Written by Steven Hansen
Econintersect‘s Economic Index forecast softened somewhat but is still indicating strong economic growth. Note that the economic potential remains better than the pre-COVID conditions as the economy was weakening well before the pandemic hit. Now, however, COVID concerns have resurrected – and actions by the various government entities could impact the economy – and send it back to the crapper.
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Analyst Summary of this Economic Forecast
Economic year-over-year growth is now slowing as the data is being compared to the country’s improving economic conditions last year. Still, the data remains better than pre-pandemic levels.
The gearing of the economy has been impacted by the pandemic, and one should expect additional disruption.
This month, most of the indicators and predictive coincident indices softened somewhat.
Our index is designed to forecast Main Street growth, whilst GDP is not designed to focus on the economy at the Main Street level. One can suggest that GDP is a lagging indicator of the underlying economy – and does not accurately portray the strength and trends of the Main Street economy.
Note that the quantitative analysis which builds our model of the economy does not include housing, personal income, or expenditures data sets.
Econintersect checks its forecast using several alternate monetary-based methods – and all are now in agreement.
Our employment forecast is predicting reasonably good employment growth six months from today.
Note that the majority of the graphics auto-update. The words are fixed on the day of publishing, and therefore you might note a conflict between the words and the graphs due to new data and/or backward data revisions.
The graph below plots GDP (which has a bias to the average – not median – sectors) against the Econintersect Economic Index (which has a bias to median).
This post will summarize the:
- special indicators,
- leading indicators,
- predictive portions of coincident indicators,
- review of the technical recession indicators, and
- interpretation of our own index – Econintersect Economic Index (EEI) – which is built of mostly non-monetary “things” that have been shown to be indicative of the direction of the Main Street economy at least 30 days in advance.
- our six-month employment forecast.
Special Indicators:
The consumer is not spending all of their income – the ratio between spending and income is significantly below the average of the levels seen since the Great Recession all triggered by the pandemic.
Seasonally Adjusted Spending’s Ratio to Income (an increasing ratio means Consumer is spending more of Income)
The St. Louis Fed produces a Smoothed U.S. Recession Probabilities Chart which finally is giving an indication of a recession.
Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf)
Sahm Recession Indicator signals the start of a recession when the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low during the previous 12 months.
Econintersect reviews the relationship between the year-over-year growth rate of non-farm private employment and the year-over-year real growth rate of retail sales. This index has returned to positive territory. When retail sales grow faster than the rate of employment gains (above zero on the below graph) – a recession is not imminent. However, this index has many false alarms – and it is hard to believe it is accurate during the recession/pandemic which has skewed the data.
Growth Relationship Between Retail Sales and Non-Farm Private Employment – Above zero suggests economic expansion
GDPNow
The growth rate of real gross domestic product (GDP) is the headline view of economic activity, but the official estimate is released with a delay. Atlanta’s Fed GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release. Econintersect does not believe GDP is a good tool to view what is happening at Main Street level – but there are correlations.
Latest estimate: 6.1 percent — July 30, 2021
The initial GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2021 is 6.1 percent on July 30. The initial estimate of second-quarter real GDP growth released by the U.S. Bureau of Economic Analysis on July 29 was 6.5 percent, 0.1 percentage point above the final GDPNow model nowcast released on July 28.
z forecast8.png or source
Nowcast
The New York Fed also has introduced its own economic projection called Nowcast. Its current forecast:
Jul 30, 2021: New York Fed Staff Nowcast
- The advance estimate from the Commerce Department of real GDP growth for 2021:Q2, released on July 29, was 6.5%. The latest New York Fed Staff Nowcast for 2021:Q2 was 3.1%.
- The New York Fed Staff Nowcast stands at 4.2% for 2021:Q3.
- News from this week’s data releases increased the nowcast for 2021:Q3 by 0.1 percentage point.
- Positive surprises from merchant wholesale inventory data drove the increase.
z forecast7.png
A yield curve inversion historically has been an accurate predictor of an impending recession. A yield curve inversion is where short-term bonds have a higher yield than longer-term bonds. The graph below shows inversions prior to USA recessions. Econintersect does not believe the yield curve is a reliable indicator of recessions in the New Normal where monetary policy uses extraordinary tools. [And in any event, there can be no warning signs for an imminent black swan event even though through coincidence it occurred before this 2020 recession].
Special Indicators Conclusion:
Most economic releases are based on seasonally adjusted data which are revised for months after issuance. The real trends in a particular release may not be obvious for many months due to data gathering and seasonality adjusting methodologies. The special indicators in this forecast are mostly showing a strong economy and the recession is over.
The Leading Indicators:
The leading indicators are for the most part monetary based. Econintersect‘s primary worry in using monetary-based methodologies to forecast the economy is the accommodative monetary policy which may (or may not) be affecting historical relationships.
Econintersect does not use data from any of the leading indicators in its economic index. Leading indices in this post look ahead six months – and are all subject to backward revision.
Chemical Activity Barometer (CAB) – The CAB is an exception to the other leading indices as it leads the economy by two to fourteen months, with an average lead of eight months. The CAB is a composite index that comprises indicators drawn from a range of chemicals and sectors. It is a relatively new index and appears somewhat accurate (but its real-time performance is unknown – you can read more here). A value above zero is suggesting the economy is expanding.
ECRI’s Weekly Leading Index (WLI) – A positive growth number shows an expansion of the business economy, while a negative number shows contraction. The methodology used in creating this index is not released but is widely believed to be monetary based.
Current ECRI WLI Index [high-frequency index]
The New York Fed’s Weekly Leading Index (WLI) – A positive number shows an expansion of the business economy, while a negative number shows contraction.
The Aruoba-Diebold-Scotti Business Conditions Index – A positive number shows an expansion of the business economy, while a negative number shows contraction.
The Conference Board’s Leading Economic Indicator (LEI) – the LEI has historically begun contracting well before a recession but has had many false contractions.
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Leading Indicators Conclusion: generally shows a slowing economy
- Chemical Activity Barometer (CAB) continues to show significant growth but slowed this month
- ECRI’s WLI continues to slow but is still better than the pre-pandemic period
- The Conference Board (LEI) has returned to pre-recession levels.
- The New York Fed’s Weekly Leading Index (WLI) is in expansion but is now trending down
- The Aruoba-Diebold-Scotti Business Conditions Index shows business conditions are in expansion but softening
Forward-Looking Coincident and Lagging Indicators
Here is a run-through of the most economically predictive coincident indices which Econintersect believes can give up to a six-month warning of an impending recession – and do not have a history of producing false warnings. Econintersect does not use any of these indicators in its economic forecast.
Consider that every recession has different characteristics and dynamics – and a particular index may not contract during a recession, or start contracting after the recession is already underway.
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 only one false warning. 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. When this sector turns robotic in the coming years – this measure will become useless – but currently, the shift from box stores to e-Commerce is creating much more employment in this sector. Either way – this index may not be capable of alerting the next recession. Further, we do not believe that the BLS is capturing all people employed in the trucking industry.
Business Activity Markit US Services Activity Index – this index is noisy. The index is now just above 60 (below 55 is a warning that a recession might occur, whilst below 50 is almost proof a recession is underway). This index may not provide timely warnings of recessions.
z%20markit_services.png
US Treasury Tax Receipts – For the Great Recession, the rolling averages went negative in February 2008 – two months after the Great Recession’s start. For the 2001 recession, the rolling averages for tax revenues went negative two months after the official start of the recession. Currently, the year-over-year rolling average growth is up 81 % year-over-year – up from last months +13 %.
Year-over-Year Change in US Government Receipts – Monthly (blue line) and Three Month Rolling Average (red line)
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Predictive Coincident Index Conclusion: The predictive indices are mostly saying that recovery has recovered, and the economic growth is strong.
Technical Requirements of a Recession
Sticking to the current technical recession criteria used by the NBER:
A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.
… The committee places particular emphasis on two monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, we refer to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes.
Below is a graph looking at the month-over-month change (note that multipliers have been used to make changes more obvious).
Month-over-Month Growth Personal Income minus transfer payments (blue line), Employment (red line), Industrial Production (green line), Business Sales (orange line)
In the above graph, if a line falls below the 0 (black line) – that sector is contracting from the previous month. Another way to look at the same data sets is in the graph below which uses indexed real values from the trough of the Great Recession.
Indexed Growth Personal Income minus transfer payments (red line), Employment (green line), Industrial Production (blue line), Business Sales (orange line)
NBER Recession Marker Bottom Line – this month the indicators are positive which indicates a recession is not near.
Econintersect believes that the New Normal economy has different dynamics than most economic models are using.
Economic Forecast Data
The Econintersect 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 three-month rolling index value is now a positive 0.74 – an small decline from last month’s +0.77. The economic forecast is based on the 3-month moving average as the monthly index is very noisy. A positive value of the index represents Main Street’s economic expansion. Readings below +0.4 indicate a weak economy, while readings below 0.0 indicate contraction.
A summary of elements affecting our economic index:
- The government portion relating to business and Main Street slowed
- The business portion improved
- The consumer portion rate of growth continues to improve
The EEI is a non-monetary-based economic index that counts “things” that have been shown to be indicative of the direction of the Main Street economy. Note that the Econintersect Economic Index is not constructed to mimic GDP (although there are correlations, the turning points may be different), and tries to model the economic rate of change seen by businesses and Main Street. The vast majority of the inputs to this index uses data not subject to backward revision.
The red line on the EEI is the 3 month moving average.
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 primary dynamic(s) driving the economy. The Main Street sector of the economy lagged GDP in entering and exiting the 2007 Great Recession.
As Econintersect continues to backcheck its model, from time to time slight adjustments are made to the data sets and methodology to align it with the actual coincident data. To date, when any realignment was done, there have been no changes for trend lines or recession indications. Most changes to date were to remove data sets that had unacceptable backward revisions, became too volatile, or were discontinued. The last realignment was done in the June 2016 forecast to swap an industrial production data set which became too volatile. Documentation for this index was in the October 2011 forecast.
Jobs Growth Forecast
The Econintersect Jobs Index is forecasting non-farm private jobs growth of 300,000 for July – unchanged from last month’s forecast of 300,000. This forecast comes from smoothed data and it looks at 6 months of data which is now leaving the dark days of the lockdown behind making this forecast reasonably accurate.
Summary of Jobs Forecast
The fundamentals which lead to job growth are mostly unchanged. The model used to create employment growth is smoothed.
The Econintersect Jobs Index is based on economic elements that 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 job creation pressures.
For the last year, job growth year-over-year (green line in below graph) is bouncing around. The forecast by the Econintersect Jobs Index is shown as the blue line in the below graph. A fudged forecast (red line in below graph) is based on the deviation between forecast & current actual using a 3-month rolling average.
The fudge factor (based on the deviation between the BLS actual growth and the Econintersect Employment Index over the last 3 months) would project jobs growth of 400,000
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 than the index itself) – in other words, it has a good correlation to future economic conditions.
General Economic Indicators:
Monthly Data: {click here to view full screen}
Quarterly Data: {click here to view full screen}
Aruoba-Diebold-Scotti Business Conditions Index: {click here to view full screen}
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