Gas And Other Commodity Declines Continue To Be Economic Tailwinds

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

October data included yet another decline in the Index of Leading Indicators, as well as declines in existing home sales (to near a 28 year low), durable goods orders, and a slight decline in core capital goods orders. Consumer sentiment as to both the present and future declined according to the University of Michigan.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 6.13%, down -0.13% w/w (1-yr range: 5.28-6.80)
• 10-year Treasury bonds 4.47%, down -0.15% w/w (3.30-4.93)
• Credit spread 1.66%, up +0.02% w/w (1.64-2.42)

(Graph at Moody’s Seasoned Baa Corporate Bond Yield | FRED | St. Louis Fed )

Yield curve

• 10 year minus 2 year: -0.48%, down -0.02% w/w (-1.07 – -0.17)
• 10 year minus 3 month: -0.96%, unchanged w/w (-1.89 – 0.21)
• 2 year minus Fed funds: -0.38%, up +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)

• 7.32%, down -0.04% w/w (6.07-8.03)

With the new highs in interest rates a little over a month ago, their rating reversed from neutral to negative. The short end of the interest rate curve has been varying between neutral and negative, and is negative again now. Both of the other spreads remain inverted and thus negative.

If long term interest rates go 4 months without making a new high, they will turn neutral.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps up +4% to 138 (125-260) (SA)
• Purchase apps 4 wk avg. up ) +2.5 to 131 (SA)
• Purchase apps YoY -20% (NSA)
• Purchase apps YoY 4 wk avg. -19% ((NSA)
• Refi apps up +2% w/w (SA)
• Refi apps YoY down -4% (SA)

*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted

(Graph at yardeni)

Real Estate Loans (from the FRB)

• Up +0.2% w/w
• Up +5.6% YoY (5.2% – 12.1%)

(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed )

Mortgage rates, like bond yields, recently made multi-decade new highs. Additionally, purchase mortgage applications in the past month sank to repeated new long term lows. Refinancing has turned neutral YoY, but that is basically because it was almost non-existent one year ago, and is still almost non-existent.

Real estate loans turned ever more positive during 2022. This was helped by inflation in house prices. This indicator declined by 1/3rd from its peak YoY% change in August, turning neutral, and three weeks ago sank below 6.0%, the last housing indicator to turn negative.

Money supply

The Federal Reserve has discontinued this weekly series. Data is now only released monthly. September data was released four weeks ago:

• M1 m/m down -0.7%, YoY Real M1 down -14.1%
• M2 m/m down -0.3%, YoY Real M2 down -7.3%

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 2022. Real M1 also turned negative as of May 2022.

Corporate profits (Q3 actual + estimated from I/B/E/S via FactSet at p. 32)

• Q3 94% actual +6% estimated up +0.11 to 58.60, up +7.4% q/q (no report this week)

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. This rating recently changed from negative to neutral, and five weeks ago, as profits made a new all time high, changed to positive.

Credit conditions (from the Chicago Fed) (graph at link)

• Financial Conditions Index down -0.6 (looser) to -0.47 (-0.03 – -0.62)
• Adjusted Index (removing background economic conditions) down -.08 (looser) to -0.47 (+0.16 – -0.59)
• Leverage subindex down -0.20 (loose) to -0.06 (+1.61 – -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. In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. The leverage index had improved from negative to neutral, but has now retreated back to negative. The adjusted index had improved beyond its breakeven point, briefly turning positive before reverting to neutral, and now positive again. The unadjusted index had also moved close enough to its breakeven point to turn neutral, then reverted to negative two weeks ago, but now is positive again.

Short leading indicators

Economic Indicators from the late Jeff Miller’s “Weighing the Week Ahead”

• Miller Score (formerly “C-Score”): down -13 w/w to 282, -17 m/m (154 9/22/23 – 315 on 3/15/23)
• St. Louis Fed Financial Stress Index: up +0.1293 to -0.5468 (1.5746 3/23/23 – -.7854 7/28/23) St. Louis Fed Financial Stress Index
• BCIp from Georg Vrba: up +0.1 to 29.2 as of 11/16/23 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, and then again briefly in March, but almost immediately decreased back below zero again and stayed there.

The BCIp, deteriorated sharply earlier this year below its recession-signaling threshold, but then improved sufficiently so that IM rescinded the recession signal. Last week, it went back below the “25” recession warning threshold, but improved above it two weeks ago. IM has updated its accompanying text to say that it “is again trending towards a recession signal.”

Trade weighted US$

• Down -1.28 to 121.29 w/w, down -2.0% YoY (last week) (broad) (117.60 – 124.77) (Graph at Nominal Broad U.S. Dollar Index
• Up +0.51 to 103.40 w/w, down -2.4% YoY (major currencies) (graph at link) (100.79-114.78)

Ever since 2021, both measures of the US$ were well above +5% higher YoY, and so negative. Recently, both declined into the neutral range, and in earlier this year, both turned positive.

Commodity prices

Bloomberg Commodity Index

• Down -0.50 to 101.42 (97.95 5/31/23-118.14)
• Down -12.9% YoY (Best: +52.3%; worst -25.3%)

(Graph at BCOM | Bloomberg Commodity Index Overview | MarketWatch )

Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)

• 138.54, up +0.77 w/w (136.32 8/15/23-179.68)
• Down -12.0% YoY (Best +69.0% May 7, 2022)

During the Boom of 2021, commodity prices soared, and total commodities were very positive. Both indexes are now in the bottom 1/3rd of their 12 month range, so both are negative. (Note, importantly, that because this particular decline in commodity prices may reflect increased supply rather than destruction of demand, the message of a nearly -10% YoY decline may have been very different from usual.)

Stock prices S&P 500 (from CNBC) (graph at link)

Stocks made several new 3 month highs and even a new 12+ month high earlier this year, including at the end of July. Since then, last month saw a new 3 month low; but this week saw a new 3 month high as well. Since we have had both within the last 3 months, this indicator improves from negative to neutral.

Regional Fed New Orders Indexes

(*indicates report this week)

• Empire State newyorkfed down -0.7 to -4.7
• Philly down -3.1 to +1.3
• Richmond down -7 to -4
• *Kansas City up +22 to 0
• Dallas down -3.6 to -8.8
• Month-over-month rolling average: up +4 to -4

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. Since spring 2022, these gradually declined to neutral and then negative. Recently they became “less negative,” but last month’s readings were generally slightly lower. If they improve to -3 or higher, that will change their rating to neutral.

Employment metrics

Initial jobless claims

• 209,000, down -14,000 w/w
• 4-week average 220,000, down -750 w/w

(Graph at St. Louis FRED)

In spring, revisions caused major changes in this index. The 4 week average had been higher by 5% or more YoY for most of this year, but not at levels which have in the past triggered a “recession warning.” In the past several months things improved considerably, warranting a neutral rating, but this week the four week average went back below 5% higher YoY, changing this metric back to neutral.

Temporary staffing index (from the American Staffing Association) (graph at link)

• Unchanged 100 w/w
• Down -7.6% YoY (low 7.9%- high +0.9%)

This was extremely positive at the end of 2021. During 2022, the comparisons at first slowly and then more sharply deteriorated, and by early this year had turned negative. After improving somewhat, in the past two months the YoY comparisons have faded again, and now it is close to its worst reading of the year.

Tax Withholding (from the Department of the Treasury) fsapps

• $235.1 B for the last 20 reporting days this year vs. $238.9 B one year ago, -$3.8 B or -1.6%

YoY comparisons peaked in Q1 2022. Since summer, it has oscillated between neutral and positive, and was negative on a monthly basis several times. Since the first of the year, these have generally turned positive. That was not the case for the month of April, but in May it turned back positive, and on a 20 day basis it has usually been near its best level in 12 months for the last few months; but for the past two weeks it has turned negative again. I will wait to see if this is passing outlier based on several poor days earlier this month.

Oil prices and usage (from the E.I.A.)

• Oil down -$10.60 to $75.18 w/w, up +0.5% YoY ($66.74 – $98.62)
• Gas prices down -.06 to $3.29 w/w, down -$0.36 YoY
• Usage 4-week average up +2.5% YoY (no report this week; will resume next week)

(Graphs at This Week In Petroleum Gasoline Section – U.S. Energy Information Administration (EIA).)

Gas and oil prices both remain in the middle 1/3rd of their 3 year range, and so are neutral. Mileage driven turned negative for 5 weeks before turning positive three weeks ago.

Note: given this measure’s extreme volatility, I believe the best measure is against their 3 year average. Measuring by 1 year, both are positive.

Bank lending rates

• 5.31 Secured Overnight Financing Rate (SOFR) down -0.01
• 5.46 LIBOR up +0.02 w/w (0.10130- 5.45) (graph at link)

The TED Spread has been discontinued, and LIBOR is in the process of being discontinued. At the suggestion of a reader, I am beginning to track the SOFR instead. Unfortunately, SOFR has only been in existence since 2018, so there is no track record has to how it might behave around normal recessions (vs. the pandemic). Over the past 5 years, it does appear to have matched the trend in LIBOR.

But because of its very brief track record, although I will report it I will not be including it in my list of indicators in the conclusion, at least for now.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Down -0.02 to 2.33 w/w (Low 0.66 Dec 10, 2022 – high 2.35 11/11/23)

After a very positive 2021, this measure declined to less than half its best YoY level, thus changing to neutral. It remained in that range all this year until two weeks ago, when it broke above 2.0, changing its rating to positive. Then it declined back into negative, before turning back to positive in the past two months.

Restaurant reservations YoY (from Open Table) OpenTable | Site Maintenance (no update this week)

• November 9 seven day average -3% YoY (Worst this year -11% 5/11/23)

I have been measuring its 7 day average to avoid daily whipsaws.

Open Table’s data indicate that by early April reservations had stabilized at slightly below zero YoY, and they have generally faded from -2% to -7% since.

Consumer spending

• Johnson Redbook up +3.4% YoY, 4 week average +3.7% (high 10.3% in November 2022; low -0.4% July 13, 2023) United States Redbook Index

The Redbook index remained positive almost without exception since the beginning of 2021 until last October. The new link I have added above goes to a 5 year graph to best show the comparison. After 3 weeks of negative readings, the 4 week average returned to positive for the past 3 months, and three weeks ago had its best reading since last winter.

Transport

Railroads (from the AAR)

• Carloads up +.3.8% YoY
• Intermodal units up +4.1% YoY
• Total loads up +4.0% YoY

(Graph at Railfax Report – North American Rail Freight Traffic Carloading Report )

Shipping transport

• Harpex down -6 to 832 (832- 4586) harpex (new 12 month low)
• Baltic Dry Index down -65 to 1755 (530-2071) (graph at link)

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 five months. In the past several months, comparisons have hovered near the zero line, varying between neutral and negative. This week they were positive again.

Harpex increased to near record highs again early in 2022, but has since backed off all the way to new lows. BDI traced a similar trajectory, rebounding sharply earlier this year and then retreating just as sharply, and remains 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 +0.8% w/w
• Up +6.4% 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. In spring 2022, it turned negative, but the YoY comparisons gradually improved. It finally improved to positive for about two months, before turning negative again for a short time. It remains positive this week.

Consumer inflation by Truflation (truflation)

• Down -0.12% to +2.92% YoY (High 7.53% 11/24/22 – Low 2.11% 7/14/23)

Thanks to a commenter for bringing this indicator to my attention. This is a daily update to inflation, similar to the “billion prices project” of the last decade (which required a subscription). I have not added this to my list below of the status of coincident or leading indicators, but needless to say it is an up-to-the-moment reading on this very important indicator.

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:

Click to enlarge

Click to enlarge

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As for a long time now, the long leading indicators remain negative, with only corporate profits being positive. We have now seen credit conditions turn “less bad” as well

Short leading measures remain neutral. The further decline in gas prices is an outright positive. As indicated in text, commodity prices low compared with a year ago is normally a negative, but in the post-pandemic era probably reflect a supply rebound, hence actually positive.

As to coincident indicators, most importantly YoY consumer spending remains positive. I will wait another week or two before reading any bigger message from the abrupt decline in tax withholding this month.

Overall the data remains consistent with a weakly positive economy, as continued declines (albeit slight in the past 6 months outside of oil) in commodity prices put a tailwind under producer profits and enable more consumer spending. Until this dynamic ends, even a big increase in interest rates will not fully “bite.”