Economic Indicators Roundup (March 25, 2013)
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||Positive|
|Bloomberg Financial Conditions Index||Positive|
|Daily Consumer Leading Indicators||Negative|
|Citigroup Economic Surprise Index||Neutral|
|Employment Trends Index||Neutral|
|Chicago Fed National Activity Index||Neutral (Downgrade)|
|Easynomics Real Estate Price Stability Index||Neutral|
|Easy Trends Dashboard||+2.00 = Clearly in good direction with a few off-trend or unconfirmed readings|
NOTE: You may be reading an outdated analysis.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 December 2012 (most recent date for which there is data for all components of the index), conditions were slightly below average (-0.125). As of about a week and a half ago, it suggested, with low confidence, that current conditions were slightly above average (+0.203), historically speaking. The index suggests that economic activity surged to well-above average levels in the 4th quarter of 2012, at which point conditions declined down to well-below-average levels (preliminary data only) – but this is probably an artifact of the way companies distributed dividends at the end of the year. The preliminary data also suggest that growth returned to above-average levels.
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.
March 16, 2013: Positive (+) 0.203 (includes weekly unemployment figures and maybe one other indicator)
One week prior: Positive (+) 0.223
One month prior: Positive (+) 0.108
One quarter prior: Positive (+) 0.502
The most recent date for which there is data for all components of the index is end of December 2012, when conditions were slightly worse than average (-0.125).
Implications: It looks like a wild roller coaster ride from late November 2012 (peak) to late January 2013 (valley), but it’s most likely a side-effect of the personal income being affected artificially by companies pulling their dividends ahead to give people beneficial tax treatment. In other words, a bunch of income that normally would have been earned in January was actually distributed in December, which just made each month look much better/worse than it should have – but the average was still the same.
After mostly below-average conditions in the 3rd quarter of 2012, we saw a surge in conditions in the 4th quarter to unusually high levels. But that quickly faded, and preliminary data suggest that conditions may have deteriorated down to well-below-average levels before rebounding back all the way above an average growth level. But as more data begin to come in, the assessment may change. That’s why it’s important not to put too much stock into data to the right of the first vertical line, and even less importance on data to the right of 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
Easy Intro to Bloomberg Financial Conditions Index | Link to Source | Latest Date This Info Represents: March 25, 2013 (mid-day)
Quick ‘n Easy
An index of financial stress dropped significantly last week due to concerns in the small country of Cyprus but remained well inside “positive” territory. It is signaling that financial stress is 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 (+) 0.96 (versus a reading of +1.24 last week)
Implications: This measure of financial stress took a pretty big hit last week due to the financial crisis hitting the banks in the small county of Cyprus. Fortunately, there was a resolution of sorts today, and the situation is a bit more stable – but clearly stress increased over the last week. Still, this index is well above the threshold I’d consider for “positive” status. Bottom line: Right now, this index is signaling that financial stress is so low that it is 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: March 23, 2013
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 March 23, was about 17% 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 83 for March 23, which means preparations for consumer discretionary purchases are about 17% lower than the fairly normal levels seen back in 2005.
Implications: It looks like the index has leveled off between 80-85 since Feb 1. The monthly update (left) shows that the absolute level of demand has really been dropping since August 2011, with some ups and downs. A chart reader would probably suggest it’s in something like a downward channel pattern. It is concerning for GDP numbers, as these have generally been well correlated to the consumer spending portion of GDP.
We need to see a significant improvement in areas that would suggest a sustainable consumer recovery, namely a surge in income. We saw an end to an upward trend in income around July 2012. At this point, I still 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. November and December’s figures were a very large step up from the previous months, but January’s plunge proved that those two months were flukes due to the changes in the tax code. The trend for disposable income had been clearly higher since November 2011, with eight consecutive monthly increases, but it’s stagnated since about July/August. That eight-month rising trend didn’t result in a significant amount of consumer spending because consumers were (and 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 better than expectations. This does not necessarily mean the reports are good or bad – just better than expectations. The index has pulled back above zero after a sustained drop that had seen it turn negative briefly, which means it will likely turn “positive” in my rating soon if it continues at this pace.
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 (+) 30 on Mar 22, 2013 (versus +30 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 turned back up after a sustained drop that forced the level down below zero. It now has pulled well above zero again and might hit a “positive” rating soon at the rate it’s going. This means that economic reports are better than expectations, not necessarily good or bad – just better than expectations. I’ll remind you of my post on the relationship between the Citigroup Economic Surprise Index and the S&P 500 (“the market”).
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 February 2013 suggested that the coming months will probably show continued growth in jobs but at a slower rate than what is needed. Clearly, it won’t be enough to put a dent in the unemployment rate.
Easy Description: Combines several indicators together to provide an outlook for employment growth.
Latest Reading: 111.14 for February 2013 (up 3.2% from one year ago) – January 2013 reading was revised up to 109.93
Implications: The index has been moving up for the last several months. According to an expert on the index, “As a result of the large increase in February, and positive revisions to earlier months, the Employment Trends index is signaling an improving employment environment. However, even though the labor market has gained in recent months, the looming sequester is likely to slow the pace of job creation in the near term.”
This is consistent with my analysis of the February 2013 Employment Report and how the trend of sluggish growth continues. Those comments suggest continued growth in jobs, but it sounds like the effects of the mandatory across-the-board government spending cuts (“the sequester”) may hold that growth rate back somewhat.
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 (Downgrade)
Easy Intro: None yet | Link to Source | Latest Date This Info Represents: February 2013
Quick ‘n Easy
An index combining 85 indicators into one number suggests that, over a three-month period, the economy was growing slightly faster than a historically average rate in February 2013. This is obviously very good news, but it remains to be seen how long this will last. It wasn’t quite fast enough growth to make “positive” according to my threshold, which downgrades the indicator back to “neutral.”
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 February 2013 was positive (+) 0.09, which was slightly worse than the previous month’s revised reading of positive (+) 0.28. This downgrades the indicator to “neutral” by my ratings thresholds, although it’s still technically slightly above average. The single month CFNAI reading for February 2013 was positive (+) 0.44, which was significantly better than the previous month’s revised reading of negative (-) 0.49.
Implications: In February specifically, economic activity was well above historical averages (positive (+) 0.44 for the single month reading), and the more reliable way of looking at things shows an economy that was growing above an average rate (+0.09). That’s good news, and we want to see if this can keep up. 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 February was slightly above historical averages, which nicely offsets the below-average level we saw for the single-month reading in January. But the January level was artificially low due to companies paying out dividends at a higher rate before the end of 2012 to help people avoid paying a higher tax rate. It looks like we have reverted back to a more normal level now. I like to see how many components were within 0.10 units of zero (average), between 0.11 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 February, the breakdown looks like this:
- Well Above Average: 1
- Close to Average (positive): 1
- Average (positive or negative): 1
- Close to Average (negative): 1
- Well Below Average: 0
Two of the four components moved from one category level to another (using revised data from last month, not the original reading before revisions):
- Production & Income staged a remarkable comeback from a “well below average” rating to “well above average” rating this time.
- Employment, Unemployment & Hours was upgraded one spot to “close to average (positive)” and a whisker away from the highest rating.
Looking at the range of indicators, 64 of the 85 total indicators were better in February 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 February was +0.14, meaning that a growing consensus of indicators improved over the last three months. This was the highest 3-month diffusion index since March 2012.
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) | NEUTRAL
Easy Intro to Easynomics Real Estate Price Stability Index | Latest Date This Info Represents: January 2013 (contains estimated portion)
Quick ‘n Easy
An index designed to look at the stability of home prices indicates that, thru January 2013, we are well below equilibrium – home prices are about 14.08 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 April 2013. It is only about 0.9 percent away from reaching that right now, but it looks like existing homes months of supply may be switching directions to help avoid that.
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 January 2013, the EREPSI is at positive (+) 14.08 percent, which means prices are 14.08 percent lower than the stable point. The January reading is based on actual values for the “months of supply” components but uses an estimate for 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 turning upwards again. Although it looked like the index was about to form a “reverse bubble” where prices of homes would be artificially low and should be pressured to rise, the existing homes months of supply rose up in the latest report, which means that may hold back the index in the coming months a bit. It would be preferable to see home prices rise a bit, while inventory of new and existing homes rose a bit to normal levels (they’re both way too low right now). That would put things back in equilibrium.
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: March 21, 2013
Consensus Score: +2.00 (vs +2.00 last week)
Interpretation: Clearly in a positive direction with a few off-trend readings or unconfirmed trends
|Indicator||Trend Score* (change from last week)|
|Existing Homes Sales and Inventory Months of Supply||+3|
|New Residential Homes Sales and Inventory Months of Supply||+3|
|Personal Income Levels||0|
*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
The data last week was pretty good, but the comprehensive indicator analysis of the Chicago Fed for February suggested growth was so close to average, that I downgraded that indicator to “neutral” territory. Although we saw the Bloomberg Financial Conditions Index take a big hit, it’s so well above the “positive” threshold, it’s nice to see that it didn’t change the view on economic conditions all that much.
We saw no movement in the Easy Trends Dashboard, and the overall average for the dashboard still clearly points in a positive direction. The ECRI is the only negative component in the Easy Trends Dashboard right now, with only one neutral (personal income levels, which is kind of in a weird place right now due to strange behavior at the end of the year).
We currently have 2 positive, 4 neutral and 1 negative economic indicators. Using a scale of positive=3, neutral=2 and negative=1, this yields an average rating of 2.14 out of 3.00 (versus 2.29 one week ago), 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 with a few off-trend readings or unconfirmed trends here and there.
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.