Friday, August 7, 2009

July Leading Economic Indicators blow through important inflection points

- by New Deal democrat

As I have previously said, this week we did receive 4 very important new data points on Leading Economic Indicators. Including the late reports from June, here is my latest estimate for July Leading Economic Indicators:

The yield curve is still wildly positive +0.3
Stocks 3 month gain is worth +0.2
New home sales are worth about +0.1
Jobless claims are worth about +0.2

Durable goods subtract -0.2
Consumer sentiment subtracts -0.1
Real M2* has been trending slightly negative, so -0.1

*For someone who formally apologized to Milton Friedman about the Fed's role in the Great Depression, it is astonishing that Ben Bernanke has let real M2 turn negative in the last few months.

So far, that is a +0.4. Adding in this last week's new data points, we get:

average hours in manufacturing+0.2
ISM deliveries +0.1
consumer nondurables +0.2

That brings the net gain for June revisions and July to +0.9!

This means:
(1) 4 months of positive LEI in a row. Three in a row usually is enough to signal a turnaround.
(2) over a 6 month period, 7 indicators are positive, 2 are negative, 1 is unchanged. Unless catastrophe strikes, one of the two negative indicators will turn positive in the next two weeks. That will make it 8-1-1. In the past, 9 of 10 positive for 6 months has always coincided with economic growth.
(3) the LEI are now positive YoY. This also in the past has coincided with economic growth.

This is consistent with economic growth beginning possibly as early as last month.

The coincident indicators will tell us the turn has actually occurred. Of the 5 important ones, real retail sales is already positive. Aggregate hours worked was just reported as unchanged from June to July. Industrial production only fell 0.1 in June, and is projected to rise 0.1 in July. That leaves payroll employment, just reported today at -247,000, as the laggard. We will probably have to wait for actual payroll growth (which could start as early as September), to be confindent that the recession really is over.

Now that is a good way to end the week!