Written by Steven Hansen
The Econintersect June 2012 economic index shows underlying economic fundamentals continue to show economic expansion – with the rate of growth slowing marginally in this forecast.
At the moment, two of the major leading economic indicators which are touted to have a six month forward vision (ECRI’s WLI and The Conference Boards LEI) are in conflict – with ECRI strongly arguing for many months that a recession is coming.
This month we will summarize all the leading indicators, intuitive portions of coincident indicators, and then interpret our own index. The Econintersect Economic Index is built of mostly non-monetary “things” that have shown to be indicative of direction of the Main Street economy at least 30 days in the future.
Several things are apparent:
- the “New Normal” economy is pulsing or growing in unpredictable spurts. These spurts are evident in ECRI’s WLI, Econintersect’s Economic Index, and the Chicago Fed’s National Activity Index (CFNAI). This makes the economy at times seem like it is gaining traction, and other times about to fall off a cliff;
- the consumer is still consuming. The graph below shows expenditure still increasing but still under the pre-recession peak;
- jobs growth has disconnected from known economic fundamentals.
These economic pulses cause some to believe the economy is heading towards a recession – as forecasts use growth rate-of-change to assess economic trends. Further, these cycles are out of phase with the calendar – and the commonly used seasonal adjusting methodology seems to exaggerate these cycles.
Most economic releases are based on seasonally adjusted data which is revised for months after issuance so a contraction in a particular release may not obvious for many months. The Econintersect forecast is based on non-adjusted data which for the most part is not subject to revision.
The Leading Indicators
The leading indicators are to a large extent monetary based (in the case of ECRI it is a knowledgeable guess as the makeup of this index is proprietary). Econintersect’s prime worry in using monetary based methodologies to forecast the economy is the current extraordinary monetary policy which may (or may not) be affecting historical relationships. This will only be known in hindsight.
Econintersect does not use any portion of the leading indicators in its economic index.
ECRI’s Weekly Leading Index (WLI) – ECRI’s WLI index value has been jumping around due to backward revision. The index is hovering around zero which means the economy six month from today will be as bad as it is today. A positive number shows an expansion of the business economy, while a negative number is contraction.
The Conference Board’s Leading Economic Indicator (LEI) – The LEI’s six-month growth rate fell slightly, but remains in expansionary territory and well above its growth at the end of 2011.
Leading Indicators Bottom Line – In the case of ECRI, they have several indices only available to clients. ECRI is saying the preponderance of their data (including the WLI) is indicating a recession is coming. The Conference Board is saying economic expansion is coming as far as they can see. These are completely opposite opinions, and one’s takeaway is confusion.
Forward Looking Coincident Indicators
Here is a run through of the most economically predictive coincident indices which Econintersect believe can have up to a six month warning of an impending recession. Yet, be warned that every recession has different characteristics – and a particular index may not contract during a recession, or start contracting after the recession is already underway. Please note that Econintersect does NOT incorporate any of these indicators into its Economic Index. In all the data Econintersect analyzes, there are no recessionary indications currently evident.
Manufacturing sub-index of Industrial Production – The manufacturing component of IP is growing 5.8% year-over-year (adjusted), and represents one of the strongest segments of the economy. It has a positive growth trend line, and has rebounded from last months decline.
Economic downturns have been signaled watching the manufacturing portion only of Industrial Production. Manufacturing year-over-year growth normally is trending “less good” going into a recession. Currently this index is above year-over-year growth levels associated with past recessions.
Truck transport portion of employment – to search for impending recessions. Look at the year-over-year zero growth line. For the last two recessions it has offered a six month warning of an impending recession with no false warnings. Transport is an economic warning indicator because it moves goods well before final retail sales occur. Until people stop eating or buying goods, transport will remain one of the primary economic pulse points.
Transport employment growth is far above the zero growth line. As transport provides a six month recession warning – the implication is that any possible recession is further than six months away.
Rail – Weekly and monthly Econintersect evaluates rail movements. As stated in Truck transport above, movement of goods and materials have logical and provable economic correlations. Rail particularly moves materials and finished goods months before final sales to the ultimate consumer.
Here rail is contracting over 2011 levels – mostly due to coal. If coal is removed from the equation, growth has been running around 3.5% per year. Coal is an alternate fuel, and the alternate now appears to be natural gas which is a pipeline product running at record levels.
Business Activity sub-index of ISM Non-Manufacturing – this index again was less good – but remains firmly in expansion territory. The current problem with interpreting this index is that a current trend is not evident.
Coincident Index Bottom Line - Econintersect believes true economic activity (not monetary based GDP) is expanding somewhere around 3% based on these indices.
A Longer View and Caveats
Econintersect notes that most elements of the economy (inflation adjusted) have NOT recovered to levels they had before the 2007-2009 recession. If this was prior to WWII, economists would consider the current USA economic state as a depression. Some actually do think we are in a depression, see Steve Keen, for example.
Econintersect believes that the New Normal economy has different dynamics than most economic models.
As Econintersect continues to back check its model, from time-to-time makes slight adjustments to the data sets and methodology to align it with the actual coincident data. To date, when any realignment was done, no change altered trend lines or recession indications. Most changes to date were to remove data sets which had unacceptable backward revisions. Documentation for this index was in the October 2011 forecast.
Economic Forecast Data
Econintersect‘s Economic Index (EEI) is designed to spot Main Street and business economic turning points. This forecast is based on the index’s three month moving average.
The EEI is a non-monetary based economic index which counts “things” that have shown to be indicative of direction of the Main Street economy at least 30 days in the future. Note that the Econintersect Economic Index is not constructed to mimic GDP (although there are general correlations), but tries to model the economic rate of change seen by business and Main Street.
The red line on the EEI is the 3 month moving average which is at 0.42 (down slightly from last month’s 0.45), while the monthly index declined from 0.50 to 0.35. The economic forecast is based on the 3 month moving average as the monthly index is very noisy. Readings below 0.4 indicate a weak economy, while readings below 0.0 indicate contraction.
The economic pulse pattern (roller coaster seen on the chart on the left) for economic growth can be clearly seen – and that pulse pattern did not exist in the index prior to the 2007 recession. The question is why. Further, the overall trend seems down.
A positive value of the index represents economic expansion. If the economy was growing at the same rate, this index would return a value of 0.50. This month’s value of 0.42 shows the economy’s rate of growth is slowing marginally.
Consumer and business behavior (which is the basis of the EEI) either lead or follow old fashion industrial age measures such as GDP depending on the dynamic which is driving the economy.
The drag on the EEI is coming from the government sector, and part of the transport sector.
Jobs Growth Forecast Improves
The Econintersect Jobs Index is forecasting slightly improving job creation short term for June.
The Econintersect Jobs Index is based on economic elements which create jobs, and (explanation here) measures the historical dynamics which lead to the creation of jobs. It measures general factors, but it is not precise (quantitatively) as many specific factors influence the exact timing of hiring. This index should be thought of as a measurement of jobs creation pressures.
At the present time, jobs growth year-over-year is averaging above the levels forecast by the Econintersect’s Jobs Index. The table below lists the private non-farm payroll forecasts against the current (not original headline) BLS private non-farm payrolls. Please note that the BLS data continuously is revised, and this employment forecast section of the economic forecast uses the most current BLS estimates.
Still, the Econintersect Jobs Index is predicting fewer jobs then are actually occurring. A discussion of the problem is in Ben Bernanke and the Puzzle of Employment. It seems employment has careened off on its own path.
|April 2012||130,000 (203,000)**||130,000|
|May 2012||130,000 (204,000)**|
|June 2012||145,000 (224,000)**|
* the current estimate of month-over-month growth from BLS seasonally adjusted private non-farm payrolls
** fudged growth based on deviation between forecast & current actual
A fudge factor (based on deviance over the last 6 months between the BLS actual growth and the Econintersect Employment Index) is also provided – and projects jobs growth could be as high as 224,000. The fudge factor is fluid as the BLS has significant backward revision to their jobs numbers.
Analysis of Economic Indicators:
Econintersect analyzes all major economic indicators. The table below contains hyperlinks to posts. The right column “Predictive” means this particular indicator has a leading component (usually other then the index itself) – in other words has a good correlation to future economic conditions.