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By New_Deal_democrat January 28, 2017 10:00 am
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Weekly Indicators: strong midrange forecast with faltering longer term positives edition
Monthly data for December included a big increase in the Index of Leading Indicators, but declining new and existing home sales, and declining durable goods orders. U. Michigan consumer sentiment improved.
 
In the rear view mirror, Q4 GDP increased at a tepid pace, while the two long leading components of the report -- proprietors' income and real residential investment -- both improved.
 

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

  • Dow Jones corporate bond index 361.28 up +0.65 w/w (2016 high was 395.36, 2016 low was 341.41)
  • 2.49% 10 year treasury bonds up +.02%
  • BofA/ML B Credit spread down -.07% to 3.80%
Yield curve, 10 year minus 2 year:
  • 1.30%, up +.11% w/w
30 year conventional mortgage rate
  • 4.24%, down -.01% w/w

Yields on treasuries and mortgage rates made new 12 month highs in December, but both have retreated enough since to score just barely neutral this week. Corporate bonds also remain neutral. The yield curve and spreads are very positive.

 

Housing

 

Mortgage applications 

 

  • purchase applications +2% w/w
  • purchase applications +0.1% YoY
  • refinance applications +0.2% w/w
 
Real Estate loans
  • Unchanged w/w
  • Up +6.6% YoY

Mortgage applications turned outright negative for three weeks before tipping back to barely neutral this week. Refi applications are near multi-year lows.  I expect this to bleed into the monthly housing numbers at some point in the next few months, and may possibly have already shown up in new and existing home sales.

 

Real estate loans have been firmly positive for over 3 years, but if the rate of growth declines enough, that could become a neutral. We're not there yet.

 

Money supply

M1

  • +0.6% w/w
  • +2.2% m/m
  • +8.1% YoY Real M1 
M2
  • +1.6% w/w  
  • +0.7% m/m
  • +4.7% YoY Real M2 

Both real M1 and real M2 were firmly positive almost all last year, although generally less so in the last several months, with real M2 showing substantial deceleration.

 

Trade weighted US$

  • Down -0.24 to 128.04 w/w, up +2.1% YoY (one week ago) (Broad)
  • Down -0.26 to 100.59 w/w, up +1.0% YoY (yesterday) (major currencies)

 

The US$ appreciated about 20% between mid-2014 and mid-2015.  It went mainly sideways since then until spiking higher after the US presidential election. It has been generally neutral for about 2 months.

 

Commodiy prices

JoC ECRI

  • Up +1.62  to 108.41 w/w
  • Up +35.97 YoY
BBG Industrial metals ETF
  • 113.86 up +0.16 w/w, up +28.9% YoY
Commodity prices bottomed over one year ago. After briefly turning negative, metals have now surged higher since the election.

 

Stock prices S&P 500

 

  • Up +1.0% w/w
Stock prices are positive, having made a string of new all-time highs beginning last summer.
 

Regional Fed New Orders Indexes

(*indicates report this week)

  • Empire State  -8.3 to +3.1
  • Philly up +11 to +25
  • *Richmond up +4 to +15
  • *Kansas City up +13 to +20
  • Dallas up +8.7 to +7.3
  • Month over month rolling average: up +3 to +14 (18 month high)
The regional average has generally been lower than the ISM manufacturing index, but has accurately forecast its month over month direction. These are now screaming positive.

 

Employment metrics

 Initial jobless claims

  • 259,000 up +25,000
  • 4 week average 245,500 down -1,250

 

Initial claims remain well within the range of a normal economic expansion, as does the 4 week average. 

 

The American Staffing Association Index

 

  • Up +2 to 93 w/w
  • Up +1.35 YoY

This index turned negative in May 2015, getting as bad as -4.30% late that year. In 2016 it became progressively "less bad" and since last May has been a neutral most weeks. This week it was positive for the fourth week in a row, with only slight seasonality remaining.

 

Tax Withholding

  • $187.0 B for the first 17 days of January vs. $178.1 B one year ago, up +$8.9 B or +5.0%
  • $217.3 B for the last 20 reporting days ending Thursday vs. $205.0 B one year ago, up +$12.3 B or +6.0%

Beginning with the last half of 2014, virtually all readings were positive, but turned more mixed and choppy, and occasionally even negative, in last 2015 through the first part of 2016.  The last few months have with brief exceptions shown a marked improvement.

 

Oil prices and usage

  • Oil down -$0.18 to  $52.15 w/w,  up +$10.60 YoY
  • Gas prices down -.03 to $2.33 w/w, up +$0.47 YoY 
  • Usage 4 week average down -4.7% YoY

 

The price of gas bottomed one year ago at $1.69.  Prices have gone sideways since late last summer, and moved higher in the last month, making them, and oil prices, neutrals.  Usage has been faltering, and even negative, for the last two months. In general oil is no longer a tailwind for the economy, but it hasn't quite turned into a headwind yet.

 

Bank lending rates

 

Both TED and LIBOR rose since the beginning of last year to the point where both have usually been negatives, although there were some wild fluctuations.  Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions.  While the TED spread turned positive for  five weeks recently, this week both were again negatives.

 

Consumer spending

 

Both the Goldman Sachs and Johnson Redbook Indexes progressively weakened in pulses during 2015, before improving somewhat in 2016.  This week both were just barely positive. Gallup showed weaker holiday spending in December vs. one year ago, then rebounded sharply for two weeks before turning negative for the second week in a row. In real terms all 3 readings are negative YoY. If this persists one more week, I will score consumer spending a negative.

 

Transport

Railroad transport

  • Carloads up +10.7% YoY
  • loads ex-coal down -7.4% YoY
  • Intermodal units up +5.8% YoY
  • Total loads up +8.1% YoY

Shipping transport

Rail turned negative in 2015. It improved for a couple of months at the beginning of 2016 before falling sharply during the spring. Since June, generally rail was neutral and then turned positive for most weeks beginning in November, and sharply so this week. Seasonality is virtually all gone.

Harpex recently declined to repeated multi-year lows. BDI recently turned very positive before declining a month ago, was positive last week, but declined to negative again this week.  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 -0.8% w/w
  • Up +6.0% YoY

Until spring 2014, steel production had generally been in a decelerating uptrend.  It then gradually rolled over and got progressively worse in pulses through the end of 2015. It improved from negative to "less bad" to positive in 2016 and has remained positive since.

 
 

SUMMARY: 

 

The interest rate components of the long leading indicators have improved enough to score just barely  neutral. The yield curve and money supply as well as real estate loans remain positive (but with the positivity in money supply and real estate loans decelerating). Refinance mortgage applications, however, remain quite negative.

 

Short leading indicators, including stock prices, jobless claims, industrial commodities, the regional Fed new orders indexes, spreads, and temp staffing are all positive.  Oil and gas prices, and the US$ are neutral. Gas usage is negative.

 

The coincident indicators remain mixed. Steel, rail, and tax withholding are positive. Shipping, the TED spread and LIBOR remain negative. For the second week in a row, consumer spending is just a hairbreadth above turning negative.

 

Seasonality is nearly all gone. The shorter term 6 month forecast remains strongly positive (barring a trade war), although the flattening of real wages and consumer spending is concerning.  The 12 month + forecast, however, is mainly neutral to negative, with even several positive aspects decelerating.

 

Have a nice weekend!

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