Economic Indicator Roundup
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.
|Indicator (Click for details – only works if full article is open)||Current Rating (change)|
|USA Today / IHS Global Insight Economic Outlook Index||Neutral|
|Bloomberg Financial Conditions Index||Neutral (Upgrade)
|Daily Consumer Leading Indicators||Neutral|
|ADS Business Conditions Index||Positive|
|Employment Trends Index||Neutral|
|Citigroup Economic Surprise Index||Positive|
|Chicago Fed National Activity Index||Neutral|
|Easynomics Real Estate Price Stability Index||Positive|
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.”
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 generally improving since the new year began. It has now risen high enough to be well into what I call a “neutral” level. At this moment, it would seem that financial stress is not a drag on economic prospects.
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 (-) 0.17 (versus a reading of minus (-) 0.52 last week)
Implications: After a brief dip two weeks ago back into “negative” territory, the index soared well up into “neutral” last week. 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 the perceived level of risk in the financial markets has improved considerably in the last several weeks.
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.
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 February 3, 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 February 3, which means preparations for consumer discretionary purchases is 8% lower than the fairly normal levels seen back in 2005.
Implications: After hitting a high point of around 96 about a week ago, the daily index has been dropping steadily to reach 92. For the most part, the daily index has been in the “neutral” range for the last six weeks or so. We will have to see which way it breaks when it eventually heads out of this range. If the economy does “muddle through” without going into recession, that would probably be because this index stays in this “neutral” range for several months.
The recent positives in employment reports definitely helps things. The consumer needs to have money to spend on discretionary items. That money generally comes from jobs. And it looks like we’re seeing more jobs and hiring for now. But watch for those statistics on disposable income levels to really get a feel for whether consumers have money to spend. We had a nice jump in December 2011. Let’s see how things look for the next several months.
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.”
Quick ‘n Easy
A combination of several key indicators of business conditions suggests, with low confidence, that current conditions are slightly above average, historically speaking. It suggests that, except for a brief dip in the middle of the fourth quarter in 2001, the levels have been mostly at or slightly 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 (-0.152).
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: +0.129 for January 31, but this only includes the weekly unemployment figures and one other indicator. This level is barely worse than the revised number for a week ago (+0.134). Conditions look like they hit a low point in the middle of the 4th quarter (around Nov 18) but have improved considerably since then. It now appears this index has mostly been at or slightly 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 (-0.152).
Implications: Recent data has strengthened this index, indicating that general business conditions are looking very healthy right now. 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 position slightly above the historical average.
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.
Quick ‘n Easy
A combination of indicators related to the jobs market through January 2012 suggested that we should see very nice job growth for the first quarter of 2012, 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: 105.81 for January 2012 (up 5.9% from one year ago) – December 2011 reading was revised up to 105.04 (previously 104.32)
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 improving rapidly for four straight months, suggesting somewhat more robust job growth is likely to continue in this quarter. Beyond that we still remain cautious. We expect sluggish growth in economic activity in the first half of 2012 and therefore we do not foresee the strengthening of the labor market to be sustained in the second quarter 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.
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 significantly better than expectations. This does not necessarily mean the reports are great – just significantly 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: +83.70 on Feb 3, 2012 (versus +63.50 on January 30)
Implications: Some much-better-than-expected news on jobs and other data last week helped this index skyrocket back up after it looked like it might be ready to slip back toward a neutral level.
The index hasn’t really dipped below the mid-60’s level since it reached that level in early December. It’s a bit unusual to see the second spike up after the index hit the 80 level and began to turn down. Now, we’ve seen two spikes back up! 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 will be interesting to see what happens from here.
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.”
Indicator: Chicago Fed National Activity Index 3-Month Moving Average | NEUTRAL
Easy Intro: None yet | Link to Source: Click Here | Latest Date This Info Represents: December 2011
Quick ‘n Easy
An index combining 85 indicators into one number suggests that, over a three-month period, the economy was growing at a rate that was barely slower than the historical average in December 2011. This level essentially rules out a recession as of December 2011.
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 December 2011 was minus (-) 0.08, which was slightly better than the previous month’s revised reading of minus (-) 0.19. The single month CFNAI reading for December 2011 was positive (+) 0.17, which is an incredible improvement from the revised minus (-) 0.46 reading for the previous month.
Implications: In December specifically, economic activity was better than historical averages (+0.17 for the single month reading), but the more reliable way of looking at things shows an economy that was barely below average. But it was not slow enough to suggest that a recession had begun in December. The “production-related indicators” are responsible for most of the turnaround in December’s reading. But the “employment-related indicators” provided a nice bump as well. In summary, of the four broad categories of indicators in December, there was 2 positive, 1 neutral and 1 negative. Good news – 53 of the 85 total indicators were positive in December (versus just 34 last month.)
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: +0.20 or higher is “positive”; between +0.20 and -0.70 is “neutral”; -0.70 or worse is “negative.” (NOTE: I just changed to +0.20 from +0.35 for the highest threshold based on reading the notes from the Chicago Fed. None of my past ratings are affected.)
Indicator: Easynomics Real Estate Price Stability Index (EREPSI) | POSITIVE
Easy Intro: Click Here | Latest Date This Info Represents: December 2011 (contains estimated portion)
Quick ‘n Easy
An index designed to look at the stability of home prices indicates that, thru December 2011, there is room for another 5.7 percent drop in home prices before reaching a stable point. Prospects for January 2012 and beyond 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 December 2011, the EREPSI is at minus (-) 5.71 percent, which means there is room for another 5.71 percent drop in home prices before reaching a stable point. 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. The January estimate relies on estimates for all components right now.
Implications: We’ve seen strong improvement in the index since July. My somewhat arbitrary decision is to call this index “positive” if it’s within 7.5 percent of a the stable point. Prospects for some stability in home prices look, dare I say, extremely good. 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.”
This week’s upgrade of the financial stress indicator leaves us with no indicators in the “negative” column – comforting, to be sure. More importantly, the composite view has a big change this week! We currently have 3 positive, 5 neutral and 0 negative components. Using a scale of positive=3, neutral=2 and negative=1, this would average a rating of 2.375 out of 3 (versus 2.25 last week), which actually falls in the top third of the possible range – ever so slightly, but it’s in there! In other words, my set of indicators now combine into a “positive” rating. I know that may seem strange given that there are more “neutral” than “positive” indicators. But the point here is that the average is in the top third of possible averages. The consensus view of the above indicators is that the economy looks like it is growing at least as fast as the historical average.
NOTE: You may be reading an outdated analysis. Please visit my latest economic indicators roundup.
Disclaimer: My dashboard isn’t really a group of similar indicators, so we can’t say that it represents any particular thing (like exactly where the economy is headed, or where it stands now). I would just guess that if the indicators I most like to follow start trending one way or the other, there is a good chance the economy is going that way, too.