Economic Indicators Roundup (November 19, 2012)
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 …)
|Indicator (Click for details – only works if full article is open)||Current Rating (change)|
|ADS Business Conditions Index||Neutral|
|Bloomberg Financial Conditions Index||Positive (upgrade)|
|Daily Consumer Leading Indicators||Negative|
|Citigroup Economic Surprise Index||Positive|
|Employment Trends Index||Neutral|
|Chicago Fed National Activity Index||Neutral|
|Easynomics Real Estate Price Stability Index||Positive|
|Easy Trends Dashboard||+0.95 = Generally good direction but with low confidence|
NOTE: You may be reading an outdated analysis. Please visit my latest economic indicators roundup.
Quick ‘n Easy
A combination of several key indicators of business conditions suggests, with high confidence, that at the end of August 2012 (most recent date for which there is data for all components of the index), conditions were well below average (-0.722). As of about a week and a half ago, it suggested, with low confidence, that current conditions were well below average (-0.721), historically speaking. The index suggests that economic activity hovered at or slightly below average for most of the second quarter before plunging near the middle of the third quarter though not to recessionary levels just yet.
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.
November 10, 2012: Negative (-) 0.721 (includes weekly unemployment figures and maybe one other indicator)
One week prior: Negative (-) 0.705
One month prior: Negative (-) 0.607
One quarter prior: Negative (-) 0.630
The most recent date for which there is data for all components of the index is end of August 2012, when conditions were well below average (-0.722).
Implications: The index plunged from early July to mid-August and has stayed well below average since then. Preliminary data made it look like conditions had improved considerably, but as more data began to come in, the assessment quickly worsened. That’s why it’s important not to put too much stock into data to the right of the first vertical line, and much less in the second line.
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.
Economic Indicator: Bloomberg Financial Conditions Index | POSITIVE (upgrade)
Easy Intro to Bloomberg Financial Conditions Index | Link to Source | Latest Date This Info Represents: November 16, 2012
Quick ‘n Easy
An index of financial stress has been hovering around the threshold between “neutral” and “positive” the last few weeks. Its latest level is “positive.” It is signaling that financial stress is probably so low that it is helping the economy right now.
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: Positive (+) 0.53 (versus a reading of +0.42 the week before)
Implications: Last week, the index moved back up into “positive” territory. The ups and downs of the index lately may have to do with the looming fiscal challenges facing Congress (i.e., “the fiscal cliff”). Bottom line: Right now, this index is signaling that financial stress is probably so low that it’s helping the economy.
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.
Economic Indicator: Daily Consumer Leading Indicators (Consumer Metrics Institute) | NEGATIVE
Easy Intro to Daily Consumer Leading Indicators | Link to Source | Latest Date This Info Represents: November 17, 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 November 17, was about 22.5% 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 77.5 for November 17, which means preparations for consumer discretionary purchases are about 22.5% lower than the fairly normal levels seen back in 2005.
Implications: We have seen a dramatic plunge since about October 24, which the Consumer Metrics Institute does not attribute solely to Hurricane Sandy’s effects. This is extremely concerning for final GDP numbers for the 4th quarter, as these have generally been well correlated to the consumer spending portion of GDP.
We haven’t seen a significant improvement in areas that would suggest a sustainable consumer recovery, namely a surge in income. At this point, I anticipate that things will remain quite dreary for consumers in the coming months.
The consumer needs to have money to spend on discretionary items. That money generally comes from jobs, and job growth is in a positive trend though not as much as we’d like. Watch for those statistics on disposable income levels to really get a feel for whether consumers have money to spend. The trend for disposable income had been clearly higher since November 2011, with eight consecutive monthly increases, but August had a precipitous drop, then September was essentially flat. That trend didn’t result in a significant amount of consumer spending because consumers are still busy unwinding their unusually large debt levels. Once that gets taken care of, their spending will be more in line with their incomes.
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
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 good or bad – just well above expectations. After an interim low on July 19, the index moved up into “positive” territory, where it stands today.
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. Also, check out my article on the relationship between the Citigroup Economic Surprise Index turning positive and the effects on the stock market.
Latest Reading (Approximate): Positive (+) 52 on Nov 16, 2012 (versus +60 last week) – NOTE: I no longer have free access to actual index values, so I am forced to approximate from the chart image.
Implications: The index has faded a bit the last few weeks, but there was a clear move upward since a recent low of negative (-) 65.3 on July 19. After a brief turn down, a few weeks ago the index surged up into “positive” territory. Thus, reports are significantly better than expectations.
Keep in mind what is basically happening, as it is usually a cycle. Expectations rise as a result of improving data, and then it becomes more likely that data will disappoint. It doesn’t actually mean the data get worse, only that they disappoint versus expectations. The reverse then happens in order to complete the cycle. We hope that the downturns don’t go as deep as the upturns go high.
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.”
Quick ‘n Easy
A combination of indicators related to the jobs market through October 2012 suggested that the coming months will probably show continued growth in jobs at about a level that is consistent with keeping unemployment steady, not really enough to improve things.
Easy Description: Combines several indicators together to provide an outlook for employment growth.
Latest Reading: 108.16 for October 2012 (up 4.6% from one year ago) – September 2012 reading was revised down to 107.63
Implications: The index has generally been flat since February. According to an expert on the index, “This is still a weak signal. And given the recent sluggishness of economic activity, employment growth is poised to remain slow in the coming months as well.”
This is consistent with my analysis of the October Employment Report and how the trend of sluggish growth continues. Those comments suggest continued growth in jobs, but it sounds like the growth rate of the overall economy won’t be able to make a sizable dent in the unemployment situation.
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.
Economic Indicator: Chicago Fed National Activity Index 3-Month Moving Average | NEUTRAL
Easy Intro: None yet | Link to Source | Latest Date This Info Represents: September 2012
Quick ‘n Easy
An index combining 85 indicators into one number suggests that, over a three-month period, the economy was growing below a historically average rate in September 2012. Although this isn’t good news, it is still probably growth rather than shrinkage and essentially rules out a recession as of that date.
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 faster than its historical trend (numbers above zero) or slower (numbers below zero). It’s not as simple when you’re trying to determine whether the economy is actually growing (expansion) or shrinking (recession). 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 2012 was negative (-) 0.37, which was slightly better than the previous month’s revised reading of negative (-) 0.53. The single month CFNAI reading for September 2012 was zero, which was an enormous surge from the revised negative (-) 1.17 reading for the previous month.
Implications: In September specifically, economic activity was virtually the same as historical averages (zero for the single month reading), and the more reliable way of looking at things shows an economy that was growing but below an average rate (-0.37). None of that sounds great, but it does signal some growth rather than a shrinking economy. Thus, we can essentially rule out that a recession had begun by September 2012. That’s all I want you to focus on because month-to-month variations can often mean little. But if you want a deeper dive into the data, read on.
The single-month reading for September was encouraging. Only one of the four major categories really changed much at all in September. The “Production and Income” related indicators skyrocketed back from way below average to very near average.
None of the four broad components were at least 0.20 units above or below average this time around. I like to see how many components were within 0.10 units of zero (average), between 0.10 and 0.20 units (close to average) and greater than 0.20 units away from zero (well above/below average). In summary, of the four broad categories of indicators in September, there were 0 well above average, 4 close to average and 0 well below average. Looking at the range of indicators, 61 of the 85 total indicators were better in September than they were the previous month. The “diffusion index” is a measure of how widespread the gains (or losses if it’s negative) were across the 85 indicators, and it is a three-month moving average. The 3-month diffusion index for September was -0.18, meaning that a building consensus of indicators worsened over the last three months. The last time we had a positive diffusion index was in April.
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.”
Economic Indicator: Easynomics Real Estate Price Stability Index (EREPSI) | POSITIVE
Easy Intro to Easynomics Real Estate Price Stability Index | Latest Date This Info Represents: September 2012 (contains estimated portion)
Quick ‘n Easy
An index designed to look at the stability of home prices indicates that, thru September 2012, we are slightly below equilibrium – home prices are about 5.70 percent below a theoretical stable point. If trends in months of supply and price/rent ratio continue, the index would rise higher, indicating that a “reverse bubble” may form by about February 2013.
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 2012, the EREPSI is at positive (+) 5.70 percent, which means prices are 5.70 percent lower than the stable point. The September reading is based on actual values for the “months of supply” components but uses an estimate for the Case-Shiller HPI. For recent trends, you can read my latest analysis on new residential homes inventory months of supply or existing homes sales and inventory months of supply.
Implications: After a strong move up starting in July 2011, the index mostly plateaued from December 2011 through July 2012 before recently turning upwards again. If trends in supply and inflation continue, it looks like the index will slowly rise over the next several months forming a “reverse bubble” where prices of homes would be artificially low and should be pressured to rise. The EREPSI value would cross into “neutral” territory by November 2012, where home prices would be quite a bit lower than where they “should” be. And we would see a “negative” rating by around February 2013, where a “reverse bubble” would have formed.
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.”
Updated: November 16, 2012
Consensus Score: +0.95 (vs +1.35 provided last week)
Interpretation: Generally in good direction with multiple off-trend readings or unconfirmed statuses that weaken confidence in making that statement
|Indicator||Trend Score* (change from last week)|
|ECRI Index||+0.5 (down 1)|
|Existing Homes Sales and Inventory Months of Supply||+3|
|Industrial Production||-1 (down 2)|
|New Residential Homes Sales and Inventory Months of Supply||+3|
|Personal Income Levels||-1|
|Unemployment Claims||-1 (down 1)|
*Trend Score Definitions:
- Confirmed trend with no recent readings that are off trend: +3 (good direction) or -3 (bad direction)
- For each consecutive recent reading that was off trend in the opposite direction, I move the score by one point in the direction of zero
- Unconfirmed trend: +1 (good direction) or -1 (bad direction)
- No trend that has at least 50 percent confidence: 0
This week, the Bloomberg Financial Conditions Index (financial stress) moved back up into “positive” territory. It’s hovering around the threshold, so we may see some ups and downs in its rating.
We’re still seeing the Easy Trends Dashboard pointing in a generally positive direction, but confidence is low due to off-trend readings and unconfirmed trends. We have lower scores in three indicators there, all of which are considered pretty good leading indicators.
We currently have 3 positive, 3 neutral and 1 negative economic indicators. Using a scale of positive=3, neutral=2 and negative=1, this yields an average rating of 2.29 out of 3.00 (versus 2.14 last week), which falls in the middle third of the possible range. In other words, my set of economic indicators combine into a “neutral” rating. The consensus view of the above indicators is that economic conditions are consistent with positive growth but below the historical average rate. Trends are generally headed in a good direction, although confidence is low in making that statement.
Disclaimer: My dashboard isn’t really a group of similar indicators, so we can’t say that it represents any one particular thing. For example, it’s not geared strictly toward predicting the future of the economy like a leading indicators dashboard. It’s not like a coincident indicator dashboard that focuses on how things are right this second. It’s just a bunch of things I like to follow, interpreted in a way to be consistent with either economic growth or shrinkage. 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.