expansion low)
30 year conventional mortgage rate
  • 3.98%, up +0.02% w/w (1 year high was 4.39%, 1 year low 3.84%)

Corporate bonds are neutral, as they are close to their 12 month low. Should they fall below 4.15%, which was the low for this entire expansion, that will be a major positive. Mortgage rates, which have also declined slightly in the last few weeks, remain neutral.

 

Yields on treasuries and mortgage rates made new 12 month highs last December and revisited that high earlier this year, but the trend for most of this year has been neutral. The yield curve is at its most narrow for this expansion, but remains positive in the longer term context. The spread between corporate bonds and treasuries remains near its recent 10 year low.

 

Housing

 

Mortgage applications 

 

  • purchase applications up +2% w/w 
  • purchase applications up +6% YoY
  • refinance applications down -8% w/w
 
Real Estate loans
  • Up +0.3% w/w 
  • Up +3.9% YoY

Purchase mortgage applications remained positive this week, while refi applications  remain near 15 year lows.  The growth rate of real estate loans declined sufficiently earlier this year and remains neutral.

 

Money supply

M1

  • +0.5% w/w 
  • -0.5% m/m  
  • +5.7% YoY Real M1
M2
  • Unchanged w/w  
  • +0.2%  m/m 
  • +2.4% YoY Real M2

Since 2010, both real M1 and real M2 were resolutely positive.  Both have recently decelerated substantially.  Real M1 is still very positive. 

 

Importantly, Real M2 has now declined beyond neutral to an outright negative, as real growth below +2.5% a year has been consistent with a recession several years out.

 

Credit conditions (from the Chicago Fed) 

 

  • Financial Conditions Index down -0.01 to -0.94
  • Adjusted Index (removing background economic conditions) down -0.01 to -0.78
  • Leverage subindex unchanged at -0.65
The Chicago Fed updated and changed the Adjusted Index recently, so that its break-even point appears to be -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$

  • Down -1.03 to 119.07 w/w, -6.7% YoY (one week ago) (Broad) 
  • Up +0.14 to 92.90 w/w, -7.7% YoY (yesterday) (major currencies) 

 

The US$ 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 positive since this summer.

 

Commodity prices

JoC ECRI

  • Down -0.40 to 107.45 w/w
  • Up +6.37 YoY 
BBG Industrial metals ETF 
  • 128.84 down -0.56 w/w, up +12.97% YoY
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the election.  Once again this week ECRI has decelerated enough to become  neutral.  Industrial metals remain a  positive, although less so than earlier this year.

 

Stock prices S&P 500

 

  • Up +1.5% w/w to 2642.22 (new record high)
Stock prices are positive, having made a string of new all-time highs beginning in summer 2016.
 

Regional Fed New Orders Indexes

(*indicates report this week) (no reports this week)

  • Empire State up +2.7 to +20.7
  • Philly up +1.8 to +21.4
  • *Richmond up +18 to +35
  • Kansas City down -5 to +22
  • *Dallas down -4.8 to +20.0
  • Month over month rolling average: up +4 to +24
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction, as they did again this month.

 

Employment metrics

 Initial jobless claims

  • 238,000 down -1,000
  • 4 week average 242,250 up +2,500

 

Initial claims remain well within the range of a normal economic expansion.

 

The American Staffing Association Index

 

  • Unchanged at 101 w/w
  • Up +1.99 YoY

This index was generally neutral from May 2016 until the end of last year, and has been positive with a few exceptions all this year.

 

Tax Withholding

  • $190.9 B for the month of November 2017 vs. $1178.8 B one year ago, up +$12.1 B or +6.8%
  • $169.1 B for the last 20 reporting days vs. $179.0 B one year ago, down -$9.9 B or -5.5%

After being positive through most of 2014, these decelerated and even occasionally were  negative, in late 2015 through the first part of 2016.  With the exception of the months of  August, 2017, and the last 20 reporting days, it has shown marked improvement. I am discounting the relatively poor 20 day result this week, as the sole difference between the monthly and 20 day measures is whether or not November 1st is included.

 

Oil prices and usage 

  • Oil down -$0.68 to $58.29 w/w,  up +18.0% YoY
  • Gas prices down -$0.04 to $2.53 w/w, up +$0.38 YoY
  • Usage 4 week average up +0.9% YoY

 

The price of gas bottomed nearly 2 years ago at $1.69.  With the exception of July, prices generally went sideways with a slight increasing trend for the last year.  Usage turned negative in the first half of this year, but subsequently improved, and for most of the last several months turned positive again.

 

 Bank lending rates

 

Both TED and LIBOR rose since the beginning of last year to the point where both were usually negatives, although there were some wild fluctuations.  Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions.  The TED spread has turned very positive for the last several months. Meanwhile LIBOR has generally turned more and more negative.

 

Consumer spending

  • Johnson Redbook up +4.8% YoY
  • Goldman Sachs down -0.4% w/w, up +1.4% YoY

 

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat in 2016, and more markedly so in the last several months.  Both were positive again this week.

 

Transport

Railroad transport

  • Carloads up +0.2% YoY
  • loads ex-coal up +1.8% YoY
  • Intermodal units up +4.7% YoY
  • Total loads up +2.4% YoY

Shipping transport

Rail turned negative in 2015 and fell even more sharply in spring 2016. Since summer 2016, rail improved to neutral and then generally positive since November 2016. Over the last several months, it has been more mixed.

Harpex recently declined to repeated multi-year lows, then came back all the way to positive, declined again, but in the last several months has come all the way back to positive again. BDI also surged back to being a positive, declined back to neutral earlier this year, but recently turned up again. 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

 

  • Down -2.4% w/w
  • Up +7.0% YoY

Steel production had generally been in a decelerating uptrend through early 2014, then gradually worsened through the end of 2015. It improved from negative to "less bad" to positive in 2016 and has generally remained positive this year, although during early summer, it alternated between positive and negative.  It has been more positive in the last several months.

 
 

SUMMARY: 

 

The big difference this week is in the long leading indicators.  The monthly data on housing has been positive enough to turn that back into a positive from mixed.  At the same time, real M2 has decelerated enough to be downgraded all the way to a negative.  Meanwhile the yield curve remains a weak positive, as do corporate bonds, M1 money supply, purchase mortgage applications, and the two more leading Chicago Fed Financial Conditions Indexes. Treasury yields, mortgage rates, and growth in real estate loans remain neutral.  Refinance mortgage applications are the only other negative.

 

All but two of the short leading indicators, including stock prices, industrial metals, the regional Fed new orders indexes, spreads, financial conditions, staffing, the US$, initial jobless claims,and gas prices and usage, remain positive. Oil prices, at a two year high, have turned into a neutral, and this week were joined by the ECRI commodity index.

 

Among the coincident indicators, positives included consumer spending, steel, the TED spread, the Baltic Dry Index and Harpex. Only LIBOR remains negative. Rail turned fully positive this week, but tax withholding was mixed.

 

The near term forecast has been very strong for the last several months, and this is showing up in the monthly reports. This is juxtaposed by more mixed long leading indicators. I am upgraded that forecast slightly to mildly positive, as the housing improvement outweighs the M2 deterioration for now.

 

Have a nice weekend!

 

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