Economic Indicator Roundup: Picking Up Steam and Almost to Positive (Jan 23, 2012)

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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: December 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 December 2011 and January 2012 is 2.4% and 2.5% respectively, and each month’s forecast is slightly lower from there, eventually reaching a May 2012 forecast of 1.8%

Implications: There has been some improvement in these numbers from last month.  However, these numbers continue to convey the risks ahead – growth should slow compared to historical averages, which removes some of the cushion that would protect us against a shock to the system (like what’s happening in Europe.)  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 shock 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   |   NEUTRAL
Easy Intro: Click here   |   Link to Source: Click here   |   Latest Date This Info Represents: Jan 20, 2012

Quick ‘n Easy Levels of stress in the financial markets were key to the most recent crisis in 2008.  After this index hit a low point (which would be high stress) on October 3, 2011, it has seen some ups and downs before steadily improving since the new year began.  It has now crossed the threshold above which I classify as “neutral” – hinting that levels of stress in the financial markets are not currently anywhere near crisis levels.

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 (-) 0.42   (versus a reading of minus (-) 0.81 last week)

Implications: The index soared last week enough to warrant a change of rating.  For a while, it was looking like the patterns in this index resembled what happened leading up the crisis in 2008, but the levels of stress never reached anywhere near those disastrous ones.  Instead, we have seen continued talks in Europe about making sure that Greece defaults on its loans in an orderly way, eliminating some concerns that there would be a financial crisis that could spread across the world.  Whether the “markets” have it wrong is a question some would debate, but there is no question that perceived levels of risk in the financial markets has improved considerably this month.

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 (Consumer Metrics Institute)  |   NEUTRAL
Easy Intro: Click here   |   Link to Source: Click here   |   Latest Date This Info Represents: Jan 18, 2012

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 January 18, was about 8% 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 92 for January 18, which means preparations for consumer discretionary purchases is 8% below the levels back in 2005.

Implications: While the new year initially brought a slow, steady downward sloping trend, we’ve seen a bounce back up the last several days.  If you discount a strange scoop down and back up, you could argue the slow downtrend started a couple of days before Christmas.  Imagine connecting a line from the tip of the “mountain” created around December 23 to the latest data point, and you’d have a slow decline that touches a fair number of the data points.  Perhaps this is an indication that the holidays were the only reason people were spending.  In actuality, their lack of discretionary income (money left over after spending on necessary items) is probably going to be a major drag on overall consumer spending for a long time.

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   |   POSITIVE
Easy Intro: Click here   |   Link to Source: Click Here   |   Latest Date This Info Represents: Jan 14, 2012

Quick ‘n Easy A combination of several key indicators of business conditions suggests, with low confidence, that current conditions are slightly above average.  It suggests that, except for a brief dip in the middle of the fourth quarter in 2001, the levels have been mostly above average since early October.  The most recent date for which all the readings leading up to it were highly confident is around Aug 30, when conditions were slightly below average (-0.141).

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: +0.165 for January 14, but this only includes the weekly unemployment figures and one other indicator.  This level is slightly better than the revised number for a week ago (+0.129).  Conditions look like they hit a low point in the middle of the 4th quarter (around Nov 18) but have improved since then.  Last week’s data has changed things such that it now appears this index has mostly been above average since the beginning of the fourth quarter except for a brief dip in mid-November.

The index value corresponding to August 30 is the most recent one for which all the readings leading up to it were highly confident (see “Additional Info” 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 slightly below average (-0.141).

Implications: The fourth quarter of 2011 started with slightly above average business conditions, but that didn’t last long.  Things turned sour in mid-November, hitting a low point around Nov 18.  Since then, the index has risen steadily to reach its current slightly-above-average position.

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 zero and minus 1.00 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: December 2011

Quick ‘n Easy A combination of indicators related to the jobs market through December 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 major optimism.

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

Latest Reading: 104.32 for December 2011 (up 4.7% from one year ago) – November reading was revised down to 103.64 (previously 103.70)

Implications: The reading is consistent with improving job growth for the next several months but with one caveat.  According to an expert on the index, “The Employment Trends Index has been signaling this growth for three straight months now. However, last Friday’s employment data — with a reported gain of 200,000 jobs in December — likely overstates the trend. We don’t expect overall economic activity to grow fast enough to sustain such rapid job gains throughout the first half of 2012.”  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 expert is not expressing optimism for a sustained rise, and 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: Jan 20, 2012

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 considerably better than expectations.  This does not mean the reports are great – 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: +71.20 on Jan 20, 2012 (versus +69.30 on January 16)

Implications: The index was slowly drifting downward after hitting a high on Dec 2 – then rocketed up on January 5-6 on surprisingly positive employment data.  It’s a bit unusual to see this kind of spike after the index hits the 80 level and begins to turn down.  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.  It has dropped again, so perhaps the January 5-6 data points were only temporary.  But again, it has not gone below the mid-60′s level.  Time will tell.

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: November 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 November 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 November 2011 was minus (-) 0.24, which unchanged from the previous month’s revised reading of minus (-) 0.24.  The single month CFNAI reading for November 2011 was minus (-) 0.37, which is worse than the revised minus (-) 0.11 reading for the previous month.  July was the only recent month with a positive reading.

Implications: In November, economic activity was probably below the historical average.  But it was not slow enough to suggest that a recession had begun.  The “production-related indicators” turned negative this time around.  The “sales, orders and inventories” indicators stayed neutral.  The “consumption and housing” indicators stayed negative.  On the plus side, the “employment-related indicators” went from neutral to positive.  That means that, of the four broad categories of indicators in November, there was 1 positive, 1 neutral and 2 negative.  Only 34 of the 85 total indicators were positive in November.

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 -0.70 is “neutral”; -0.70 or worse is “negative.”

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Indicator: Easynomics Real Estate Price Stability Index (EREPSI)   |   NEUTRAL
Easy Intro: Click Here   |   Latest Date This Info Represents: November 2011 (December is more heavily estimated)

Quick ‘n Easy An index designed to look at the stability of home prices indicates that, thru November 2011, there is room for another 10.8 percent drop in home prices before reaching a stable point.  Prospects for December 2011 look even 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 November 2011, the EREPSI is at minus (-) 10.79 percent.  This is based on actual values for the “months of supply” components but an estimated value for the Case-Shiller HPI that assumes its trend will continue.  December relies on estimates for both the Case-Shiller HPI and the new homes inventory months of supply, but it does check in at an even better minus (-) 3.94 percent.

Implications: We’ve seen strong improvement in the index since July.  My somewhat arbitrary decision is to call this index “neutral” if it’s within 15 percent of a the stable point.  Prospects for some stability in home prices look better.

The estimated level for December 2011 is within the “positive” category right now, as it would be within 7.5 percent of the equilibrium point!  Based on the parameters that this index tracks, there is hope that real estate prices may not move down much farther from here.

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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