Economic Indicators Roundup (December 22, 2014)

Economic indicators are everywhere, so this is kind of like a dashboard that I like to follow.  For each indicator, I will try to give you a brief description, the latest reading and what I understand to be its implications.  For simplicity, I will assign each a rating of positive, neutral or negative.  For the economic indicators, I will denote in each one’s section how I decide which rating to give it.  At the end, I assign an overall rating, but this is just to guide me in my takeaway of where things stand.  It’s not scientifically rigorous or anything.

  • Positive – indicative of a healthy, growing economy.
  • Neutral – indicative of a slow or no growth economy but not a contracting (recession) economy.
  • Negative – indicative of a shrinking economy or recession.

(NOTE: For a “Quick ‘n Easy” read, just review the labeled white boxes, then skip to my “Easy Take” summary at the end.  You can review any charts/graphs afterward.  I want to make sure no one is intimidated by the length of my posts, even though I’m trying to making them easy …)


Quick Summary

Indicator (Click for details – only works if full article is open) Current Rating (change from previous roundup)
GDPNow (GDP Forecast from Atlanta Fed) Neutral
ADS Business Conditions Index Positive
Bloomberg Financial Conditions Index Positive   (Upgrade)
Daily Consumer Leading Indicators Negative
Citigroup Economic Surprise Index Neutral
Employment Trends Index Positive
Chicago Fed National Activity Index Positive   (Upgrade)
Easynomics Real Estate Price Stability Index Positive
Easy Trends Dashboard   (min/max -3 to +3) +2.67 = Definitely moving in a positive direction, with hardly any unconfirmed trends or off-trend readings

NOTE: You may be reading an outdated analysis.  Please visit my latest economic indicators roundup.



Economic Indicator: GDPNow   |   NEUTRAL
Easy Intro: None yet   |   Link to Source   |   Latest Date This Info Represents: 4th Quarter 2014 (i.e., three months ending December 2014)

Quick ‘n Easy

The current forecast for real GDP growth in the 4th quarter of 2014 is 2.7 percent – below-average growth by historical standards. The Federal Reserve Board of Atlanta combines a whole bunch of public data to mimic what the government does when reporting Gross Domestic Product (GDP), which is the broadest and most comprehensive measure of the economy that is widely accepted. It basically measures the value of all goods and services produced in the country, regardless of industry. In a sense, that’s what economics is all about, the value of things. The rate at which GDP is growing tells us whether our economy is strong or not. Historically, the average has been about 3.3 percent per year. It would be great to see at least that rate of growth.

Economic Indicators - GDPNow from Atlanta Fed - Dec 16 2014

Source: FRBAtlanta.org

Easy Description: GDPNow is a frequently updated estimate of the growth rate of the economy (GDP growth) as opposed to having to wait for quarterly estimates from the Bureau of Economic Analysis for “official” figures.

Latest Readings:

4th Quarter of 2014: On Dec 16, GDPNow is positive (+) 2.7 percent annualized growth rate (versus +2.2 percent on Dec 11)

NOTE: “Annualized growth rate” is how much growth we would see over a full year if economic growth continued at the same pace as it did in the latest quarter being forecast.

Implications: We have now seen two solid quarters of growth after the 1st quarter of 2014 setback due to cold weather. The 4th quarter is projected to fall back to sluggish growth. Thus, the overall year would once again show slow growth, just as we’ve seen for several years now.

Additional Info: This is a new indicator, so my use of it here may evolve over time. I like it because it provides a very comprehensive and more timely update for overall economic growth.

Easynomics Rating Methodology: For this index, I will use data on the most recent quarter available. If the latest GDPNow estimate refers to a quarter for which there is already an official BEA reading, then I will go with the BEA reading. I will rate anything between zero and (+) 3.3 as “neutral” – anything above or below that will be rated “positive” or “negative” respectively.

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Stock Market Forecast Update

I have updated my Stock Market Forecast page with the latest systems I’m testing. You can read the explanation there in detail. The quick summary is that I’m doing two primary models (4-week and 13-week), both using a linear regression model (a statistical way of finding a straight-line relationship between a set of variables and a calculated outcome) that involves four different technical analysis data points.

I graph the stock market forecast for each model over the coming 4-week or 13-week period.

Lastly, I will issue two weighted combination forecasts each week in my update post, each of which makes only one “official” forecast for the record book. One represents a weighted average between where the two models think the S&P 500 will close this upcoming week. The weights are based on how well each model explains the ups and downs of the S&P 500 – that is, using the “r-squared” for the regression analysis. The other is a “Headline Adjusted” model, which tries to account for the fact that extreme and unforeseen events can throw off the models. So, I remove data that seems affected by such effects and keep the more pure data. This model will also make only one forecast, one week in advance.

Performance of Last Week’s Forecast

Weekly Direction of the S&P 500

Correct:   4-week   /   13-week   /   Weight-Adjusted Combo   /   Headline-Adjusted

Incorrect:   None

Accuracy of the Weight-Adjusted Combination Models

Regular Weight-Adjusted Combination: 1.74 percent too optimistic

Headline-Adjusted Combination: 2.74 percent too pessimistic

Accuracy of Individual Models

4-week Model:  1.18 percent too optimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  3 out of 4 predictions

******************

13-week Model:  1.89 percent too optimistic

Correct Prediction of S&P 500 Direction thru Last Week’s Close:  12 out of 13 predictions

Estimated Effect of Headlines on Current Market Value

NOTE: This is based on a calculation I do after running the current week’s headline-adjusted forecasts.

4-week Model: Negative effect of 1.8 percent   (up 2.1 percent from last week)

13-week Model: Negative effect of 2.3 percent   (up 2.6 percent from last week)

Notes: The headline effect went up an average of 2.4 percent from last week, so headlines are artificially holding down the markets by about 2.1 percent right now.

Stock Market Forecast Summary for Upcoming Week

Here’s the breakdown:

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Stock Market Technical Analysis – Tech It Easy (thru December 19, 2014)

Stock market technical analysis is all you need to know, complete hogwash or somewhere in between. It depends on who you ask. If you find it interesting, you’ll probably like reading this weekly feature.

NOTE: You may be reading an outdated article. Please visit my latest stock market technical analysis summary of the S&P 500 for more.

I used to have screenshots of the various stock market technical analysis assessments I present below, as well as a bit more analysis for each one. In order to save time, I will not be doing the screenshots and will abbreviate some of the text for each analysis as well. The last time I did a comprehensive analysis can be foundhere, in case you want to see what it looked like.

The next few paragraphs are my standard intro to stock market technical analysis – you can skip down to the table (or click “continue reading”) if you read this feature regularly: 

Many people who trade in the markets believe that there are patterns that can generally lead to profitable trades. By analyzing stock charts that show the change in price along with the volume (how many shares were traded), “technical analysts” believe they have an edge and can time their trades profitably. There is significant controversy over this subject, however. Others say that, unless you have some information that no one else does, basically you can never beat “the market” because everything is already baked into the current price of a stock.

Nevertheless, supporters of stock market technical analysis are everywhere, and the tools for their trade can be found throughout bookstores and the Internet. I like to follow some websites that do some of the work automatically and provide a snapshot opinion of whether a particular stock is considered “bullish” (going to go up in price), “bearish” (going to go down in price) or “neutral” (stay about the same price).

For simplicity, I’d like to start by showing you a snapshot of what several stock market technical analysis websites suggest about the exchange traded fund (ETF) with the ticker symbol of SPY. This fund is supposed to go up and down the same as the S&P 500 index does. And many people consider the S&P 500 index (a measure of the price of the 500 largest companies that trade in the U.S.) to be an accurate gauge of where “the market” stands.

For each of the sources below, where I have a choice, I will use a measure that attempts to predict the future direction of SPY or S&P 500 in the next 3 months.

S&P 500 Technical Analysis Summary

Source: Barchart.com   |  BULLISH   (Upgrade)

Quick ‘n Easy

Barchart.com uses three analyses to predict the direction of SPY over the next three months or so. Looking at the average value and strength of these three signals, we can conclude that BarChart.com thinks that the price of SPY will rise over the next three months.

Easy Notes: BarChart.com says that the price of SPY will probably rise over the next three months. This is the first “bullish” assessment after 1 week of a “non-bullish” assessment. Two of three signals are at “buy,” and neither is a weak one. Fortunately, all three signals are headed in the right direction (the right direction would mean “buy” signals are strengthening and “sell” signals are weakening). Overall, this is a bullish assessment.

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Initial Weekly Unemployment Claims (4-Week Moving Average) thru Week Ending December 13, 2014 – Easy Trends

In this article, I’ll do an “Easy Trends” analysis of the initial weekly unemployment claims data.  “Easy Trends” is a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither.  You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis.  Please visit my latest unemployment claims trend analysis for more info.

Quick ‘n Easy

By tracking the number of people who are filing for unemployment benefits for the first time each week, we get a quick insight into the latest status of the economy’s health.  Fewer claims equals more jobs, which equals more income, which usually equals more consumer spending (70% of the economy!) that supports company profits, which in turn can lead to more hiring.

Quick Version of Easy Trends Analysis

For the Initial Weekly Unemployment Claims series, I will be doing only a brief update as long as the level of claims is super low (below 300,000) or just low (below 350,000) without a confirmed upward trend (which is undesirable of course). I will only call out a few specific statistics that I like to track. I’ll be tracking the trends, but it takes a lot of time to do the post, so I won’t do a post with the full analysis unless there is any cause for concern. Bottom Line: If you’re seeing my “quick version” of this analysis – don’t be worried about weekly jobless claims!

4-week moving average of weekly initial unemployment claims: 298,750   (good – we want this number to be below 350,000)

4-week moving average of weekly initial unemployment claims as a percent of the total size of the nation’s workforce: 0.19 percent   (good)

Current Trend: Confirmed upward trend of about 3,000 more claims per week.   (Bad – but at least we’re at a low level still)

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Leading Indicators vs April 2015 – Easynomics Court

For an explanation on “Easynomics Court” and how it works, read this page on leading indicators vs six months into the future.

NOTE: In case you are accessing this post long after it was originally posted, you may also be interested in the most recent Easynomics Court case.

As of today, the official Easynomics Court conviction record for categorizing the growth level six months into the future is:

  • 18 – Guilty (Win)
  • 11 – Not Guilty (Loss)
  • Conviction Rate = 62 percent

NOTE: A random guess would yield the correct result only 33 percent of the time, so the leading indicators are definitely worth noting.


Leading Indicators from October 2014

Charges Filed: “The Leading Indicators hereby charge that April 2015 shall be a POSITIVE month, as indicated by a positive annualized growth rate at or faster than the historical average of 3.3 percent.”

Exhibit A – Industrial Production | NEUTRAL

In the six months leading up to October 2014, Industrial Production rose at an annualized rate of about 3.26 percent. This is consistent with growth that is positive but below historically average rates over the next six months or so.

Easy Description: Industrial production (manufacturing, mining and utilities) is an excellent leading indicator for the broader economy.

Easynomics Rating Methodology: I will calculate the change in the Industrial Production Index over the six months leading up to the month the “charges” are being filed. I will convert that change into an annualized rate. If the annualized rate is less than zero, I will issue a “negative” rating – 3.3 percent or higher will be “positive” – anything in between will be “neutral.”

NOTE: I thought I would use Residential Investment here in Exhibit A but then realized that I’d have to wait until the end of each quarter before being able to use it! (silly me)

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Industrial Production – Easy Trends (thru November 2014)

Let’s talk about industrial production, its importance and the current trends. I’m continuing a feature called “Easy Trends” – a place where I’ll analyze the recent trend for an indicator and discuss whether it is currently going up, down or neither. You can read the basics of my methodology on the FAQ page.

NOTE: You may be reading an outdated analysis. Please visit my latest industrial production trend analysis for more info.

Quick ‘n Easy

Industrial Production (IP) measures how much is being produced by factories, mines and utilities. The changes in IP track very closely with changes in the overall economy.

First, a nice summary of what Industrial Production (IP) is from Econoday:

The index of industrial production shows how much factories, mines and utilities are producing. The manufacturing sector accounts for less than 20 percent of the economy, but most of its cyclical variation. Consequently, this report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.

Easy Translation: The first sentence is probably enough for an understanding – what’s being produced at factories, mines and utilities. The second sentence is a key detail though. Because it relates to manufacturing, and manufacturing is only about 20 percent of our economy, at first glance one might consider this indicator not important. But the changes in the manufacturing sector track the changes in the economy extremely well. In other words, the cycles of the two are well matched, making IP incredibly important to track.

Here’s a ten-year chart of the Industrial Production Index from the Federal Reserve Bank of St. Louis (a level of “100” represents the level in 2007):

Industrial Production Index - November 2014 - FRED

Source: StLouisFed.org

Industrial Production Trends and Projections

Below, I will discuss whether industrial production is currently in a trend, when the last confirmed trend was and what that says about projecting the next data point to be released. I generally start my analysis from 3 years ago. continue reading…

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