Thursday, September 1, 2016

An economy in Indian Summer

 - by New Deal democrat

Let me get the bad news out of the way first.  This morning's ISM Manufacturing report was disappointing to say the least.  Not only did the overall number fall below 50, but so did the leading new orders index, for the first time all year:

This mirrors the poorer regional Fed reports we got during August.

Still, it is only one month, and ISM readings between 48 and 50 have generally been consistent with slowdowns, not recessions.

But in general the news in the last few months has been better than in the earlier part of this year,  most notably industrial production which likely bottomed in March:

And here's a graph from Matt Trivisonno that Barry Ritholtz put up this morning of the 90 day average of tax withholding payments YoY:

And here is real personal income and spending:

So the dominant coincident indicators of the economy have all shown improvement in the last few months. 

I think the best paradigm for this improvement is compare it with the nice warm autumn days of Indian Summer.  The real summer has passed, and winter is still a ways off, but this is a nice episode.

This was brought to mind by a post I read from Lee Adler of the Wall Street Examiner.  Adler's headlines are typically Doomish, but he tracks real indicators, doesn't cherry pick which onces get attention,  and lets the data speak, even when it contradicts his narrative.  So this was a graph he put up a few days ago comparing real retail sales YoY and real personal consumption expentitures:

Note that for the first few years of this expansion, YoY retail sales were higher than PCE's.  This reversed about 18 months ago.  This is a typical mid-cycle reversal that I have previously pointed out has been a consistent pattern for over 50 years.

The index of leading indicators turned flat in July 2015, and didn't really recover until April of this year:

But the US$ has a history of being a leading indicator as well, and it probably has more relevance as the US economy becomes more globally enmeshed.  So here is what the monthly change, inverted, of the US$ look like, inverted so that strength in the dollar means a drag on the economy:

The dollar drags down the LEI from summer 2014 through January of this year.  If we assign a -.1% contribution to the LEI for every 1% increase in the US$, it makes the downturn in late 2015 through January of this year more intense, and begins the abatement in February -- on time to start showing improvement by now.

So while this morning's ISM report wasn't so hot, I expect the generally positive and improving news to continue for the remainder of this year -- i.e., a period of late cycle Indian Summer.