Saturday, December 17, 2011

Weekly Indicators: Dr. Jekyll and Mr. Hyde edition

- by New Deal democrat

Monthly data was decidedly mixed, with a negative bias. The only unequivocally good news was the improvement in the Empire State and Philadelphia Fed Indexes. These have completely wiped out their post debt debacle weakness. Retail sales, both nominal and real, were up a weak 0.2%. On the other hand, both industrial production and capacity utilization fell. The trend of these is especially concerning. During the first 12 months of the expansion, Industrial production grew at a rate of 8% YoY. For the next 12 months, the rate of growth was about 3.5%. For the last 4 months, the annualised growth rate is only 2.5%, and rolling over negative in 1Q 2012 is a non-trivial possibility. CPI was actually slightly negative, but rounded to 0. This is the second month in a row where the actual number has been negative. By my definition, one more negative month of CPI puts us in a deflationary scenario. Commodity deflation signals weakness. Further, the yield curve is useless as a positive long leading indicator when the period one year later is in deflation - and the yield curve has consistently been the most positive element of the LEI.

The high frequency weekly indicators are at the point where holiday seasonality strongly affects their week over week performance. YoY comparisons are more important, but whether those comparisons are improving or deteriorating is most important. These exhibited a severe case of split personality this week. A few were strongly positive, but several more were worryingly negative. I again remind new readers that my "Weekly Indicators" column is not designed to be a big picture forecast of the future, but rather by use of high frequency data to capture an up-to-the-minute snapshot of the economy as it is right now.

Let me start with the most severe case of split personality. The BLS reported that Initial jobless claims declined by 15,000 to 366,000. This is the lowest figure in over 3 1/2 years. The four week average declined by 5500 to 387,750. Take both of these with grains of salt since this is the second week where year-end seasonality is significant. Even if the numbers are slightly overcompensating for seasonal factors (not unusual), the trend is still very good.

On the other hand, adjusting +1.07% due to the 2011 tax compromise, the Daily Treasury Statement showed that withholding for the first 11 days of December stood at $74.7 B vs. $77.8 B a year ago. For the last 20 reporting days, $129.7 B was collected vs. $130.9 B a year ago, a loss of $1.2 B or -1.1%. I have tested this result by checking 4 week Tuesday to Tuesday and Wednesday to Wednesday numbers, and those results are even worse. Simply put, there do not appear to be any day-of-the-week or other quirks in this measurement, so this is a worrying negative result.

Finally, the American Staffing Association Index rebounded by 3 to 92 last week. This is entirely due to the previous Thanksgiving week's seasonality. This series is now just barely below last year's levels, after stagnating earlier this year.

Rail traffic and asking prices for housing also turned in very good reports. The American Association of Railroads reported that total carloads increased 3.4% YoY, up about 17,600 carloads YoY to 538,300. Intermodal traffic (a proxy for imports and exports) was up 6900 carloads, or 3.0% YoY. The remaining baseline plus cyclical traffic increased 8600 carloads or 3.7% YoY. Total rail traffic has staged an impressive rebound in the last 3 months.

For the third week in a row, YoY weekly median asking house prices from 54 metropolitan areas at Housing Tracker were positive, up +1.1% YoY. The areas with YoY% increases in price increased by 4 to 25, just two short of 1/2 of all areas. Only Chicago continued to have a double-digit YoY% decline.

Mortgage applications were more tepid. The Mortgage Bankers' Association reported that seasonally adjusted purchase mortgage applications decreased -8.2% last week, almost exactly reversing the gain of the week before. On a YoY basis, purchase applications were down -4.3%. The actual reading remains firmly within the range that purchase mortgage applications have been in since May 2010. Refinancing rose +9.3% w/w, to a multi-month high.

Retail same store sales were decidedly mixed for the second week in a row, as one service reported an outright YoY decline for the first time all year. The ICSC reported that same store sales for the week ending December 10 increased 2.9% YoY, but were down -0.1% week over week. Shoppertrak, however, reported that YoY sales decreased -1.9% YoY but reversed last week's big decline, with a 10.6% gain. For further contrast, Gallup's daily tracking of consumer spending continues to show solid YoY gains.

Money supply has been flat or down since its Euro crisis induced tsunami of several months ago. M1 decreased -0.1% last week, and also declined -0.2% month over month. It is now up 18.1% YoY, so Real M1 remains up 14.7%. This is about 6% under its peak YoY gain several months ago. M2 was up +0.2% w/w but unchanged month over month. It remains up 9.5% YoY, so Real M2 was up 6.1%. This is also significantly less than its YoY reading at the crest of the tsunami.

Finally, signs of weakness continue in credit spreads and gasoline usage. Weekly BAA commercial bond rates increased .02% to 5.30%. Yields on 10 year treasury bonds were flat at to 2.04%. In the last month, spreads have widened again, representing increasing weakness.

The Oil choke collar loosened, as Oil closed at $93.53 a barrel on Friday. This slightly below the recession-trigger level calculated by analyst Steve Kopits. Gas at the pump was flat at $3.29 a gallon. Measured this way, we probably are only about $.05 above the 2008 recession trigger level. Gasoline usage, at 8666 M gallons vs. 9349 M a year ago, was off a whopping -7.3%. The 4 week moving average is off -4.5%. For the last 2 weeks we have returned to the dramatically less usage YoY that started in March and intensified since July.

It is extremely difficult to reconcile these Dr. Jekyll and Mr. Hyde reports. Are we still on the rebound, or on the immediate cusp of a recession as ECRI has insisted? I am inclined to believe that, whether or not there is an actual recession, 1Q 2012 is likely to be the epicenter of weakness, not least because it is 12 months after the large spike in gasoline prices - and thus the point of maximum impact on the economy. But global weakness should mean lower gas prices, and recharged batteries for American consumers and businesses.