Sunday, March 17, 2013

Weekly Indicators: Real M2 money supply a new area of concern edition

 - by New Deal democrat

Monthly data released in the past week included strongly positive retail sales, even after gasoline-dominated inflation was taken into account. Industrial production and capacity utilization also rose strongly. The Empire Sate Manufacturing report was positive. On the negative side, business inventories increased and consumer sentiment, especially forward-looking expectations soured. The latter is most likely due to the ongoing sequester and latest "grand bargain" machinations in Washington.

Let me remind readers that this look at high frequency weekly data is not predictive, but attempts to capture the most up to the minute pulse of the economy in the present. As I've done for the last few weeks, due to the recent payroll tax increases, let's start again this look at the high frequency weekly indicators by checking what is happening with tax withholding:

Employment metrics

Daily Treasury Statement tax withholding

  • $153.1 B (adjusted for 2013 payroll tax withholding changes) vs. $163.1 B, -6.1% YoY for the last 20 days.  The unadjusted result was $176.1 B for an 8.0% increase.
Initial jobless claims
  •   332,000 down 8,000

  •   4 week average 346,750 down 2,000
American Staffing Association Index
  • up 1 to 91 w/w up 3.6% YoY
Employment metrics were positve this week, with the ongoing quandary as to what is happening with tax withholding.  Initial claims have established a new lower range of between 330,000 to 375,000.  The ASA is still running slighty below 2007, and slightly ahead of last year.

To reiterate, I am adjusting my YoY tax withholding figures to reflect the increase in personal withholding taxes. While the YoY collections are up substantially, they should be up over 15% to compensate for the tax increase.  Since I can think of no reason why employment itself should have fallen off a cliff in January, it is very possible that there is a lag in the payment of withholding taxes with the new increase.  If this hypothesis were correct, I would have expected tax withholding to be much more reliable by about now. So far, that isn't happening.

Consumer spending Gallup has been very positive for 3 months. After tailing off in late February, there has been another splurge of spending in March.  The ICSC varied between +1.5% and +4.5% YoY in 2012. with one excpetion, the report for the last few weeks has been near the bottom of this range.. The JR report this week is in the middle of its typical YoY range for the last year.  Even in the worst case, it still looks like consumer spending has not collapsed due to the tax withholding increase. The rebound in the last several weeks may be due to tax refunds finally arriving in consumers' hands.

Housing metrics

Housing prices
  • YoY this week. +5.0%
Housing prices bottomed at the end of November 2011 on Housing Tracker, and have averaged an increase of +2.0% to +2.5% YoY for the last year. For the fifth week in a row, this week was the best YoY comparison in about 7 years.

Real estate loans, from the FRB H8 report:
  • -0.2% w.w

  • unchanged YoY

  • +2.2% from its bottom
Loans turned up at the end of 2011 and averaged about 1% gains YoY through most of 2012.  In the last month these have stalled.

Mortgage applications from the Mortgage Bankers Association:
  • -3% w/w purchase applications

  • +9% YoY purchase applications

  • -5% w/w refinance applications
Purchase applications had been going sideways for 2 years. In the last couple of months they have finally broken out of that range - slightly - to the upside.  Refinancing applications were very high for most of last year with record low mortgage rates, but did decreased recently with an increase of mortgage rates. In the last week, mortgage rates declilned again, and refinancing went up.

Interest rates and credit spreads
  •  4.85% BAA corporate bonds up 0.08%%

  • 1.96% 10 year treasury bonds up 1.96%

  • 2.89% credit spread between corporates and treasuries unchanged
Interest rates for corporate bonds have generally been falling since being just above 6% two years ago in January 2011, hitting a low of 4.46% in November 2012.  Treasuries have fallen from about 2% in late 2011 to a low of 1.47% in July 2012. Spreads have varied between a high over 3.4% in June 2011 to a low under 2.75% in October 2012.  The  last several months have seen a marked increase in rates and credit spreads have widened.

Money supply

  • +0.1% w/w

  • -0.8% m/m

  • +9.4% YoY Real M1

  • +0.1% w/w

  • -0.8% m/m

  • +4.6% YoY Real M2
Real M1 made a YoY high of about 20% in January 2012 and has generally been easing off since.  This week's YoY reading remained above a new low set several weeks ago.  Real M2 also made a YoY high of about 10.5% in January 2012.  Its subsequent low was 4.5% in August 2012.  It was weak once again this week. In absolute terms, M2 made a high over 2 months ago and is down -0.7% from that peak. The behavior of M2 thus bears close scrutiny.

Oil prices and usage
  •  Oil $93.45 up $1.50 w/w

  •   gas $3.71 down $0.05 w/w

  • Usage 4 week average YoY +1.1%
The price of a barrel of Oil has backed off recent seasonal highs, and is actually down YoY.  Unusually for the last year plus, the 4 week average for gas usage for the sixth week in a row was positive YoY.  This may be due to winter weather having been actually winter-like this year.


Railroad transport from the AAR
  •  -2500 or -0.9% carloads YoY

  • +500 or +0.4% carloads ex-coal

  • +9,000 or +4.0% intermodal units

  • +6600 or +1.3% YoY total loads
Shipping transport Rail transport appears to have returned to its pattern from last year.  The Harpex index remains slightly off its 3 year low of 352, and the Baltic Dry Index remains above its recent low.

Bank lending rates The TED spread increased slightly from its 18 month+ low.  LIBOR remained at its new 52 week low and is close to a 3 year low.

JoC ECRI Commodity prices
  • up 1.35 to 128.09 w/w

  • +1.61% YoY
As I said lasst week, I am really not sure what to make at all at this point of tax withholding. Unadjusted of course it is running very well above last year. But it should be about 15% higher, after adjusting for the payroll tax increase, not 10%, and we are now more than 2 months into the year. ICSC consumer spending came in rather weak, but Johnson Redbook is in its usual YoY range. Meanwhile, Gallup consumer spending, after a pause, is back on a tear. It's worth emphasizing that once again Gallup has stood out from the rest as accurately predicting monthly retail sales and overall economic activity.

Relatively weak comparisons included real estate loans and bank credit rates and spreads. Of more concern is that M2 money supply, a historically important component of the LEI, has declined since the first of the year.

In addition to Gallup consumer spending, other continuing positives once again include housing prices and mortgage applications. Bank lending rates remain positive.  Gas usage remains positive, and Oil prices are more accomodating. Initial claims are very positive. Rail traffic was also generally positive again.

Only tax withholding adjusted for increased rates, plus real M2 measured from the beginning of this year are outright negative. To reiterate my conclusion from lat week, many of the others are less positive than they used to be, and are close to neutral. Thus I remain more cautious than in recent months.

Have a nice weekend.