Weekly Indicators: Services Sector Strong – Production, Sales, Spending On Goods Stalled

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

May data included positive new home sales, real personal income, durable goods orders and core capital goods orders, and an increase in consumer sentiment as measured by both the Conference Board and the U. Of Michigan.

April house prices as measured by Case Shiller declined, but increased as measured by the FHFA. Real total manufacturing and trade sales declined.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.77%, up +0.03% w/w (1-yr range: 5.00-6.59)
• 10-year Treasury bonds 3.84%, up +0.10% w/w (2.60-4.25)
• Credit spread 1.93%, down -0.07 w/w (1.76-2.42)

(Graph at Moody’s Seasoned Baa Corporate Bond Yield | FRED | St. Louis Fed )

Yield curve

• 10 year minus 2 year: -1.06%, down -0.05% w/w (-1.06 – 1.59) (new low)
• 10 year minus 3 month: -1.46%, up +0.10% w/w (-1.69 – 2.04)
• 2 year minus Fed funds: -0.17%, up +0.15% w/w

(Graph at 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity | FRED | St. Louis Fed )

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

• 7.02%, up +0.07% w/w (5.05-7.38)

At the end of February there was a significant change in bond ratings, which all moved from negative to neutral, because yields did not make a new high in the previous 4 months. Typically in the past this is the first step towards the longer lived decline in bond yields which signals the end of a recession in the future.

While the spread between corporate bonds and Treasuries remains positive, all three of my yield curve indicators remain negative.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps up +3% w/w to 171 (137-349) (SA)
• Purchase apps 4 wk avg. +4 to 163 (SA) (268 high 3/26/22, low 154 Mar 17)
• Purchase apps YoY -21% (NSA)
• Purchase apps YoY 4 wk avg. -28.5% (NSA)
• Refi apps up +3% w/w (SA)
• Refi apps YoY down -32% (SA)

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

(Graph at https://www.yardeni.com/pub/mortgageapprate.pdf )

Real Estate Loans (from the FRB)

• Up +0.1% w/w
• Up +8.8% YoY (7.9 – 12.1)

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

Mortgage rates, like bond yields, appear to have made their peak for this cycle in October. Unlike bonds, I will not move these to “neutral” unless they get closer to their average in the last 3 years. Importantly, purchase mortgage applications have essentially bounced around close to 10 year lows in a fairly narrow range of between 155 and 180 in the 6+ months since last October.

Real estate loans turned ever more positive during 2022. This was helped by inflation in house prices; the YoY peak was in December 2022 at 11.9%. This week was yet another 10 month YoY low. This indicator will turn neutral when it is only higher by 8% or less YoY.

Money supply

The Federal Reserve has discontinued this weekly series. Data is now only released monthly. April data was released four weeks ago:

• M1 m/m down -0.1%, YoY Real M1 down -9.8%
• M2 m/m up +0.6%, YoY Real M2 down -8.1%

No recession has happened without a YoY real M1 negative, or YoY real M2 below +2.5%. Real M2 fell below that threshold in March 2022. Real M1 also turned negative as of May 2022.

Corporate profits (Q1 actual earnings from I/B/E/S via FactSet at p. 28)

• Q1 actual unchanged at 53.25, down -0.4% q/q
• Q2 estimated down -0.31 to 52.80, down -0.8% q/q

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. The cumulative decline since the recent Q2 peak through Q1 2023 is -6.1%. I am maintaining a negative rating so long as that is the case, and there is a quarterly decline as well.

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

• Financial Conditions Index down -.02 (looser) to -0.32 (-0.03 – -0.62)
• Adjusted Index (removing background economic conditions) unchanged (loose) at-0.31 (+0.16 – -0.59)
• Leverage subindex up +0.10 (less tight) to +1.48 (+1.61 – -0.35)

In these indexes, lower = better for the economy. 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. The leverage index is now very negative, while the adjusted index has declined below its breakeven point, so has turned back positive. The unadjusted index is also sufficiently above breakeven point to be negative.

Short leading indicators

Economic indicators from the late Jeff Miller’s “Weighing the Week Ahead”

• Miller Score (formerly “C-Score”): down -9 w/w to 305, +11 m/m (168 on 7/22/22 – 319 on 11/4/22)
• St. Louis Fed Financial Stress Index: up +0.0214 to -0.5525 (1.5746 3/23/23 – -.8325 9/16/22) St. Louis Fed Financial Stress Index
• BCIp from Georg Vrba: up +8.6 to 8.6 as of 6/11/23 iM’s Business Cycle Index (100 is max value, below 25 is recession signal averaging 20 weeks ahead)

The Miller Score is designed to look 52 weeks ahead for whether or not a recession is possible. Any score over 500 means no recession. This number fell below that threshold at the beginning of August 2021, so not only is it negative, but we are now well into the “recession eligible” time period.

The St. Louis Financial Stress index is one where a negative score is a positive for the economy, and during its limited existence, has risen above zero before a recession by less than one year. It did so in December, and then again briefly in March. Now it has decreased back below zero again.

The BCIp, which remained very positive until very recently, deteriorated sharply this year, and is below its recession-signaling threshold, although it has improved in the past several months.

Trade weighted US$

• Up +0.75 to 119.61 w/w, down -0.7% YoY (last week) (broad) (118.06 – 128.31) (Graph at Nominal Broad U.S. Dollar Index
• Up +0.02 to 102.91 w/w, down -2.1% YoY (major currencies) (graph at link) (100.79-114.78)

Ever since 2021, both measures of the US$ were well above +5% higher YoY, and so negative. Recently, both declined into the neutral range, and within the past month, both turned positive.

Commodity prices

Bloomberg Commodity Index

• Down -0.87 to 101.48 (99.64-136.61)
• Down -13.4% YoY (Best: +52.3%; worst -25.3%)

(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch )

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

• 141.35, down -1.92 w/w (135.97-327.84)
• Down -9.2% YoY (Best +69.0% May 7, 2022)

During the Boom of 2021, commodity prices soared, and total commodities were very positive. Both total commodities (which include oil) and industrial metals have also declined into the bottom 1/3rd of their 52 week range, so have also turned negative.

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

• Up +2.3% to 4450.38 (new 12 month high)

Stocks made several new 3 month highs in the past month, so this indicator remains positive.

Regional Fed New Orders Indexes

(*indicates report this week)

• Empire State up +31.1 to +3.1
• Philly down -2.1 to -11
• Richmond down -9 to -29
• Kansas City unchanged at -14
• *Dallas down -0.5 to -16.6
• Month-over-month rolling average: down -1 to -15

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. Since last spring, these gradually declined to neutral and then negative. They are very negative now, despite the big improvement in the NY Fed.

Employment metrics

Initial jobless claims

• 239,000, down -26,000 w/w
• 4-week average 257,500, up +1,500 w/w

(Graph at St. Louis FRED)

Recently, revisions have caused major changes in this index. The 4 week average has been higher YoY for several months, and with its big increase in the past three weeks, the yellow “caution flag” remains. If it remains higher by 12.5% YoY for over a month, it will warrant a red flag recession warning.

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

• Down -1 to 99 w/w
• Down -5.9% YoY

This was extremely positive at the end of 2021. During 2022, the comparisons at first slowly and then more sharply deteriorated, and four weeks ago for this first time turned negative. It had the most negative February downturn since the inception of the index 16 years ago, and continued to a new post-pandemic low in the weeks since then as well. In the past five weeks it has improved slightly.

Tax Withholding (from the Department of the Treasury) Issues: Current and Archive

• $250.5 B for the last 20 reporting days this year vs. $236.2 B one year ago, +$14.3 B or +6.1%

YoY comparisons peaked in Q1 2022. Since summer, it has oscillated between neutral and positive, and was negative on a monthly basis several times. Since the first of the year, these have generally turned positive. That was not the case for the month of April, but in May it turned back positive, and remains so this month.

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

• Oil up +$1.30 to $70.56 w/w, down -18.0% YoY ($66.74 – $123.70)
• Gas prices down -$0.01 to $3.57 w/w, down -$1.30 YoY
• Usage 4-week average up +3.8% YoY

(Graphs at This Week In Petroleum Gasoline Section – U.S. Energy Information Administration (EIA))

Gas prices are in the middle 1/3rd of their 3 year range, and so have returned to neutral. Oil is also in the middle of its 3 year range, and so it remains neutral.

Mileage driven has remained positive in the past few months.

Note: given this measure’s extreme volatility in the past 18 months, I believe the best measure is against their 3 year average. Measuring by 1 year, both have turned positive.

Bank lending rates

• 0.358 TED spread down -0.049 w/w (0.02 -.685)
• 5.20 LIBOR up +0.05 w/w (0.10130- 5.22) (graph at link)

TED was above 0.50 before both the 2001 and 2008 recessions. Since early 2019 the TED spread had remained positive, except the worst of the coronavirus downturn, until last spring. It has been very choppy recently, varying between neutral and negative. It turned positive again over one month ago.

LIBOR has been increasing consistently well into its negative range.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Up +0.24 to 1.32 w/w (Low 0.66 Dec 10, 2022 – high 3.29 July 2, 2022)

After a very positive 2021, this measure declined to less than half its best YoY level, thus changing to neutral. I will continue to treat it as neutral unless the number turns negative.

Restaurant reservations YoY (from Open Table) State of the Restaurant Industry | OpenTable

• June 21 seven day average -3% YoY (Worst this year -11% 5/11/23)

I have been measuring its 7 day average to avoid daily whipsaws.

Open Table has resumed this metric. Its data indicate that during March and early April it stabilized at roughly unchanged, but in the next 5 weeks declined significantly. After whipsawing sharply for 2 weeks due to Mothers’ Day scheduling, it resumed its slightly negative trend four weeks ago.

Consumer spending

• Johnson Redbook up +0.5% YoY (high 15.8% in July 2022; low 0.4% June 16, 2023) United States Redbook Index – 2023 Data – 2005-2022 Historical – 2024 Forecast

The Redbook index remained positive almost without exception since the beginning of 2021 until October. This week improved from last week’s lowest YoY comparison in 2.5 years. The new link I have added above goes to a 5 year graph to best show the comparison.

I recently downgraded this metric to neutral. The 4 week average is now just +0.6%

Transport

Railroads (from the AAR)

• Carloads -0.4% YoY
• Intermodal units down -5.5% YoY
• Total loads down -3.2% YoY

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

Shipping transport

• Harpex down -8 to 1227 (1056- 4586)https://harpex.harperpetersen.com/harpex
• Baltic Dry Index down -104 to 1112 (530-3369) (graph at link)

Rail carloads turned positive early in 2021, before gradually fading to negative from August through the end of the year and the beginning of this year. The total loads index has been consistently negative for the past five months. In the past several months, comparisons have hovered near the zero line, varying between neutral and negative. This week they were neutral again.

Harpex increased to near record highs again early in 2022, but has since backed off all the way to new lows. BDI traced a similar trajectory, before rebounding sharply in the past few weeks, and remains negative.

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 (American Iron and Steel Institute)

• Up +0.9% w/w
• Up +1.2% YoY (worst -10.0% Dec 2, 2022)

Since the end of March 2021, against terrible comparisons, this metric had been positive, typically running at a double digits higher YoY percentage growth. This past spring, after almost continuous deterioration, it turned negative, and has remained so. The YoY comparisons have improved considerably in the past few weeks. For several months it improved above -5.0% YoY, turning neutral, but then reverted to negative again. In the past six weeks it has improved substantially again, and this week has turned positive.

Summary and conclusion

Below are this week’s spreadsheets of the long leading, short leading, and coincident readings. Check marks indicate the present reading. If there has been a change this week, the prior reading is marked with an X:

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The “Recession Warning” which began at the end of November for this year remains, as all three of my primary systems remain consistent with a near-term recession. The big decline in gas prices late last year, together with the pent-up demand from supply backlogs in vehicle production and house construction are the most likely reasons why it has not occurred – at least not yet.

The continuing surge in stock prices is noteworthy, as is the slight improvement (to “less awful” in real money supply. At the same time, real spending on goods as measured both by monthly real personal goods consumption and real retail sales, as well as the weekly Redbook report, continue to be either barely above zero, or actually negative. So are industrial production and real sales of goods. This consumption tends to lead employment, although so far it continues to be outweighed by continued growth in real spending on services.