Weekly Indicators: Stress Indicators Remain In Spotlight, Joined By Sinking Profits

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

February data included very slight increases, rounding to zero, in real personal spending and real income less transfer payments, a slight decrease in real personal income, and an increase in saving.

House prices fell slightly through January in the Case Shiller index, but rose slightly in the FHFA index. Real manufacturing and trade sales rose sharply in January.

In the rear view mirror, real Gross Domestic Income in Q4 declined.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.66%, up +0.02 w/w (1-yr range: 4.20-6.59)
• 10-year Treasury bonds 3.48%, up +0.10 w/w (1.66-4.25)
• Credit spread 2.18%, down -0.08 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: -0.57%, down -0.17% w/w (-0.86 - 1.59)
• 10 year minus 3 month: -1.30%, unchanged w/w (-1.17 - 2.04)
• 2 year minus Fed funds: -0.73%, up +0.28% 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)

• 6.57%, up +0.19% w/w (4.29-7.38).

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 last 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 are negative.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps up +2% w/w to 173 (137-349) (SA)
• Purchase apps 4 wk avg. up +7 to 165 (SA) (268 high 3/26/22, low 154 Mar 17)
• Purchase apps YoY -35% (NSA)
• Purchase apps YoY 4 wk avg. -38% (SA)
• Refi apps up +5% w/w (SA)
• Refi apps YoY down -61% (SA)

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

(Graph at yardeni)

Real Estate Loans (from the FRB)

• Up +0.1% w/w
• Up +12.0% YoY (-0.9 - 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. Purchase mortgage applications may also recently have bottomed.

Real estate loans turned ever more positive in the past year. This was helped by inflation in house prices; thus the turn in the indicator will be when that cools - which *may* be starting to happen.

Money supply

The Federal Reserve has discontinued this weekly series. Data is now only released monthly. February data was released this week:

• M1 m/m down -1.2%, YoY Real M1 down -11.8% (60+ year low)
• M2 m/m down -0.6%, YoY Real M2 down -8.3% (60+ year low).

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

Corporate profits (Q4 actual S&P 500 earnings and Q1 estimated earnings from I/B/E/S via FactSet at p. 28)

• Q4 actual unchanged at 53.42 w/w, down -3.9% q/q
• Q1 estimated down -0.26 to 50.75, down -5.0% 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 Q4 is -5.8%; for Q1 2023 it is -10.4%. Needless to say, this metric is now a firm negative.

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

• Financial Conditions Index up +.12 (less loose) to -0.11 (-0.03 - -0.62)
• Adjusted Index (removing background economic conditions) up +.17 (less loose) to -0.06 (+0.16 - -0.59)
• Leverage subindex up +.51 (tighter) to +1.27 (+1.27 - -0.35) (new 14 year high).

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 readings for the past year underwent major revisions this week, and now read as extremely poor, while the adjusted index is close enough to its breakeven points to warrant a neutral rating. The unadjusted index is sufficiently above its breakeven point this week to warrant a change to negative.

Short leading indicators

Economic Indicators from the late Jeff Miller's "Weighing the Week Ahead"

• Miller Score (formerly "C-Score"): down -28 w/w to 273, +5 m/m (125 6/24/22 - 335 on 4/29/22)
• St. Louis Fed Financial Stress Index: down -1.2252 to 0.3406 (1.5746 3/23/23 - -.8325 9/16/22)
• BCIp from Georg Vrba: down -0.9 to 10.5 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, but the 4 week average subsequently dropped below 0, warranting a change in rating back to positive. Until one week ago, when the index increased more sharply than at any previous point of its existence, changing the rating to very negative.

The BCIp, which remained very positive until very recently, deteriorated sharply in the past several months, and is now generally below its recession-signaling threshold.

Trade weighted US$

• Down -1.08 to 120.50 w/w, +4.0% YoY (last week) (broad) (114.23 - 128.58) (Graph at Nominal Broad U.S. Dollar Index
• Down -0.70 to 102.58 w/w, up +4.0% YoY (major currencies) (graph at link) (94.63-114.78).

In early 2021, both the broad rating and the USD against major currencies turned higher YoY, and so changed to neutral. For a long time, both measures were well above +5% YoY, and thus negative. The $ against major currencies declined below the +5.0% YoY threshold again this week, so is neutral; against major currencies, the $ has been fluctuating, and remains neutral.

Commodity prices

Bloomberg Commodity Index

• Up +2.49 to 105.51 (102.59-136.61)
• Down -14.8% YoY (Best: +52.3% June 4).

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

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

• 159.99, up +1.92 w/w (135.97-327.84)
• Down -25.6% YoY (Best +69.0% May 7).

During the Boom of 2021, commodity prices soared, and total commodities were very positive. Total commodities (which include oil) made a new 1 year low, so are negative. 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 +3.5% to 4108.93.

Since January 3 of last year, there have been ongoing new 3 month and even 1 year lows. In February it made a new 3 month high, but there has been no 3 month new low, so the rating of this indicator improved from neutral to positive.

Regional Fed New Orders Indexes

(*indicates report this week)

• Empire State down -13.9 to -21.7
• Philly down -14.6 to -28.2
• *Richmond up +13 to -11
• Kansas City down -7 to -13
• *Dallas down -1.1 to -14.3
• Month-over-month rolling average: up +2 to -17.

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. These had usually been extremely positive ever since June 2020, but since last spring, gradually declined to neutral and then negative. They are very negative now.

Employment metrics

Initial jobless claims

• 198,000, up 7,000 w/w
• 4-week average 198,250, up +2,000 w/w.

(Graph at St. Louis FRED.)

New claims made new all-time lows on a 4 week average in April. Once this metric failed to make a new 3 month low, its rating changed to neutral. It will not turn negative unless and until the 4 week average is higher YoY. Instead, six weeks ago it made a new 8 month low, so this metric turned positive again.

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

• Down -1 to 98 w/w
• Down -6.6% 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. Last week it had the most negative February downturn since the inception of the index 16 years ago, and continued to a new post-pandemic low this week.

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

• $269.4 B for the last 20 reporting days this year vs. $253.7 B one year ago, +$15.7 B or +6.2%.

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 turned positive.

NOTE: The Treasury has changed its reporting format for this metric, which is now found in two places, on Tables II and IV at the line item "Taxes - Withheld individual/FICA," which must be added together for comparison purposes.

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

• Oil up +$6.28 to $75.49 w/w, down -11.2% YoY ($66.74 - $123.70)
• Gas prices unchanged at $3.42 w/w, down -$0.81 YoY
• Usage 4-week average up +0.6% 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 improved to neutral.

Note: With gas and oil prices so volatile in the past 12 months, I believe the best measure is against their 3 year average. Measuring by 1 year, both have turned positive.

Bank lending rates

• 0.512 TED spread up +0.119 w/w (0.02 -.685)
• 4.85 LIBOR unchanged w/w (0.10130- 4.85) (graph at link) (tied for new high).

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 had declined well below that level, and so turned positive; but turned negative again this week.

LIBOR has been increasing consistently well into its negative range.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Up +0.43 to +1.47 w/w (+0.72 3/17/23 - +6.16 2/19/22).

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)

• March 9 seven day average +14% YoY (Worst -29% Jan 13, 2022).

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

Open Table has indicated they have "temporarily suspended" this metric. If it is not resumed by the end of April, I will delete this entry.

Consumer spending

• Johnson Redbook up +2.8% YoY (high 15.8% in Jan. 2022; low 2.6% Mar 17, 2023) United States Redbook Index - 2023 Data - 2005-2022 Historical - 2024 Forecast (24 month low).

The Redbook index remained positive almost without exception since the beginning of 2021 until October. With three exceptions the past 9 weeks have been the lowest YoY comparisons in many months. 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 below 3%

Transport

Railroads (from the AAR)

• Carloads down -0.2% YoY
• Intermodal units down -13.9% YoY
• Total loads down -7.5% YoY.

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

Shipping transport

• Harpex up +3 to 1108 (1056- 4586) harperpetersen.
• Baltic Dry Index down -86 to 1403 (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 four months. In the past several months, comparisons have hovered near the zero line, varying between neutral and negative. This week they were negative 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 several 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)

• Down -0.4% w/w
• Down -1.8% 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. Having improved above -5.0% YoY, its rating has now changed to neutral.

Summary & 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:

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.

There are just a few sectors still holding up the economy, the most important of which are employment-related. Consumer spending - particularly as measured by Redbook - continues to trend ever so slowly downward, but isn't negative yet.

It is noteworthy that the long leading indicators are showing some volatility, as long term interest rates have been declining, and mortgage applications bottoming (good), while financial stress indicators are increasing, and corporate profits declining bad). In the meantime, sometime next week I plan on taking a detailed look at the coincident indicators most relied upon by the NBER in determining if a recession is occurring.