Weekly High Frequency Indicators: Forecast And Nowcast Stabilize As Domestic U.S. Pandemic Progress Reverses

Purpose

I look at the high frequency weekly indicators because, while they can be very noisy, they provide a good nowcast 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.

A Note on Methodology

Data is presented in a “just the facts, ma’am” format with a minimum of commentary so that bias is minimized.

Where relevant, I include 12-month highs and lows in the data in parentheses to the right. All data taken from St. Louis FRED unless otherwise linked.

A few items (e.g., Financial Conditions indexes, regional Fed indexes, stock prices, the yield curve) have their own metrics based on long-term studies of their behavior.

Where data is seasonally adjusted, generally, it is scored positively if it is within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it is not seasonally adjusted, and there are seasonal issues, waiting for the YoY change to change sign will lag the turning point. Thus, I make use of a convention: data is scored neutral if it is less than 1/2 as positive/negative as at its 12-month extreme.

With long leading indicators, which by definition turn at least 12 months before a turning point in the economy as a whole, there is an additional rule: data is automatically negative if, during an expansion, it has not made a new peak in the past year, with the sole exception that it is scored neutral if it is moving in the right direction and is close to making a new high.

For all series where a graph is available, I have provided a link to where the relevant graph can be found.

Recap of Monthly Reports

June data included an increase in housing permits and starts, retail sales, industrial production and capacity utilization, and a jump in consumer inflation. Consumer sentiment as measured by the University of Michigan declined, however.

NOTE: For many indicators, I have added the week of the worst reading since the coronavirus crisis began in parentheses following this week’s number. The first indication of bottoming will be when these comparisons get “less worse,” and a bottom will probably be in when the comparison improves by about 1/2).

Long Leading Indicators

Interest rates and credit spreads

Rates

  • BAA corporate bond index 3.31%, down -0.04% w/w (1-yr range: 3.29-5.18)
  • 10-year Treasury bonds 0.62%, down -0.02% w/w (0.54-2.79)
  • Credit spread 2.69%, down -0.02% w/w (1.96-4.31)

(Graph at FRED Graph | FRED | St. Louis Fed )

Yield curve

  • 10 year minus 2 year: +0.48%, down -0.01% w/w (-0.04 – 0.67)
  • 10 year minus 3 month: +0.50%, down -0.01% w/w (-0.52 – 0.70)
  • 2 year minus Fed funds: +0.10%, unchanged w/w

(Graph at FRED Graph | FRED | St. Louis Fed )

30-Year conventional mortgage rate (from Mortgage News Daily) (graph at link)

  • 2.91%, unchanged w/w (2.89-4.63) (new all-time low intraweek)

Corporate bonds fell to an expansion low late in 2020, but also spiked to near 5-year highs early this year. In the past three months, bonds have bounced back into positive territory near their lows.

The spread between corporate bonds and Treasuries turned very negative in March, but has also bounced back significantly. Two of the three measures of the yield curve remain solidly positive, while the Fed funds vs. 2 year spread is neutral. Mortgage rates made yet another all-time low this week, and so are extremely positive.

Housing

Mortgage applications (from the Mortgage Bankers Association)

  • Purchase apps -6% w/w to 307 (184-326) (SA)
  • Purchase apps 4 wk avg. -4 to 314 (SA)
  • Purchase apps YoY +16% (NSA) (Worst: -35% on 4/18)
  • Purchase apps YoY 4 wk avg. +21% (NSA)
  • Refi apps +12% w/w (SA)

*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted

(Graph)

Real Estate Loans (from the FRB)

  • Up +0.2% w/w
  • Up +4.4% YoY (2.8-5.2)

(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed )

Purchase mortgage applications had been solidly positive in late 2019 and early this year. When the crisis started, they reverted back to negative. Since then, they have rebounded to new decade highs. Refi has also improved generally to neutral.

With the exception of several weeks in 2019, real estate loans have generally stayed positive for the past several years.

Money supply

M1

  • -1.5% w/w
  • +3.9% m/m
  • +36.9% YoY Real M1 (-0.1 to 39.7)

M2

  • +0.5% w/w
  • +1.5% m/m
  • +24.9% YoY Real M2 (2.0-24.9) (new one year high)

(Graph at FRED Graph | FRED | St. Louis Fed )

In 2019, both M1 and M2 improved from negative to neutral and ultimately positive. Fed actions to combat the economic crash amplified that.

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet at p. 24).

  • Q1 2020 actual, unchanged at 33.32, down -20.2% q/q, down -22.3% from Q4 2018 peak
  • Q2 2020 9% actual + 91% estimated up +0.79 to 23.73, down -28.8% q/q, down -44.7% from Q4 2018 peak

FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. The “neutral” band is +/-3%. I also average the previous two quarters together, until at least 100 companies have actually reported.

Q1 earnings were dismal, but while Q2 are expected to be much worse, they have started out far better than awful expectations. Nevertheless, this metric remains negative.

Credit conditions (from the Chicago Fed) (graph at link)

  • Financial Conditions Index down -0.04 (looser) to -0.43
  • Adjusted Index (removing background economic conditions) down -0.03 (less tight) to 0.13
  • Leverage subindex down -0.06 (less tight) to +0.30

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. In early April ago all turned negative. In the past two months, there has been a rebound. The un-adjusted Index is positive, and for the past six weeks, the Adjusted Index improved to neutral.

Short Leading Indicators

Trade weighted US$

Both measures of the US$ were negative early in 2019. In late summer, both improved to neutral on a YoY basis. Both measures had recently been neutral. The broad measure had improved to neutral, but has reverted to negative. Against major currencies, it has recently fluctuated between positive and neutral.

Commodity prices

Bloomberg Commodity Index

  • Up -0.15 to 66.49 (58.87-83.08)
  • Down -16.4% YoY (Worst: -26.0% on April 25)

(Graph at Bloomberg Commodity Index )

Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)

  • 109.67, up +4.65 w/w (88.46-124.03)
  • Down -5.8% YoY (Worst: -23.6% on April 11)

Both industrial metals and the broader commodities indexes declined to very negative into 2019, although there has been a considerable bounce in the past three months. In the case of industrial metals, this has been enough to move them from negative to neutral.

Stock prices S&P 500 (from CNBC) (graph at link)

Five weeks ago, briefly, there was a new 3-month high. There has not been a 3-month low in the past 3 months, so this metric has turned positive.

Regional Fed New Orders Indexes

(*indicates report this week)

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. In April, the average was even more negative than at its worst reading of the Great Recession. It rebounded by more than half in May, and at the end of June, it rebounded all the way to positive.

Employment metrics

Initial jobless claims

  • 1,300,000 down -10,000 w/w (Worst: 6.867 M on April 4)
  • 4-week average 1,375,000, down -60,000 w/w (Worst: 5.786 M on April 25)

(Graph at FRED Graph | FRED | St. Louis Fed )

The pace of new claims has slowed to less than 1/4 its record from 9 weeks ago. Continuing claims turned down six weeks ago from their worst readings. While the employment picture is “less awful,” as these are read as leading indicators, they qualify as positives.

Temporary staffing index (from the American Staffing Association) (graph at link)

  • Unchanged at 68 w/w
  • Down -27.0% YoY (Worst: 36.3% on May 28)

This index turned negative in February 2019, worsened in the second half of the year, and plummeted beginning in March.

Tax Withholding (from the Dept. of the Treasury)

  • $170.4 B for the last 20 reporting days vs. $193.9 B one year ago, down -$23.5 B or -12.1% (Worst: -16.0% on July 3)

YoY comparisons were almost uniformly positive since February 2019, but since May have been firmly negative.

Oil prices and usage (from the E.I.A.)

  • Oil up +$0.05 to $40.63 w/w, down -25.9% YoY
  • Gas prices up +$.01 to $2.19 w/w, down -$0.58 YoY (Worst: -$1.12 on May 1)
  • Usage 4-week average down -8.8% YoY (Worst: -43.7% on May 1)

(Graphs at This Week In Petroleum Gasoline Section )

At the beginning of this year, prices went higher YoY, but since abruptly turned lower; thus, they turned positive. Gas prices remain very low. Usage was positive YoY during most of 2019 and had oscillated between negative and positive in the first quarter of this year. It turned very negative at the beginning of April, but has since rebounded by more than half since its low point, and so has become neutral

Bank lending rates

  • 0.170 TED spread up +0.03 w/w (0.14-1.51) (graph at link) (new one year low)
  • 0.190 LIBOR up +0.01 w/w (0.17-2.50) (graph at link)

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. After being whipsawed between being positive or negative in 2018, since early 2019, the TED spread remained positive. It briefly turned negative during the worst of the coronavirus downturn, but both TED and LIBOR have declined far enough to turn positive.

Business formations

Prof. Geoffrey Moore included net formations minus bankruptcies as measured by Dun and Bradstreet among his 11 short leading indicators. This statistic, which isn’t exactly the same and is only 15 years old, is a similar measure. There is marked seasonality and considerable variance week to week, but a 5-week average cuts down on most of that noise while retaining at least a short leading signal that appears to turn 1-3 months before the cycle.

This turned negative YoY in March as soon as coronavirus turned into a real issue. But, by five weeks ago, it had turned back positive.

Coincident Indicators

Note: The St. Louis FRED has initiated a Weekly Economic Index consisting of many of the same components as I track below, plus the weekly Rasmussen consumer index, electricity usage, plus initial and continued jobless claims and the Staffing Index I track above. You can find it here.

Restaurant reservations YoY (from Open Table)

The last day that restaurant reservations were positive YoY was February 24. The sharp break downward began on March 9. Since the reopening of restaurants in some States, the comparisons have gradually improved each week. Two weeks ago, this metric has improved to better than -60% YoY and so was neutral, but last week and this week turned back to negative.

Consumer spending

  • Johnson Redbook down -5.5% YoY (Worst: -9.7% June 12)
  • Retail Economist -1.2% w/w, -9.8% YoY (Worst: -27.5% on April 25)

In April, the bottom fell out below the Retail Economist reading, followed a few weeks later by Redbook. Because the former has rebounded by more than half from its worst YoY reading, it has become a neutral, while the latter remains negative.

Transport

Railroads (from the AAR)

  • Carloads down -22.7% YoY (Worst: -30.2% on May 22)
  • Intermodal units down -7.4% YoY (Worst: -22.4% on May 1)
  • Total loads down -14.9% YoY (Worst: -39.4% on May 8)

(Graph at Railfax Report – North American Rail Freight Traffic Carloading Report )

Shipping transport

Since January 2019, rail has been almost uniformly negative, and worsened beginning late in the year. YoY comparisons worsened in April, but have gotten “less awful” since. The intermodal and total readings have improved by more than 50% from their worst readings, so they turned from negative to neutral. One week ago, intermodal traffic was positive YoY, but this was likely an artifact of the 4th of July holiday.

Harpex made new three-year highs in mid-2019 and remained near those highs until the beginning of this year, before declining to a new one year low three weeks ago. It is therefore negative. BDI traced a similar trajectory, making new three-year highs into September 2019, then declining to new three-year lows at the beginning of February. Four weeks ago, the BDI improved enough to warrant changing its rating from negative to neutral.

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 (from the American Iron and Steel Institute)

  • Up +1.7% w/w
  • Down -30.2% YoY (Worst: -39.4% on May 8)

The YoY comparison in production was generally positive early this year, but in March, it turned negative again. The bottom fell out in April. There has been slight improvement in the past 8 weeks.

Summary and Conclusion

Among the coincident indicators, the TED spread and LIBOR remained positive. The BDI, Retail Economist consumer spending, intermodal and total rail loads, are neutral. Restaurant reservations, Redbook consumer spending, tax withholding, rail carloads, steel, and Harpex remained negative.

Among the short leading indicators, gas and oil prices, the Chicago Financial Conditions Index, business formations, initial jobless claims, and stock prices, the regional Fed new orders indexes and the US$ against major currencies, are positives. The spread between corporate and Treasury bonds, industrial metals, and gas usage are neutral, joined this week by the broad trade weighted US$. Temporary staffing and overall commodities are negative.

Among the long leading indicators, corporate bonds, treasuries, mortgage rates, two out of three measures of the yield curve, real M1 and real M2, real estate loans, and purchase mortgage applications are all positives. The 2 year Treasury minus Fed funds yield spread, mortgage refinancing, and the Adjusted Chicago Financial Conditions Index are neutral. Corporate profits and the Chicago Financial Leverage subindex remain negative.

The nowcast remains negative. The short-term forecast remains positive. The long-term forecast continues to be very positive.

In general, while indicators have not started to deteriorate again, with few exceptions, they have stopped getting significantly better. The long leading forecast is responding primarily to all-time low interest rates. I remain perplexed that the short-term forecast continues to be positive. I read an article this week ascribing the progress in several to the fact that the rest of the developed world outside the US has contained the coronavirus, which is an explanation worth consideration. Because infections, hospitalizations, and deaths in the US due to the pandemic are now all increasing (see 91-divoc.com), I anticipate that the domestic picture will deteriorate in the near term.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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