Economic Indicator Roundup – Citigroup Economic Surprise Index First One to Turn Positive (Nov 14, 2011)

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 …

This is a dashboard of economic indicators that I most regularly follow.  For each, 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 each indicator, I will denote in its section how I decide which rating to give it.

• 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.

 

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Indicator: USA Today / IHS Global Insight Economic Outlook Index   |   NEUTRAL
Easy Intro: Click here   |   Link to Source: Click here   |   Latest Date This Info Represents: October 2011

Quick ‘n Easy A combination of indicators that predict the growth rate of the economy for the next several months suggests that the U.S. economy will grow at a very slow pace through March 2012.  But at least it’s slow growth instead of a shrinkage.

Easy Description: Forecast of the 6-month annualized Real GDP growth rate for the next several months.  Based on an index of 11 leading indicators, each of which generally predicts future changes in economic growth.

Latest Reading: Forecast for November is 1.8%, and each month’s forecast is slightly lower from there, eventually reaching a paltry March 2012 forecast of 1.1%

Implications: These numbers continue to convey the risks ahead – growth should be very slow, and that means a recession is much more of a possibility, especially if there is a shock to the financial system (like a disorderly default on loan obligations for European governments.)  These growth rates will almost certainly result in an increase in unemployment rates.  Also, some of this forecast depends upon interest rate spreads (the difference in interest rates on short-term bonds versus long-term bonds, for example).  Those kinds of spreads have been artificially affected by the Federal Reserve’s interventions that are intended to keep interest rates low.  Their usefulness as tools for forecasting economic growth are lower as a result.  What I’m saying is that this forecast may be slightly too optimistic – it shouldn’t surprise anyone if we end up in a recession six months from now, despite what this forecast says.

Easynomics Rating Methodology: For this index, if the average growth rate of the forecast months is 3 percent or higher, I will rate that “positive” – between 0 and 3 percent is “neutral” – below zero will be “negative.”

 

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Indicator: Bloomberg Financial Conditions Index   |   NEGATIVE
Easy Intro: Click here   |   Link to Source: Click here   |   Latest Date This Info Represents: Nov 11, 2011

Quick ‘n Easy Levels of stress in the financial markets were key to the most recent crisis in 2008.  Stress started picking up again in August, which is reflected in lower values of the Bloomberg Financial Conditions Index.  Just as they were approaching dangerous levels in early October, they started improving in conjunction with a strong market rally based on hopes that Europe could solve its financial problems soon.  Recent steps appear to have moved Europe closer to a long-term solution, so stress has declined again.  But make no mistake, these levels still signify elevated stress in the financial markets.

Easy Description: Monitors the level of stress in the U.S. financial markets.  Zero is normal, above zero is good and below zero is bad.

Latest Reading:  minus (-) 1.07   (versus a reading of minus (-) 1.01 last week)

Implications: This index keeps hovering around or below the minus (-) 1.00 mark.  In fact, since early August when it dropped down precipitously below that mark, the minus (-) 1.00 level has almost acted like a “resistance” level that technical analysts often assign to stock prices.  After closing just worse than minus (-) 2.00 on Oct 3, the index has soared up to a respectable range, particularly once some more concrete progress was made on a European solution to the financial crisis.  Are we out of the woods?  Probably not.  This kind of up and down movement after a big drop happened back in 2008, too.  We are not yet at a healthy level, but things are not on the edge of disaster as they were at the beginning of October.

Easynomics Rating Methodology: For this index, I will rate anything between 0.50 and minus (-) 0.50 as “neutral” – anything above or below that will be rated “positive” or “negative” respectively.

 

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Indicator: Daily Consumer Leading Indicators   |   NEGATIVE
Easy Intro: Click here   |   Link to Source: Click here   |   Latest Date This Info Represents: Nov 8, 2011

Quick ‘n Easy Consumer spending makes up about 70% of our economy, so an indication of what this spending looks like down the road is key in predicting growth rates.  The level of interest from consumers in making discretionary (non-essential) purchases in the near term, as captured by the Consumer Metrics Institute on November 8, was about 16% below a fairly normal level seen in the year 2005.

Easy Description: Very unique indicator that captures the level of consumer  interest in purchasing discretionary (non-essential) items.  It measures activities that occur well in advance of the purchase, so that makes it a true leading indicator.  The indicator that I choose to focus on is called the “Absolute Demand Index.”  It tracks where demand is compared to levels in 2005, a fairly normal level.  So, if the Absolute Demand Index level is 90, it means the level of consumer interest in purchasing discretionary items is 90% of what it was in 2005.  The index is expressed in a daily form (see chart to right) and a monthly form (see chart below.)

Latest Reading: Absolute Demand Index daily reading is approximately 84 for November 8, which means preparations for consumer discretionary purchases is 16% below the levels back in 2005.

This index began surging around May or June from down around 78 but is now well off its late October peak.

Implications: It looks as though the daily numbers are starting to drop, and rapidly at that.  The daily index was at 96 on Oct 26 or so.  The author of the index has offered that it is the drop in consumer discretionary income (the amount of money consumers have left over to spend on whatever they want after paying for mandatory things like housing, food, medical expenses, etc.).  I’ll be looking to this index to confirm an impending slowdown that we’ve seen from other leading indicators.

Easynomics Rating Methodology: For this index, if the daily Absolute Demand Index is 98 or higher, I will rate that “positive” – between 90 and 98 will be “neutral” – below 90 will be “negative.”

 

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Indicator: ADS Business Conditions Index   |   NEUTRAL
Easy Intro: Click here   |   Link to Source: Click Here   |   Latest Date This Info Represents: Nov 5, 2011

Quick ‘n Easy A combination of several key indicators of business conditions suggests, with low confidence, that conditions have been slightly below average from mid-August thru early November.  The most recent period for which the index is highly confident is around September 9, when conditions were clearly below average (-0.252).

Easy Description: Combines several indicators together to describe current business conditions.  A value above zero means that conditions are better than average, but below zero means worse than average.

Latest Reading: minus (-) 0.198 for November 5, but this only includes the weekly unemployment figures and one other indicator.  This level is slight improvement over the revised number for a week ago (-0.224).  Conditions look like they were flattening out at a below-average level as we approached the latter portion of the 3rd quarter.  The line now extends into a good portion of the fourth quarter, implying that conditions in that quarter may have started off below average as well.

The index value corresponding to September 9 is the most recent one with a very high confidence level (see below about varying degrees of confidence on the chart).  According to the ADS Business Conditions Index, we can confidently say that on that date, business conditions were well below average (-0.252).

Implications: The third quarter of 2011 started with slightly above average business conditions, but that didn’t last long.  Things turned sour for most of the second half of the quarter.  It is likely that conditions remained below average through the second half of the quarter and into the fourth quarter without much improvement.

Additional Info: This index provides confident readings about the past, when all of the indicators have been collected (everything to the left of the left-most vertical line).  The readings in between the two vertical lines are somewhat less confident because they include some, but not all, of the indicators.  And the latest reading (the one mentioned above) always falls to the right of the right-most vertical line and includes only a couple of indicators.

Easynomics Rating Methodology: For this index, I will rate anything between 0.25 and minus 0.25 as “neutral” – anything above or below that will be rated “positive” or “negative” respectively.

 

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Indicator: Employment Trends Index   |   NEUTRAL
Easy Intro: Click here   |   Link to Source: Click Here   |   Latest Date This Info Represents: October 2011

Quick ‘n Easy A combination of indicators related to the jobs market through October 2011 suggested that we will continue to see weak job growth for the foreseeable future but, fortunately, not a decline.  The index has been growing, but generally weak outlook for the economy in general is what keeps the experts on this index from feeling comfortable expressing any optimism.

Easy Description: Combines several indicators together to provide an outlook for employment growth.

Latest Reading: 101.92 for October 2011 (up 5% from one year ago) – September reading was revised to 101.20  (previously 100.95)

Implications: Consistent with weak job growth, but not a decline.  According to an expert on the index, “The increase in the Employment Trends Index in October, and the upward revisions for September and August, signal a slightly more optimistic outlook for jobs. However, given the deterioration in the confidence of consumers, businesses and investors in recent months, we think that the economy is simply not strong enough to deliver more than 125,000 jobs a month.”

Easynomics Rating Methodology: For this index, I will base my rating largely upon what the index expert says.  If the indication is for job growth of any kind, I will rate it either “positive” or “neutral” depending upon the level of growth.  If jobs are expected to decline, I will issue a “negative” rating.

 

 

 

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Indicator: Citigroup Economic Surprise Index US   |   POSITIVE
Easy Intro: Click here   |   Link to Source: Click Here   |   Latest Date This Info Represents: Nov 11, 2011

Quick ‘n Easy An index that measures whether reports on economic data are generally coming in above, at or below expectations suggests that we are getting reports that are better than expectations, enough to warrant a “positive” rating.  This does not mean the reports are good – just better than expectations.

Easy Description: Daily measure of whether, on balance, U.S. economic reports have been better than (positive values), worse than (negative values) or same as (zero) what economists have expected.  For the importance of this, see my post about expectations versus actual results.

Latest Reading: +34.30 on Nov 11, 2011

Implications: This index has been steadily increasing since early June and recently broke above zero.  Read my post about what that may or may not mean for the S&P 500 index going forward.  The latest reading is the best we’ve had since April 7.  The index has now pulled away from the zero level, so we’re getting economic reports that are generally beating expectations.

This index has improved over the last several months considerably.  But remember that economic reports aren’t necessarily leading indicators, so where we are headed could be somewhere better (or worse).  I don’t take much heart in this indicator’s improvement because it is probably more of a lagging indicator, and we’ve already seen where the leading indicators are headed.

Easynomics Rating Methodology: I will give this indicator a rating as follows: 100 to 34 is “positive”; 33 to -33 is “neutral”; -100 to -34 is “negative.”

 

 

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Indicator: Chicago Fed National Activity Index   |   NEUTRAL
Easy Intro: None yet   |   Link to Source: Click Here   |   Latest Date This Info Represents: September 2011

Quick ‘n Easy An index combining 85 indicators into one number suggests that the economy was growing at a slower-than-historical-average rate in September 2011 but not slow enough to be considered in recession.

Easy Description: The Federal Reserve Bank of Chicago combines 85 different indicators into one number to give a sense of whether the overall U.S. economy is growing (numbers above zero) or shrinking (numbers below zero).  If you average the last three months’ index values, you get the CFNAI-MA3 (“moving average 3 months”).  According to the Chicago Fed:

When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.

Latest Reading: The more reliable moving average of the last three months (CFNAI-MA3) for September 2011 was minus (-) 0.21, which was a little better than the previous month’s reading of minus (-) 0.28.  The single month CFNAI reading for September 2011 was minus (-) 0.22, which is significantly better than the -0.59 reading for the previous month.  See chart on right from Doug Short.

Implications: In September, economic activity was below the historical average.  But it was not slow enough to suggest that a recession had begun.  All four major categories of the index improved in September versus August, but three of the four are just barely above zero (above average) and the other (“consumption and housing”) is far below zero.  In other words, things improved but are not good.

Keep in mind that this index reports significantly later than other ones, likely because it takes a while for all 85 of its required indicators to be updated!  Still, I like its comprehensive look at the economy and its fairly reliable prediction of upcoming recessions.

Easynomics Rating Methodology: I will give this indicator a rating based on the CFNAI-MA3 as follows: +0.35 or higher is “positive”; between +0.35 and -0.35 is “neutral”; -0.35 or worse is “negative.”

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Indicator: Easynomics Real Estate Price Stability Index (EREPSI)   |   NEGATIVE
Easy Intro: Click Here   |   Latest Date This Info Represents: September 2011 (October 2011 is only estimated)

Quick ‘n Easy An index designed to look at the stability of home prices indicates that, thru September 2011, there is room for another 20 percent drop in home prices before reaching a stable point.  Prospects for October 2011 look about the same based on estimates only.

Easy Description: This index is an average of three indicators that help ascertain whether home prices are above or below historically normal levels: 1) new homes inventory months of supply, 2) existing homes inventory months of supply and 3) price-to-rent ratio.  For more info on what these mean, click on the “Easy Intro” above.

Latest Reading: Thru September 2011, the EREPSI is at minus (-) 20.0 percent.  This is based on actual values for the “months of supply” categories but assumes the same price-to-rent ratio as August since the September data is not yet posted on Calculated Risk.  The estimated October 2011 reading is only barely better than that at minus (-) 19.44 percent.

Implications: The August reading for the EREPSI represented a huge jump from the previous month.  September most likely represents continued improvement, while October is only an estimate but still a bit better.  Things look better for home price stability since July.

Easynomics Rating Methodology: In the housing market, if things get too far “out of whack” with respect to price-to-rent ratio and inventory, it doesn’t matter which direction … it’s a negative.  We don’t want a bubble or an overly pessimistic crash.  Therefore, I will give this indicator a rating as follows, based on the most recent month with actual “months of supply” data to use in calculations: Within 7.5 percent of zero in either direction is “positive”; within 15 percent of zero in either direction (but not closer than 7.5 percent) is “neutral”; farther than 15 percent from zero in either direction is “negative.”

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