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Purpose
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
December data included a slight increase from a downwardly revised November new home sales number; an increase in total durable goods orders, but a slight decrease in core orders; a slight increase in consumer sentiment as measured by the U. Of Michigan; a slight increase in nominal and real personal income; but a decrease in nominal and real personal spending. The Index of Leading Indicators for December also declined sharply, its 9th decline in a row.
In the rear view mirror, November real manufacturing and trade sales declined, and Q4 GDP increased fairly strongly in real terms, but both leading components in the release (proprietors’ income and real residential investment) declined.
Long leading indicators
Interest rates and credit spreads
Rates
- BAA corporate bond index 5.40%, up +0.02 w/w (1-yr range: 3.59-6.59)
- 10-year Treasury bonds 3.52%, up +0.03 w/w (1.66-4.25)
- Credit spread 1.88%, down -.01 w/w (1.76-2.42)
(Graph at Moody’s Seasoned Baa Corporate Bond Yield | FRED | St. Louis Fed.)
Yield curve
- 10 year minus 2 year: -0.69%, up +0.01% w/w (-0.85 – 1.59)
- 10 year minus 3 month: -1.16%, down -0.01% w/w (-1.17 – 2.04)
- 2 year minus Fed funds: -0.11%, down -0.05% 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.)
- 6.20%, up +0.09% w/w (3.67-7.38).
Although they have declined significantly since October, corporate bonds remains near the top of their 10 year range, so are negative. The same applies to long term treasury bonds and mortgage rates. Corporate bond yields, which often peak even before the Fed finishes raising rates, may have already made their high.
While the spread between corporate bonds and Treasuries remains positive, all three of my yield curve indicators have now turned negative. Only the Fed funds and 3 month Treasury are not fully inverted vs. the rest of the curve, where the 6 month Treasury continues to be the highest yielding maturity.
I should note that interest rates have not made a new high since October or November, depending on the metric. At some point in the next month or so, if they continue to trend lower as they have since then, some or all of them may change from “negative” to “neutral.”
Housing
Mortgage applications (from the Mortgage Bankers Association).
- Purchase apps up +3% w/w to 200 (154-349) (SA)
- Purchase apps 4 wk avg. up +1 to 170 (SA) (341 high Jan 29, low 158 Nov 25)
- Purchase apps YoY -39% (NSA)
- Purchase apps YoY 4 wk avg. -40% (NSA)
- Refi apps up +15% w/w (SA)
- Refi apps YoY down -77% (SA)
*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted
(Graph at Yardeni.com)
Real Estate Loans (from the FRB)
- Up +4.3% w/w
- Up +11.6% YoY (-0.9 – 11.6) (new high).
(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed.)
The highest mortgage rates in 12 years killed both purchase and refinance mortgage applications, the four week averages of which continue at or close to 8 and 20 year lows, respectively. On the other hand, mortgage rates, like bond yields, appear to have made their peak for this cycle in October, and are getting “less negative.”
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. Interestingly, this week for the first time in a long time, such loans actually declined slightly.
Money supply
The Federal Reserve has discontinued this weekly series. Data is now only released monthly. December data was just released this week:
- M1 m/m down -1.3%, YoY Real M1 down -10.1% (40+ year low)
- M2 m/m down -0.7%, YoY Real M2 down -7.7% (60+ year low).
No recession has happened without a YoY real M1 negative, or YoY real M2 below +2.5%. Real M2 fell below that threshold last March. Real M1 also turned negative as of May.
Corporate profits (Q4 estimated + actual S&P 500 earnings from I/B/E/S via FactSet at p. 30)
- Q4 29% actual + 71% estimated up +.04 to 53.31 w/w, down -4.2% 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. The cumulative decline since the recent Q2 peak is -6.0%. Needless to say, this metric is now a firm negative.
Credit conditions (from the Chicago Fed) (graph at link).
- Financial Conditions Index down -.03 (looser) to -0.37 (-0.03 – -0.62)
- Adjusted Index (removing background economic conditions) down -.04 (looser) to -0.35 (+0.16 – -0.59)
- Leverage subindex down -.03 (looser) to +0.16 (+0.51 – -0.35).
In these indexes, lower = better for the economy. The Chicago Fed’s Adjusted Index’s real break-even point is roughly -0.25. It is sufficiently below that point to warrant changing its rating all the way back to positive. 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 near its highest since the Great Recession, obviously negative.
Short leading indicators
Economic Indicators from the late Jeff Miller’s “Weighing the Week Ahead”
- Miller Score (formerly “C-Score”): down -45 w/w to 187, -81 m/m (125 6/24/22 – 374 on 2/25/22)
- St. Louis Fed Financial Stress Index: up +0.0098 to -0.3025 (0.4997 5/27/22 – -.8325 9/16/22)
- BCIp from Georg Vrba: down -7.1 to 20.5 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 at the beginning of August 2021, so not only is it negative, but we are now well 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. It did so in December, but the 4 week average has subsequently dropped below 0, warranting a change in rating back to positive.
The BCIp, which remained very positive until very recently, deteriorated sharply in the past month. It was below its recession-signaling threshold for three weeks before rising back above it this week.
Trade weighted US$
- Up +0.24 to 119.46 w/w, +4.2% YoY (last week) (broad) (114.23 – 128.58) (Graph at Nominal Broad U.S. Dollar Index
- Down -0.05 to 101.95 w/w, up +4.8% YoY (major currencies) (graph at link) (94.63-114.78).
In early 2021, both the broad rating and the USD against major currencies turned higher YoY, and so changed to neutral. For a long time, both measures were well above +5% YoY, and thus negative. Now that both are lower than +5%, they are neutral.
Commodity prices
Bloomberg Commodity Index
- Down -0.57 to 111.61 (103.54-136.61)
- Up +4.8% YoY (Best: +52.3% June 4).
(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch.)
Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)
- 176.61, up +0.23 w/w (135.97-327.84)
- Down -2.0% YoY (Best +69.0% May 7).
During the Boom of 2021, commodity prices soared, and total commodities were very positive. Total commodities (which include oil) are in the lower 1/3rd of their range, so are negative. Industrial metals have also declined into the bottom 1/3rd of their 52 week range, so have also turned negative.
Stock prices S&P 500 (from CNBC) (graph at link)
Since January 3 of last year, there have been ongoing new 3 month and even 1 year lows. Since in the past 3 months we have had neither a new high (missing by only about 2% this week) nor a new low, this indicator has turned from negative to neutral.
Regional Fed New Orders Indexes
(*indicates report this week)
- Empire State down -27.5 to -31.1
- Philly up +11.4 to -10.9
- *Richmond down -20 to -24
- *Kansas City down -2 to -8
- Dallas up +11.7 to -9.2
- Month-over-month rolling average: down -2 to -17.
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 since last spring, gradually declined to neutral and then negative. They are *very* negative now.
Employment metrics
Initial jobless claims
- 186,000, down -6,000 w/w
- 4-week average 197,500, down -9,250 w/w
(Graph at St. Louis FRED.)
New claims made new all-time lows on a 4 week average in April. Once this metric failed to make a new 3 month low, its rating changed to neutral. It will not turn negative unless and until the 4 week average is higher YoY. Instead, this past week it made a new 8 month low, so this metric turns positive again.
Temporary staffing index (from the American Staffing Association) (graph at link.)
- Down -2 to 95 w/w
- Up +0.2% YoY.
This gradually improved to neutral at the beginning of 2021, and has been positive since then. There is a great deal of seasonality in the numbers, which typically rise slowly throughout the year except for certain holiday periods. The comparisons in the past several months have deteriorated sharply, and having fallen below +3.0% YoY, turned neutral.
Tax Withholding (from the Dept. of the Treasury)
- $325.5 B for the last 20 reporting days this year vs. $287.2 B one year ago, +$38.3B or +13.3%.
YoY comparisons turned positive in the beginning of 2021, remained that way until a short time ago. The YoY% change fell below 5% several times since summer, then rebounded, and oscillated between neutral and positive for several months. As the 20 day average picked up sharply in the past several weeks (which may well be year-end, year-beginning volatility), these have turned very positive. This may be due to comparisons with the huge Omicron wave of the pandemic one year ago. If so, we should see the comparison ebb in the next few weeks. It is noteworthy that since the beginning of this fiscal year on October 1, aggregate tax withholding is up only 1.8%.
Oil prices and usage (from the E.I.A.)
- Oil down -$2.01 to $79.39 w/w, up +4.8% YoY ($71.46 – $123.70)
- Gas prices up +$.10 to $3.41 w/w, up $0.09 YoY
- Usage 4-week average down -4.7% YoY.
(Graphs at This Week In Petroleum Gasoline Section – U.S. Energy Information Administration (EIA).)
Gas prices are in the middle 1/3rd of their 3 year range, and so have returned to neutral. Oil is also in the middle of its 3 year range, and so it remains neutral. It does appear that both have made their typical winter bottoms.
Mileage driven remains negative.
Note: With gas and oil prices so volatile in the past 12 months, I believe the best measure is against their 3 year average. Measuring by 1 year, both have turned positive.
Bank lending rates
- 0.259 TED spread down -0.031 w/w (0.02 -.685)
- 4.550 LIBOR up +0.040 w/w (0.10130- 4.550) (graph at link)(new 12 month 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 this spring. It has been very choppy recently, varying between neutral and negative. It has declined well below that level, and has turned positive.
LIBOR has been increasing consistently well into its negative range.
Coincident indicators
St. Louis FRED Weekly Economic Index
- Down -0.45 to +0.77 w/w (+0.77 1/27/23 – +6.16 2/19/22).
After a very positive 2021, this measure declined to less than half its best YoY level, thus changing to neutral. With revisions, this week was the lowest level since February 2021. I will continue to treat it as neutral unless the number turns negative.
Restaurant reservations YoY (from Open Table)
- January 19 seven day average Unchanged YoY (Best +% Jan. 5, 2023)
- January 26 seven day average -3% YoY (Worst -29% Jan 13, 2022).
Last year the metric gradually improved to neutral, and for one week, positive. It has recently been very volatile. It remains close enough to unchanged to score neutral again.
Note I am now measuring its 7 day average to avoid daily whipsaws.
Consumer spending
- Johnson Redbook up +4.6% YoY (high 15.8% in Jan. 2022; low 4.6% Jan. 27, 2023) United States Redbook Index – 2023 Data – 2005-2022 Historical – 2024 Forecast (22 month low).
The Redbook index remained positive almost without exception since the beginning of 2021 until October. With two exceptions the past 7 weeks have been the lowest YoY comparisons in many months. The new link I have added above goes to a 5 year graph to best show the comparison.
I recently downgraded this metric to neutral. It rebounded sharply for several weeks, then this week fell to yet another new 22 month low.
Transport
Railroads (from the AAR)
- Carloads up +3.3% YoY
- Intermodal units down -6.7% YoY
- Total loads down -2.1% YoY.
(Graph at Railfax Report – North American Rail Freight Traffic Carloading Report.)
Shipping transport
- Harpex down -3 to 1100 (1100-4586) (new 18-month low)
- Baltic Dry Index down -134 to 677 (677-3369) (graph at link) (3 year 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. In the past several months, comparisons have hovered near the zero line, varying between neutral and negative. This week they were neutral again.
Harpex increased to near record highs again early in 2022, but has since backed off all the way to new lows. BDI has traced a similar trajectory, warranting a change to negative.
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)
- Up +1.1% w/w
- Down -6.6% YoY (worst -10.0% Dec 2, 2022).
Since the end of March 2021, against terrible comparisons, this metric had been positive, typically running at a double digits higher YoY percentage growth. This past spring, after almost continuous deterioration, it turned negative, and has remained so.
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 | |
|---|---|---|---|---|
| Corporate bonds | ✓ | |||
| 10 year Treasury | ✓ | |||
| 10 yr-2 yr Treasury | ✓ | |||
| 10 yr-3mo Treasury | ✓ | |||
| ✓ | ||||
| Mortgage rates | ✓ | |||
| Purchase Mtg. Apps. | ✓ | |||
| Refi Mtg Apps. | ✓ | |||
| Real Estate Loans | ✓ | |||
| Real M1 | ✓ | |||
| Real M2 | ✓ | |||
| Corporate Profits | ✓ | |||
| Adj. Fin. Conditions Index | ✓ | x | ||
| Leverage Index | ✓ | |||
| Totals: | 2 | 0 | 12 | |
| Short Leading Indicators | Positive | Neutral | Negative | |
|---|---|---|---|---|
| Credit Spread | ✓ | |||
| Miller Score | ✓ | |||
| St. L. Fin. Stress Index | ✓ | X | ||
| US$ Broad | ✓ | |||
| US$ Major currencies | ✓ | X | ||
| Total commodities | ✓ | |||
| Industrial commodities | ✓ | |||
| Stock prices | ✓ | |||
| Regional Fed New Orders | ✓ | |||
| Initial jobless claims | ✓ | |||
| Temporary staffing | ✓ | |||
| Gas prices | ✓ | |||
| Oil prices | ✓ | |||
| Gas Usage | ✓ | |||
| Totals: | 2 | 7 | 5 | |
| Coincident Indicators | Positive | Neutral | Negative | |
|---|---|---|---|---|
| Weekly Econ. Index | ✓ | |||
| Open Table | ✓ | |||
| Redbook | ✓ | |||
| Rail | ✓ | |||
| Harpex | ✓ | |||
| BDI | ✓ | |||
| Steel | ✓ | |||
| Tax Withholding | ✓ | |||
| TED | ✓ | |||
| LIBOR | ✓ | |||
| Financial Cond. Index | ✓ | x | ||
| Totals: | 3 | 4 | 4 | |
Two months ago I went from “Recession Watch” to “Recession Warning,” as all three of my primary systems are consistent with a near-term or imminent recession.
There are two significant items to note this week. The first is that holiday distortions have ebbed almost completely away. The second is that, after months of consistent worsening of the indicators, changes are afoot. The coincident indicators are overall neutral rather than negative, as there have been recent improvements in restaurant reservations, rail, tax withholding, the TED spread, and the financial conditions index. The 3 big coincident indicators I have been watching closely lately – Redbook, the ASA Staffing Index, and tax withholding, have “stubbornly” refused to roll over, although the past action in the leading indicators strongly suggest they will. (Importantly, note that in monthly series, both industrial production and real manufacturing and trade sales appear to have rolled over. Employment – not yet).
Further, a number of interest rate long leading indicators, as well as the US$ in the short leading indicators, are on the cusp of moving from negative to neutral, although they aren’t there yet.
In short, the economic indicators are not just indicating a recession is probably close at hand, they are also beginning to suggest that it may not be that long or that deep.
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