Economic Indicator Roundup – Discretionary Consumer Spending Fizzles (Dec 12, 2011)

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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: November 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 slower-than-average pace through April 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 and December is 2.2%, and each month’s forecast is slightly lower from there, eventually reaching a April 2012 forecast of 1.6%

Implications: There has been some improvement in these numbers from last month.  However, 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: Dec 9, 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.  The index continues to go up and down with developments in the crisis.  It is currently showing considerable stress, but not at the levels of the 2008 financial crisis.

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 (-) 1.01   (versus a reading of minus (-) 1.10 last week)

Implications: It was an unusually uneventful week for this index despite some major headlines coming out of Europe.  It probably means that the results of the week were pretty much as expected.  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 soared up to a respectable range, particularly once some apparent 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.

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: Dec 9, 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 December 2, was about 13% 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 87 for December 9, which means preparations for consumer discretionary purchases is 13% below the levels back in 2005.

This index began surging around May or June from down around 78 but now appears to be making a pronounced downward move.

Implications: The daily numbers temporarily improved starting around Thanksgiving.  The author of the index has offered that the big drop from late October was due to 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.).  Perhaps consumers abandoned that mentality briefly for their early holiday shopping.  The clear move downward since Dec 1 tells me that it was a temporary surge of people buying things early to get good deals.

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: Dec 3, 2011

Quick ‘n Easy A combination of several key indicators of business conditions suggests, with low confidence, that conditions have been very close to average since the end of September.  The most recent date for which the index is highly confident is around August 31, when conditions were clearly below average (-0.296).

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 (-) 0.005 for December 3, but this only includes the weekly unemployment figures and one other indicator.  This level is barely above the revised number for a week ago (-0.026).  Conditions look like they hit a low point as we approached the latter portion of the 3rd quarter (around Sep 6) but began rising from there and into the 4th quarter.  Based on newer economic data, the index says that business conditions have been within 0.15 points of the average since the end of September.

The index value corresponding to August 31 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 (-0.296).

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 improved toward the end of the 3rd quarter and turned slightly positive early in the 4th quarter before dipping down below average again since early November.  Unfortunately, the degree to which the index went above zero has been reduced over the last several releases of this index, meaning that some of the newer indicators have been more negative than the ones released very early on.

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 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 use the very latest reading and 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: November 2011

Quick ‘n Easy A combination of indicators related to the jobs market through November 2011 suggested that we should see an acceleration in job growth for several months, but this will likely be temporary given the expected slowdown in the economy.  The index has been growing, but a generally weak outlook for the economy 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: 103.7 for November 2011 (up 6.4% from one year ago) – October reading was revised down to 102.42  (previously 103.92)

Implications: Consistent with improving job growth for the next several months, but with one caveat.  According to an expert on the index, “The better than expected growth in economic activity in recent months is likely to lead to some acceleration in job growth in the beginning of 2012. However, this improvement may be short lived, in particular as the U.S. economy slows down once again in the coming quarters.”  Translation: The jobs market lags the economy usually, so the recent improvement in the economy will show up over the next several months – but once things slow down, several months later we will see a deterioration in the jobs market, too.  I will keep the rating at “neutral” because the index has not returned anywhere near the previous levels before the recession.

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: Dec 9, 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 much better than expectations.  This does not mean the reports are great – just much 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: +78.00 on Dec 9, 2011 (versus +85.70 on December 2)

Implications: The index sunk back just a bit after skyrocketing last week.  It’s not surprising to see the index starting a slow march back down since going well over 80 recently.  Over the last five years, when it has reached levels well above 60 or so, it has never stayed there longer than a handful of days.

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).

Easynomics Rating Methodology: I will give this indicator a rating as follows: 100 to 34 is “positive”; between 34 and -34 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: October 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 October 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 October 2011 was minus (-) 0.27, which was a little worse than the previous month’s revised reading of minus (-) 0.16.  The single month CFNAI reading for October 2011 was minus (-) 0.13, which is slightly better than the -0.20 reading for the previous month.  Basically, the reason the 3-month moving average worsened is that the reading for July was replaced by the reading for October – that’s the way moving averages work out.  July was the only recent month with a positive reading, so taking it away from the moving average and replacing it with a negative reading moved things down a bit.

Implications: In October, economic activity was probably below the historical average.  But it was not slow enough to suggest that a recession had begun.  Only one of the four major categories of the index improved meaningfully in October versus September, the production-related indicators.  Manufacturing, mining and utilities contributed well in October.

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 and November are estimates)

Quick ‘n Easy An index designed to look at the stability of home prices indicates that, thru September 2011, there is room for another 20.2 percent drop in home prices before reaching a stable point.  Prospects for November 2011 look considerably better, but that assumes that the current trends in months of supply and price/rent continue.

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 (-) 20.18 percent.  This is based on actual values for all components.  The October reading has an estimated price-to-rent ratio, while the November reading is purely based on estimates for all components, assuming recent trends continue.  If the November estimate actual were true, it would be rated as a “neutral” by my rules below.

Implications: We’ve seen strong improvement in the index since July.  Prospects for some stability in home prices look better, but that assumes that trends will continue.

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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