Economic Forecast July 2012: Growth Continues to Hang In

Written by Steven Hansen

The Econintersect July 2012 economic index shows underlying economic fundamentals continue to show economic expansion – with the rate of growth improving marginally in this forecast.

The news out there is not good – Europe in a death spiral, the BRIC economies slowing rapidly, most surveys at or near recession levels, and sick USA employment numbers.  But much of this bad news does not correlate to economic activity.  And the headlines (data) which do correlate generally have stable flat to positive trend lines.

However, one of the three the major USA leading economic indicators which are touted to have a six month forward vision is negative and degrading – and the authors say a recession is coming.

This post will summarize the:

  1. leading indicators,
  2. predictive portions of coincident indicators,
  3. review the technical recession indicators, and
  4. then interpret our own index – Econintersect Economic Index (EEI) – which 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.


  • the “New Normal” economy is pulsing or growing in unpredictable spurts. These spurts are evident in ECRI’s WLI, Econintersect 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.  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 methodologies seem to exaggerate these cycles.;
  • the consumer is still consuming – but the rate of spending relative to income is degrading.  There is much nuance with consumer spending and the current background is available here;

Seasonally Adjusted Spending’s Ratio to Income (a declining ratio means consumer is spending less of its Income)

  • Joe Sixpack’s economic position may be strengthening.  Econintersect is experimenting with and economic index whose underlying principle is to estimate how well off Joe feels.  The index is documented at the bottom of this post.  Joe and his richer friends are the economic drivers.  Joe is the blue line in the graph below, and is not close to the levels associated with past recessions.

Joe Sixpack Index

  • jobs growth has disconnected from known economic fundamentals.
  • 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 primary 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 has been strongly arguing for almost a year that a recession is coming.  In July, they have stated the country is currently in a recession.  ECRI’s WLI index value has been jumping around due to backward revision – but now is solidly in negative territory. 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.

Current ECRI WLI Index

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.   Looking at the historical relationships in this index must be in negative territory many months (6 or more) before a recession has occurred.

Leading Index for the United States from the Philadelphia Fed – This index is the super index for all the state indices.

The leading index for each state predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.

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. Both the Conference Board (LEI) and the Philly Fed’s Leading Index is saying economic expansion will continue as far as their indexes can see. These are completely opposite opinions.

Forward Looking Coincident Indicators

Here is a run through of the most economically predictive coincident indices which Econintersect believes can have up to a six month warning of an impending recession – and do not have a history of producing false warnings.

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.

In all the data Econintersect analyzes, there are no recessionary indications currently evident.

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.

Current Rail Data

Here rail year-to-date is contracting over 2011 levels – mostly due to coal. If coal is removed from the equation, growth has been running between 2.5% and 3.5% per year (slightly less good than the data one month ago). 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 marginally better in its last update – and remains firmly in expansion territory. The current problem with interpreting this index is that a current trend is not evident.

Predictive Coincident Index Bottom LineEconintersect believes true economic activity (not monetary based GDP) was expanding in May 2012 somewhere between 2% to 3% in many sectors of the economy using non-monetary pulse points based on these indices shown above, and other indices which Econintersect are indicative of the real economy.  This was slightly less good than last months look at the coincident data.

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.

Here is a one graph says it all looking at the month-over-month change (note that multipliers have been used to make change more obvious).

Month-over-Month Growth Personal Income less 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.  At his point, business sales are nearest contraction – but is not contracting.  Your interpretation of graph should be that the economy was not recessing in June 2010.  Again, this is a rear view mirror, is subject to revision, and is not predictive of where the economy is going.

Econintersect believes that the New Normal economy has different dynamics than most economic models.

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 0.52 (up slightly from last month’s 0.42), while the monthly index improved from 0.35 to 0.63. 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.

With this month’s update, the trend of the index has improved from downward (less good but economy growing) to flat (rate of growth constant).

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 0.52 shows the economy’s rate of growth is constant.

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 main street sector of the economy lagged GDP in entering and exiting the 2007 Great Recession.

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.

Jobs Growth Forecast Improves

The Econintersect Jobs Index is forecasting an improving job creation short term for July.

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.



Current Actual*

July 2011 135,000 175,000
August 2011 145,000 52,000
September 2011 145,000 216,000
October 2011 145,000 139,000
November 2011 125,000 178,000
December 2011 100,000 234,000
January 2012 90,000 277,000
February 2012 95,000 254,000
March 2012 125,000 147,000
April 2012 130,000 (203,000)** 87,000
May 2012 130,000 (200,000)** 92,000
June 2012 145,000 (215,000)**
June 2012 155,000 (200,000)**

* 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 200,000. 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.

Links to Analysis Of Indicators:

Leading Indicators
ECRI economic forecasts x
Leading Economic Indicator x
Economic Metrics
Gross Domestic Product
Chicago Fed National Activity Index Limited
Federal Reserve View of Economy (Beige Book)
Federal Reserve FOMC Meetings
Trade Balance x
Rail Traffic x
Sea Container Counts x
Truck Transport Tonnage
University of Michigan Consumer Sentiment
Consumer Credit
Conference Board Consumer Confidence
Personal Consumption Expenditures (PCE)
Prices and Inflation – CPI, PPI and Export/Import
Business & Manufacturing
Wholesale Sales
Retail Sales Limited
ISM Non-Manufacturing Survey x
Manufacturing Sales
ISM Manufacturing Survey
Durable Goods
Industrial Production x
Empire State Manufacturing Survey
Philly Fed Business Survey
Construction Spending
New Home Construction
Real Estate
Pending Home Sales
Case-Shiller Home Price Index
New Home Sales limited
Existing Home Sales
CoreLogic Home Price Index
Weekly Initial Unemployment Claims
Job Opening and Labor Turnover Survey (JOLTS) Limited
Bureau Of Labor Statistics Jobs Report x
ADP Employment Report

General Economic Indicators:

Monthly Data: [click here to go to source file]

Quarterly Data: [click here to go to source file]

Aruoba-Diebold-Scotti Business Conditions Index: [click here for source file]

Past EEI Forecasts

Documenting Joe’s Index:

Objective: To design an economic index centering on the average consumer – Joe Sixpack – a Main Street index.

Profile: Joe Sixpack is a blue or white collar worker with a home and mortgage. He has little in the bank, and few real investments.

Methodology: No index will represent the average Joe as this is America, and in America all Joes are different. No reason to get fancy.

  • just want to get a feel of what Joe thinks he is making by looking as his wage / salary income and housing value.
  • want to use real (inflation adjusted) values to equalize across time periods.
  • want to adjust for unemployment by looking at per capita income to get a feel of the dynamics. [assume that transfer payments are made for survival – food, shelter, and clothing so no transfer payments included; Joe Sixpack is assumed not to be a proprietor; Joe has no rental income.]

  • The graph above shows the four components of personal income. The red line in the graph below shows per capita real (inflation adjusted) real disposable income (DPI). Also in the graph below, the blue line shows real per capita salary and wages – real DPI less transfer payments, proprietors income, and rental income.

  • As shown on the graph above Joe’s real wages are around 2000 levels.
  • Real Home values (in aggregate as shown on the graph below) are at levels seen in the 1990s – note that this graph is NOT adjusted for the growth in the number of homes.

The Joe Economic Index:

The graph below adds change in per capita change in real home values to get a feel of what Joe feels his income is. The premise is that Joes at least subconsciously count “non-real” earnings (such as change in home value) as income and adjust consumption accordingly. In reality, in the past Joes were using this gain to buy bigger houses, or take out home equity loans to buy boats and recreational vehicles and take vacations.

Combining per capita home values and wages, let me present Joe’s Index.

Unfortunately, the home values (from Federal Reserve Z.1) are updated quarterly, and that means Joe’s Index is only current through 31March2012. But we KNOW that both income AND home prices are improving – so we know the current value is higher than the graphs we are showing here.

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