I look at the high frequency weekly indicators because while they can be very noisy, they provide a good nowcast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available. They are also an excellent way to “mark your beliefs to market.” In general, I go in order of long leading indicators, then short leading indicators, then coincident indicators.
A Note On Methodology
Data is presented in a “just the facts, ma’am” format with a minimum of commentary so that bias is minimized.
Where relevant, I include 12-month highs and lows in the data in parentheses to the right. All data taken from St. Louis FRED unless otherwise linked.
A few items (e.g., Financial Conditions indexes, regional Fed indexes, stock prices, the yield curve) have their own metrics based on long-term studies of their behavior.
Where data is seasonally adjusted, generally it is scored positively if it is within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it is not seasonally adjusted, and there are seasonal issues, waiting for the YoY change to change sign will lag the turning point. Thus I make use of a convention: data is scored neutral if it is less than 1/2 as positive/negative as at its 12-month extreme.
With long leading indicators, which by definition turn at least 12 months before a turning point in the economy as a whole, there is an additional rule: data is automatically negative if, during an expansion, it has not made a new peak in the past year, with the sole exception that it is scored neutral if it is moving in the right direction and is close to making a new high.
For all series where a graph is available, I have provided a link to where the relevant graph can be found.
Recap of monthly reports
July data started out with a blockbuster employment report, emphatically refuting the idea that the U.S. is already in a recession. The ISM manufacturing index decelerated slightly further, but was still positive, and the non-manufacturing index improved.
Factory orders also increased in June, but construction spending decreased.
Long leading indicators
Interest rates and credit spreads
- BAA corporate bond index 5.00%, down -0.10 w/w (1-yr range: 3.13-5.48)
- 10-year Treasury bonds 2.83%, up +0.17 w/w (1.08-3.48)
- Credit spread 2.18%, down -0.27 w/w (1.65-4.31)
(Graph at Moody’s Seasoned Baa Corporate Bond Yield | FRED | St. Louis Fed)
- 10 year minus 2 year: -0.42%, down -0.19 w/w (-0.42 – 1.59) (22 year low)
- 10 year minus 3 month: +0.29%, up +0.02% w/w (-0.99 – 2.04)
- 2 year minus Fed funds: +0.98%, down -0.09% w/w
(Graph at 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity | FRED | St. Louis Fed)
30-Year conventional mortgage rate (from Mortgage News Daily) (graph at link)
- 5.45%, up +0.32% w/w (2.75-6.28)
Corporate bonds are near the top of their 5 year range, so negative.
Similarly, treasury bonds and mortgage rates are also in the vicinity of 5 or even 10 year peaks, so their rating is also negative. I hasten to add that mortgage rates have fallen by over 1% from their recent peak. If they fall much further (below 5%), they would improve to neutral.
The spread between corporate bonds and Treasuries remains positive. The yield curve at the important 2 to 10 year level remains inverted – at the worst level since 2000 – so is negative. Two weeks ago the 3 month-10 year spread tightened into the neutral zone, but turned back positive last week.
Mortgage applications (from the Mortgage Bankers Association)
- Purchase apps up +1% w/w to 210 (208-349) (SA)
- Purchase apps 4 wk avg. down -6 to 214 (SA) (341 high Jan 29, low 214 6/10/22 and this week)
- Purchase apps YoY -16% (NSA)
- Purchase apps YoY 4 wk avg. -18% (NSA)
- Refi apps up +2% w/w (SA)
- Refi apps YoY down -82% (SA) (lowest since 2000)
*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted
Real Estate Loans (from the FRB)
- Up +0.1% w/w
- Up +8.4% YoY (-0.9 – 8.5) (new high)
(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed)
The highest mortgage rates in 12 years have killed both purchase and refinance mortgage applications, the four week averages of which are at 6 and 20 year lows, respectively. We have seen this feed into all of the monthly housing sales and construction reports. Prices for existing homes haven’t quite turned yet, but new home prices may have turned in June.
From 2018 until late in 2020 real estate loans with few brief exceptions stayed positive. Earlier last year they varied between neutral and negative, but for the past several months have been very positive. This is being helped by inflation in house prices; thus the turn in the indicator will be when that cools.
The Federal Reserve has discontinued this weekly series. Data is now only released monthly. June data was released last week:
- Real M1 m/m down -1.7%, YoY Real M1 down -2.6%
- Real M2 m/m down -1.4%, YoY Real M2 down -3.1%
No recession has happened without a YoY real M1 negative, or YoY real M2 below +2.5%. Real M2 fell below that threshold in March. Real M1 also turned negative as of May.
Corporate profits (Q2 actual + estimated S&P 500 earnings from I/B/E/S via FactSet at p. 29)
- Q2 2022 87% actual + 13% estimated up +.37 to 56.82, up 5.2% q/q
FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. The “neutral” band is +/-3%. I also average the previous two quarters together, until at least 100 companies have actually reported. Now that this has happened, Q1 has dropped out of the average. Since Q2 actual + estimated are up over 3%, this counts as a positive.
Credit conditions (from the Chicago Fed) (graph at link)
- Financial Conditions Index up +.01 (less loose) to -0.19 (-0.09 – -0.72)
- Adjusted Index (removing background economic conditions) unchanged (loose) at -0.11 (+0.19 – -0.75)
- Leverage subindex up +0.03 (tighter) to +0.37 (+0.81 – -0.39)
In these indexes, lower = better for the economy. The Chicago Fed’s Adjusted Index’s real break-even point is roughly -0.25. In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. Leverage is at its highest since the Great Recession, obviously very negative.
Short leading indicators
Economic Indicators from the late Jeff Miller’s “Weighing the Week Ahead”
- Miller Score (formerly “C-Score”): down -37 w/w to 172, -1 m/m (125 6/24/22 – 479 on 9/3/21)
- St. Louis Fed Financial Stress Index: up +.1915 to -2.0015 (-2.1930 7/22/22 – -0.0609 12/3/21) (new all-time low one week ago)
- BCIp from Georg Vrba: unchanged at 98.4 iM’s Business Cycle Index (100 is max value, below 25 is recession signal averaging 20 weeks ahead)
The Miller Score is designed to look 52 weeks ahead for whether or not a recession is possible. Any score over 500 means no recession. This number fell below that threshold one year ago this week, so not only is it negative, but we are now crossing into the “recession eligible” time period.
The St. Louis Financial Stress index is one where a negative score is a positive for the economy, and during its limited existence, has risen above zero before a recession by less than one year. Thus the present reading is also a strong positive for the economy.
Trade weighted US$
- Down -0.66 to 121.85 w/w, +8.1% YoY (last week) (broad) (111.02 – 126.47) (Graph at Nominal Broad U.S. Dollar Index
- Up +0.73 to 106.56 w/w, up +14.8% YoY (major currencies) (graph at link) (89.54 -105.11)
In early 2021, both the broad rating and the USD against major currencies turned higher YoY, and so changed to neutral. With both measures now well above +5% YoY, these ratings are negative.
Bloomberg Commodity Index
- Down -3.98 to 117.85 (79.11-135.43)
- Up +24.5% YoY (Best: +52.3% June 4)
(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch)
Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)
- 156.30, down -1.69 w/w (131.43-230.32)
- Down -2.4% YoY (Best +69.0% May 7)
During the Boom last year, commodity prices soared, and total commodities were very positive. Last week, total commodities (which include oil) improved back in the middle of their range, and the decline in industrial metals has put that indicator in the bottom 1/3rd of its 52 week range, so a negative.
Stock prices S&P 500 (from CNBC) (graph at link)
- Up +0.4% to 4145.19
This last high for this index was January 3. As there has not been a new three month high since then, but there have been ongoing new 3 month and even 1 year lows, so this indicator has been a negative. At the same time, the advance in stocks in the last month has been important. Should stocks advance only another 0.6% next week, that would constitute a 3 month high, and switch this indicator to neutral.
Regional Fed New Orders Indexes
(*indicates report this week) (no reports this week)
- Empire State up +0.9 to +6.2
- Philly down -12.4 to -24.8
- Richmond up +10 to -10
- Kansas City up +6 to -2
- Dallas down -1.9 to -9.2
- Month-over-month rolling average: up +1 to -8
The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. These had usually been extremely positive ever since June 2020, but in the last several months have fallen, and precipitously so in the past two months. The indicator having fallen below -5, it turned negative.
Initial jobless claims
- 260,000, up +6,000 w/w
- 4-week average 254,750, up +6,000 w/w
(Graph at St. Louis FRED)
New claims made new all-time lows on a 4 week average in April. Now that this metric had failed to make a new 3 month low, its rating has changed to neutral. It will not turn negative unless and until the 4 week average is higher YoY. The bad news is, on its current trend, that will happen in about 3 months.
Temporary staffing index (from the American Staffing Association) (graph at link)
- Unchanged at 105 w/w
- Up +9.2% YoY
This gradually improved to neutral at the beginning of 2021, and positive since then.
Tax Withholding (from the Dept. of the Treasury)
- $230.3 B for the last 20 reporting days this year vs. $213.7 B one year ago, +$16.6 B or +7.8%
- $228.2 B for the month of July vs. $216.5 B last year, +$11.7 B or +5.4%
YoY comparisons turned positive in the beginning of 2021, and have remained that way – usually very strongly so – almost every week since. These are now normally reliable. The YoY% change fell below 5% several times in the past several months, making it a neutral, but six weeks ago it once again rebounded to positive.
Oil prices and usage (from the E.I.A.)
- Oil down -$10.22 to $88.23 w/w, up +39.8% YoY ($62.32 – $123.70)
- Gas prices down -$.14 to $4.19 w/w, up $1.03 YoY
- Usage 4-week average down -8.8% YoY
(Graphs at This Week In Petroleum Gasoline Section – U.S. Energy Information Administration (EIA))
Gas prices remain negative, despite a significant decline. Oil rebounded this week, but is in the middle of its 52 week range, and so it remains neutral.
A hallmark of an oil shock is an overreaction by consumers, and it appears that with the precipitous decline in gas usage, we have gotten that – at least in terms of mileage driven. But with gas prices having declined sharply, we will see if that reverses.
Bank lending rates
- 0.485 TED spread up +0.011 w/w (0.02 -.685)
- 2.370 LIBOR unchanged w/w (0.0753- 2.260) (graph at link) (tied for new multi-year high)
TED was above 0.50 before both the 2001 and 2008 recessions. Since early 2019 the TED spread had remained positive, except the worst of the coronavirus downturn, until earlier this spring. Three weeks ago it declined enough two weeks ago to be neutral, then increased back to negative, but declined into neutral range again one week ago.
The increases since to the Russian invasion of Ukraine added more stress. LIBOR also turned from positive all the way to negative. With Ukraine now effectively in a stalemate, the situation may be peaking.
St. Louis FRED Weekly Economic Index
- Down -0.15 to +2.95 w/w (+2.54 6/17/22 – +10.40 5/29/21)
In the 5 years before the onset of the pandemic, this Index varied between +.67 and roughly +3.00. Just after the Great Recession, its best comparison was +4.63. After a very positive 2021, it declined to less than half its best YoY level, thus changing to neutral.
Restaurant reservations YoY (from Open Table)
- July 28 seven day average -1% YoY (Best +31% Oct 21)
- August 4 seven day average -3% YoY (Worst -29% Jan 13)
The comparison year for this metric is 2019 and not 2021. Compared with the depths of the pandemic, in 2021 reservations rebounded to neutral, and even positive for a number of months, before declining back to neutral. During the Omicron tsunami they turned very negative, but in the past several months have improved to neutral.
Note I am now measuring its 7 day average to avoid daily whipsaws. This metric is within its neutral range.
- Johnson Redbook up +15.5% YoY (high 21.4% on Dec 28, 2021; low 11.4% June 11,2022)
In April 2020 the bottom fell out in the Redbook index. It has remained positive almost without exception since the beginning of 2021.
Railroads (from the AAR)
- Carloads up +3.6% YoY
- Intermodal units down -1.9% YoY
- Total loads up +0.6% YoY (Best +34.0% April 23, 2021)
(Graph at Railfax Report – North American Rail Freight Traffic Carloading Report)
- Harpex down -113 to 4336 (1038- 4586)
- Baltic Dry Index down -342 to 1603 (1302-5650) (graph at link) (6 month low)
Rail carloads turned positive early in 2021, before gradually fading to negative from August through the end of the year and the beginning of this year. The total loads index has been consistently negative for the past four months. With both carloads and total loads now positive, rail is a neutral.
Earlier in 2021, Harpex repeatedly rose to new multiyear highs, before leveling off in October. It declined from that peak, but has increased to near record highs again. Meanwhile, BDI traced a similar trajectory, repeatedly making new multi-year highs. But several months ago it fell about 75%, warranting a change to negative. It has been whipsawing back and forth between positive and neutral; at the moment it is positive.
I am wary of reading too much into price indexes like this, since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.
Steel production (American Iron and Steel Institute)
- Down -1.5% w/w
- Down -7.3% YoY
Since the end of March 2021, against terrible comparisons, this metric had been positive, typically running at a double digits higher YoY percentage growth. Several months ago, after almost continuous deterioration, it turned negative.
Summary And Conclusion
Below are this week’s spreadsheets of the long leading, short leading, and coincident readings. Check marks indicate the present reading. If there has been a change this week, the prior reading is marked with an X:
|Long leading Indicators||Positive||Neutral||Negative|
|10 year Treasury||✓|
|10 yr-2 yr Treasury||✓|
|10 yr-3mo Treasury||✓|
|2 Yr Treasury-Fedfunds||✓|
|Purchase Mtg. Apps.||✓|
|Refi Mtg Apps.||✓|
|Real Estate Loans||✓|
|Adj. Fin. Conditions Index||✓|
|Short Leading Indicators||Positive||Neutral||Negative|
|St. L. Fin. Stress Index||✓|
|US$ Major currencies||✓|
|Regional Fed New Orders||✓|
|Initial jobless claims||✓|
|Weekly Econ. Index||✓|
|Financial Cond. Index||✓|
There were no rating changes this week, but there have been several indicators with continuing important countertrend moves. Interest rates have declined substantially in the last month, stock prices have advanced to within 0.6% of turning neutral, and gas prices have declined half the way from their 52 week highs to last year’s lows.
The long leading forecast continues to be negative, despite even more resilient corporate profits. Thus my “Recession Watch” start time of Q1 of next year continues. The short term forecast also remains negative, as initial jobless claims and the regional Fed new orders indexes have continued to trend more negative.
But important coincident indicators continue to be positive. I do not think we are in a recession now; and I think it may be an understatement to say that recessions do not occur when the economy is adding 528,000 jobs in a month! As I wrote last week, this year has been primarily an “inventory correction,” as consumers pause and shift spending, catching manufacturers and wholesalers with too much of the wrong kind of inventory.
I have also written in the past few weeks that “hopes for a ‘soft landing’ must rely on the possibility that gas prices will decline further enough fast enough to make a big dent in inflation, assisting consumer spending, and perhaps prompting the Fed to pause interest rate hikes.” At the moment gas prices are cooperating with this scenario, having fallen $1/gallon in the past month, collectively putting $billions back into consumers’ pockets for other spending. After months of seriously rising prices, a *negative* CPI print next Wednesday is reasonably possible.