by Brad Parkes
Economic Discussion
In the past it was common to suggest that the stock market was a leading economic indicator and would peak up to six months prior to the economy. I think that was due to a slow dissemination and collection of economic data versus the quick realisation of punters’ view of economic activity. I think the stock market and economy will top almost simultaneously (within three months) this time.
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As I speculated in the Viewpoint (see the upcoming newsletter) and in my 2017 Trends, the War on Terror (WoT) is potentially culminating, Russia and the US seem to have a coordinated strategy and major leadership have recently been killed. I mentioned I think is the final requirement for the bullish JPM (in the newsletter) chart to “rhyme” with the past. New highs are happening regularly and new highs tend to happen in clusters and in the bull market eras identified in the JPM chart.
On the blog I have written a post about my guess on the current stock market cycle (here) and to summarize, it is still a bull market.
Due to my view that the peak in stock market activity and economic activity may be simultaneous any continued and significant divergence in the US economic situation versus the stock market will be reason to become more cautious and anticipate the top of the cycle.
GROWTH
The first chart I came across from Colin Twiggs. I thought it was a clever model and maybe one day it no longer applies, but currently it has GDP expanding at about two and a half percent.
The Purchasing Managers Index for both Developed and Emerging Markets have increased in 2017. Earlier in the year Emerging Markets had caught up to Developed markets for the first time since 2013, however, since DM growth has outpaced EM growth.
The model and PMI data gets confirmation from global hotel data. I am a big believer that hotel data is a coincident indicator for the economy, in some cases lagging.
Hotel activity has improved across almost all metrics globally:
- The European hotel industry reported positive year-over-year performance metrics during May 2017. Occupancy rose 3.5% to 75.6%, ADR increased 4.8% to €114.35 ($127.85) and RevPAR jumped 8.5% to €86.47 ($96.68).
- In May, the Middle East hotel industry reported occupancy 5.9% to 64.4%, ADR fell 2.5% to $150.47 and RevPAR dropped 8.2% to $96.88. Africa, on the other hand, despite posting a 0.9% occupancy dip to 55.2%, saw an 11.6% ADR increase to $99.20 drive a 10.5% RevPAR increase to $54.76.
- The Central/South America region reported occupancy increased 5.2% to 54.1% in May, according to STR. While ADR dropped 1.5% to $95.74, RevPAR rose 3.7% to $51.78 during the month.
- Hotels in the Asia/Pacific region reported occupancy rose 2.7% to 68.9% in May. ADR increased 2.4% to $96.78 and RevPAR jumped 5.2% to $66.73 when compared to the same month in 2016.
What does offer some concern is that the US market cycle for hotels is going parabolic. This would suggest lesser business going forward. This can be confirmed in the below chart where occupancy seems to be rolling over after peaking in late 2016.
CONSTRUCTION
The Architecture Billings Index remains positive indicating growing construction intentions.
The Dodge Momentum Index, which tracks construction intentions for commercial and non-residential buildings, also show spending plans at multi year highs. This is a lagging indicator and will likely turn down after the economy, however, with it still growing the economy has not turned.
Residential construction is also at a multi-year high. This metric could be considered coincident with the economy, versus the lagging nature of commercial non-residential construction, and confirms the economy is still growing.
TRADE
Singapore is likely the economy most dependent on trade and can be viewed as microcosm on global trade. Currently Singapore GDP is off the lows but closer to the lows than the highs, but export volumes are picking up to growth levels that have not been seen since immediately after the financial crisis of 2009.
The increase in global trade volumes can be seen in the Long Beach Port Activity which has also been very strong, but since goods that arrive today were shipped weeks ago, it is a lagging indicator.
The Port of Long Beach reported that June was the second best June ever. The second quarter container traffic jump 8.3 percent where 648,287 TEUs arrived in May which was an increase of 1.2 percent y-o-y. This follows May business that was the second largest in history (only after 2016).
So far in 2017 container imports have grown 5.1 percent compared to 2016.
The Cass Freight Index shows that shipments of goods are near five year highs.
MANUFACTURING
Steel production in the US, year to date up to the first week of July 2017, was 46,803,000 net tons with a capability utilization rate of 74.4 percent increasing 2.2% over the same period in 2016, when the capacity utilization rate was 72.4 percent.
American Iron and Steel Institute
CONSUMER
One of my favourite indicators is Light Truck Sales. I think it is a good proxy of small scale labour. The quarterly sales total has peaked five to sixteen quarters before the onset of the last our recessions. It is possible that one or two quarters ago the total sales numbers peaked. This could indicate the two previous charts are about to rollover.
To determine how growth is changing the below chart is the same light truck sales data but plotted as the percent change from a year ago covering the last four recessions. Admittedly the data is a little messy and there are two false signals, however, when the growth rate gets significantly below 0% it has been associated with a recession and the growth rate has weakened significantly.
UNEMPLOYMENT
The labour market is still tightening but by a smaller amount. Over the last seven recessions when the year over year change in the four week moving average of initial jobless claims has increased by 40,000 or more a recession has been close at hand. Currently the figure is still negative but approaching the zero line.
The following chart is a very different indicator. It is not meant to be a social statement, anything to do with my perspective on labour quality, racism or anything else. It just a metric that happens to have a good forecasting record. The chart is of the African American Unemployment Rate minus the Caucasian Unemployment Rate. For whatever reason when this metric bottoms and turns higher the US economy has been in recession. It currently is at the lowest ever and some structural changes to society may account for this. Hopefully this indicator continues to trend down to 0%, but it is worth noting it is in the range of the last two recessions.
LABOUR MARKET
Aggregate Weekly Hours Worked is at an all time high.
But compensation has declined in 2017.
Leading to less disposable income as Americans continue to spend. This is not a good indication of labour market strength and consumer financial health.
MONETARY
The recession indicator that is considered the most accurate at forecasting is the yield curve and it currently is not flashing a warning signal.
The Leading Indicator Index for the US is still very much in positive territory, however, drops below 1% growth has been associated with a recession over the past three recessions, with only one false signal. The current growth rate is barely above one percent.
The Coincident Index minus the Leading Index has peaked before the last three recessions and drops below 2.5% have been associated with recessions. The good news is that currently the reading is above 2.5%, consistent with the above chart of the economy growing moderately.
Conclusion
I think the prudent investor and speculator should be on recession watch. The indicators show the economy is growing but I think it is slowing and that my gut feeling is 75/25 there will be a recession by the third quarter of 2018. The alternative bull view would be to believe the JPM chart and that WoT is being won behind the scenes and will be over in short order and this is the bottom of the economy and a rare soft landing has been accomplished and the next phase of the cycle is up.
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