May data was focused on housing. Housing starts rose to a new expansion high, but the less volatile and more leading permits made an 8 month low, as did single family permits. As a result of the decline in permits, the Index of Leading Indicators rose less than forecast, at +0.2.
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.
NOTE that I include 12 month highs and lows in the data in parentheses to the right.
Interest rates and credit spreads
- BAA corporate bond index 4.85% up +.03% w/w (1 yr range: 4.15 - 4.94)
- 10 year treasury bonds 2.90% down -.02% w/w (2.05 - 3.11)
- Credit spread 1.95% up +.03% w/w (1.56 - 2.30)
Yield curve, 10 year minus 2 year:
- 0.34%, down -0.02% w/w (0.34 - 1.30) (new expansion low)
30 year conventional mortgage rate
- 4.69%, up +0.05% w/w (3.84 - 4.79)
BAA Corporate bonds remain neutral. If these go above 5%, they will become a negative. Mortgage rates and treasury bonds are still both negatives. The spread between corporate bonds and treasuries has now gone above 1.85%, and so I have switched it from positive to neutral. The only remaining positive is the yield curve, and if that declines to +0.25%, that too will become a neutral.
Housing
Mortgage applications
- Purchase apps up +4% to 257 w/w
- Purchase apps 4 week avg. +3 to 250
- Purchase apps YoY +3%, 4 week YoY avg. +3%
- Refi app up +6% w/w
Real Estate loans
- Unchanged w/w
- Up +3.8% YoY ( 3.3 - 6.5) (re-benchmarked, adding roughly +0.5% to prior comparisons)
Refi has been dead for some time. Purchase applications were strong almost all last year, began to falter YoY in late December, but rebounded during spring, ultimately making new expansion highs. The 4 week average declined from the peak enough to qualify as neutral for the last several weeks, but this week rebounded to positive.
With the re-benchmarking of the last year, the growth rate of real estate loans changed from neutral to positive. If the YoY rate falls below +3.25%, I will downgrade back to neutral.
Money supply
M1
- -1.4% w/w
- +1.5% m/m
- -0.4% Real M1 last 6 months
- +3.4% YoY Real M1 (1.6 - 6.9)
M2
- +0.1% w/w
- +0.7% m/m
- +1.4% YoY Real M2 (0.9 - 4.1)
Since 2010, both real M1 and real M2 were resolutely positive. Both decelerated substantially in 2017. Real M2 growth has fallen below 2.5% and is thus a negative. Real M1 growth this week was again below 3.5% YoY, and on a 6 month basis it has returned to a negative, so real M1 overall is scored as neutral.
Credit conditions (from the Chicago Fed)
- Financial Conditions Index unchanged at -0.81
- Adjusted Index (removing background economic conditions) unchanged at -0.52
- Leverage subindex up +.03 to -0.34
The Chicago Fed's Adjusted Index's real break-even point is roughly -0.25. In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. All three metrics presently show looseness and so are positives for the economy.
Trade weighted US$
- Up +1.31 to 123.92 w/w +1.7% YoY (last week) (broad) (116.42 -128.62)
- Down -0.25 to 94.54 w/w, -2.84% YoY (yesterday) (major currencies)
The US$ appreciated about 20% between mid-2014 and mid-2015. It went mainly sideways afterward until briefly spiking higher after the US presidential election. Both measures had been positives since last summer, but in the last two weeks the broad measure turned neutral.
Commodity prices
JoC ECRI
- Down -3.01 to 109.57 w/w
- Up +8.23 YoY
BBG Industrial metals ETF
- 133.22 down -3.46 w/w, up +20.14% YoY (108.00 - 149.10)
Commodity prices bottomed near the end of 2015. After briefly turning negative, metals also surged higher after the 2016 presidential election. With the exception of one week ago, ECRI has been neutral for many months. On the other hand, industrial metals have been strongly positive and recently made a new high.
Stock prices S&P 500
- Down -0.9% w/w at 2754.88
Stock prices are a neutral, having not made either a new 3 month high or low in the last three months. They made a string of new all-time highs beginning in summer 2016.
Regional Fed New Orders Indexes
(*indicates report this week)
- Empire State up +5.3 to +21.3
- *Philly down -22.7 to +17.9
- Richmond up +25 to +16
- Kansas City up +1 to +38
- Dallas down -0.2 to +27.7
- Month over month rolling average: down -5 to +24
The regional average has been more volatile than the ISM manufacturing index, but has accurately forecast its month over month direction. After being very positive for most of this year, it has moderated slightly in the last few weeks.
Employment metrics
Initial jobless claims
- 218,000 unchanged
- 4 week average 221,000 down -3,250
Initial claims have recently made several 40+ year lows and so are very positive. The YoY% change in these metrics had been decelerating but is now back on its multi-year pace.
The American Staffing Association Index
- Unchanged at 97 w/w
- Up +1.5% YoY
This index was generally neutral from May through December 2016, and then positive with a few exceptions all during 2017. It was negative for over a month at the beginning of this year, but returned to a positive since then.
Tax Withholding
- $177.3 B for the last 20 reporting days vs. $181.1 B one year ago, down -$3.8 B or -2.1%
- 20 day rolling average adjusted for tax cut [+$4 B]: up +$0.2 B or +0.1%
With the exception of the month of August and late November, this was positive for almost all of 2017. It has generally been negative since the effects of the recent tax cuts started in February.
I have discontinued the intramonth metric for the remainder of this year, since the kludge to guesstimate the impact of the recent tax cuts makes it too noisy to be of real use.
I have been adjusting based on Treasury Dept. estimates of a decline of roughly $4 Billion over a 20 day period. Until we have YoY comparisons, we have to take this measure with a big grain of salt.
- Oil up +$4.85 to $69.18 w/w, up +61% YoY
- Gas prices down -$.03 to $2.88 w/w, up $0.55 YoY
- Usage 4 week average up +0.9% YoY
The price of gas bottomed over 2 years ago at $1.69. With the exception of last July, prices generally went sideways with a slight increasing trend in 2017. Usage turned negative in the first half of 2017, but has almost always been positive since then. Because the YoY change has gone back above 40%, the rating is now negative.
Bank lending rates
- 0.452 TED spread down -0.006 w/w
- 2.090 LIBOR unchanged w/w (tied for new expansion high)
Both TED and LIBOR rose in 2016 to the point where both were usually negatives, with lots of fluctuation. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions. The TED spread was generally increasingly positive in 2017, while LIBOR was increasingly negative. This year the TED spread has also turned negative, then turned positive in the past month before returning to negative in the last two weeks.
Consumer spending
- Johnson Redbook up +4.7% YoY
Both the Goldman Sachs and Johnson Redbook Indexes generally improved from weak to moderate or strong positives during 2017 and have remained positive this year.
Transport
Railroad transport
- Carloads up +1.9 YoY
- Intermodal units up +6.3% YoY
- Total loads up +4.1% YoY
Shipping transport
- Harpex unchanged at 678 (440 - 678) (tied for 6 year high)
- Baltic Dry Index down -27 to 1377 (~700 - 1700)
Rail was generally positive since November 2016 and remained so during all of 2017 with the exception of a period during autumn when it was mixed. After some weakness in January and February this year, rail has returned to positive.
Harpex made multi-year lows in early 2017, then improved, declined again, and then improved yet again to recent highs. BDI traced a similar trajectory, and made 3 year highs near the end of 2017, declined early this year, but recently has hit multiyear highs.
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 -0.7% w/w
- Down -0.4% YoY
Steel production improved from negative to "less bad" to positive in 2016 and with the exception of early summer, remained generally positive in 2017. It turned negative in January and early February, but with the exception of three weeks (including the last two weeks) has been positive since then.
SUMMARY:
Among the long leading indicators, the more leading Chicago Fed Financial Conditions Indexes and real estate loans remained positive, rejoined this week by purchase mortgage applications. Corporate bonds and mortgage rates are neutral, rejoined this week by real M1. Treasuries, refinance applications, and real M2 are all negative. That the most leading monthly housing data for May declined to seven month lows is also noteworthy.
Among the short leading indicators, industrial metals, the regional Fed new orders indexes, financial leverage, jobless claims, gas usage, and staffing are all positive. Stock prices, gas prices, and the spread between corporate and Treasury bonds are all neutral, rejoined this week by the ECRI commodities index. The US$ is mixed. Oil prices turned negative.
Among the coincident indicators, positives include consumer spending, Harpex, and rail, joined this week by tax withholding. The Baltic Dry Index is neutral. LIBOR and TED remain negative, joined this week by steel.
There were a number of small moves this week across the spectrum, but (except for the unreliable tax withholding) all but one were to the downside. As a result, while both the nowcast and the short term forecast remain positive, they are a little less so than in the last few months. The longer term forecast crossed the line ever so slightly from positive to neutral several weeks ago, and remains neutral.
