Category Archives: Leading Indicators

FOMC Commentary, November Leading Indicators, December Philadelphia Fed Survey, Jobless Claims

KEY DATA: Leading Indicators: +0.6%/Philadelphia Fed: 24.5 (-16.3 points)/Jobless Claims: 289,000 (down 6,000)

IN A NUTSHELL:   “The Fed may be shifting into “patience” mode, but the economy is continuing to accelerate.”

WHAT THE DATA MEAN: Today’s economic reports showed that the economy continues to improve.  The Conference Board’s Leading Economic Index jumped again in November and it looks like the increases are pointing to a very strong economy going forward.  Looking at a graph of the index, the rise seems to match the 2003-2004 housing bubble economic surge.  Supporting the view that the economy is picking up steam was another fall in weekly jobless claims.  The jump in claims near Thanksgiving seems to have been a one-week wonder and we are back to record lows, when adjusting for the size of the labor force.   As for the Philadelphia Fed’s Business Outlook Survey, a large decline was expected.  This index can be very volatile and the November number was one of the highest on record.  The December level also points to strong growth, especially since orders remain solid. 

FOMC Commentary: Yesterday, the Fed did and didn’t do what I thought they would and should do: Remove the “considerable time” phrase.  Maybe.  It didn’t do it because it repeated it.  But more importantly, the Committee substituted a new comment,that it can be patient (emphasis added) in beginning to normalize the stance of monetary policy”, and noted that patience and considerable time were similar if not equal.  Getting confused?  No kidding!  The statement seems to be the most tortured attempt at changing the psychology surrounding the timing of tightening I have seen.  I guess that is what happens when you worry more about market reaction than policy clarity.  We know little more now than we did before the meeting and press conference.  So much for better communications.

So, what does patience mean, when it comes to rate hikes?  Chair Yellen said we have a breather for the next two meetings. However, the chart of fed funds rate expectations points to a tightening in 2015, which will likely come at around mid-year.  What would make her lose her patience?  Stronger growth and that is where the data come in.  By the time we get to the April meeting, we will have three more employment reports and GDP numbers for the fourth quarter of 2014 and first quarter 2015.  If the Leading Indicators are pointing to anything it is the string of 3.5% growth rates could be sustained.  If that is the case and the job gains are above 250,000 and the unemployment rate continues to decline, it would be hard to see how wage increases don’t accelerate.  But I am guessing that patience will be tied to compensation and until we actually see large increases in wages, the Fed will continue to dawdle. 

October Existing Home Sales, Leading Indicators and November Philadelphia Fed Index

KEY DATA: Home Sales: +1.5%; Leading Indicators: +0.9%; Phila. Fed: up 20.1 points

IN A NUTSHELL:   “It is looking more and more like the economy is accelerating.”

WHAT IT MEANS:  Where should I start?  How about the outlook for the future?  The Conference Board’s Index of Leading Indicators jumped for the second consecutive month, and the stock market didn’t even help this time!  If this measure has any predictive capacity, and it does, then it is pointing to a lot stronger growth in the months to come.  A second indication that growth may be picking up was the huge increase in the Philadelphia Federal Reserve Board’s Business Outlook Survey’s activity index.  This index does bounce around but the enormous rise points to a clearly improving manufacturing sector.  There was a special set of questions asked about employment and almost 56% of the respondents say that they expect to hire in the next twelve months.  That is up about ten percentage points since January and the major reason is that firms expect sales to rise.  The positive sales outlook should not be a surprise given that only 1.7% of the respondents expect growth to slow over the next six months.

For the economy to really hit its stride, we need the housing market to at least hold up its part of the deal.  Existing home sales rose in October and demand has finally clawed back above where it was when rates spiked.  For the first time since October 2013, the year-over-year change was positive.  The increases across the nation were solid but there was a decline in demand in the West.  Prices seem to firming again, in part because of the inventory is shrinking.  Rising prices is critical if homeowners are to have enough equity to sell their current houses and move into different ones.  That churn has been missing from the market.

MARKETS AND FED POLICY IMPLICATIONS:  What a day for the economic data.  While overall inflation may be restrained, we saw that services inflation is coming back and the level of jobless claims points to additional strong employment reports.  Now it appears that housing is picking up, albeit slowly, while manufacturing may be poised for a large increase.  When you add those numbers the jump in the leading indicators, you really have to feel optimistic about the economy.  The Fed is debating the use of the term “considerable time” when it comes to keeping rates low.  But the members may dump that phrase as early as the mid-December FOMC meeting if the economic numbers continue to show increasing economic and labor market strength.  They may also have to start talking about services inflation, something that really needs to get the attention that has been missing.  But investors like to focus on the positive and the latest numbers only feed the bullish beast.

September Leading Indicators and Weekly Jobless Claims

KEY DATA: LEI: +0.8%; Coincident Index: +0.4%/Jobless Claims: 283,000 (up 17,000)

IN A NUTSHELL:  “Despite some issues with housing, signs are pointing to even better growth in the months ahead for the economy and the labor markets.”

WHAT IT MEANS:  With turmoil all around, you would assume the economy is in danger of stalling.  Wrong again.  Investors have decided that maybe the world is not falling apart, even as more chaos occurs, and the equity markets have rebounded.  Consumer confidence, at least through the first half of the month, has actually improved.  And now we see that an indicator of future growth, The Conference Board’s Leading Economic Index, rose sharply for the second time in three months.  The measure had stalled in August, but it bounced back with a vengeance and the three-month average increase is pointing to even better growth ahead.  The Coincident Index, which measures current activity, has not been rising as quickly as the LEI might imply.

Jobless claims, one of the factors driving the indicators, rose last week.  But the increase was from an historically low level when labor force size is considered.  These numbers are volatile.  Smoothing them, the four-week average was down to a new record low.  Also, a new index about the labor market, ADP’s Workforce Vitality Index, posted a solid third quarter rise from the second quarter level.  Conditions in the South and West have firmed sharply over the past year.  This report, when coupled with the jobless numbers, point to an accelerating economy.  

About the only concern in the Conference Board’s report was the housing market and the data are really all over the place.  But we are seeing things improve, such as existing home sales.  Also, the Federal Housing Finance Agency released its August Housing Price Index and prices rose solidly.  The index is back to where it was in August, 2005 but is still nearly 6% below its April, 2007 peak.  The year-over-year increase, however, is decelerating, though it was better in August than July.

MARKETS AND FED POLICY IMPLICATIONS: Today was a good day for the economic numbers.  They should brighten an already rebounding investor mood as they point to stronger growth in the future.  Issues such as Ebola and ISIS terrorism may cause concern, but they shouldn’t have a great impact on fundamental economic activity.  And if the labor markets are tightening, as most data seem to imply, then the Fed has to take notice.  We will see if the lights are on in the Eccles Building next week as the FOMC is meeting.  Quantitative Easing should be ended but concerns about less than desired inflation and labor market slack may still be at the center of the discussion.  Since some at the Fed want to see the whites of inflation’s eyes before shooting, there is no reason for them to indicate they are going to pull the trigger soon.  But if the October and November employment reports are as good as I suspect, conditions may be a lot different when the Fed members meet again in the middle of December.  That is when I expect them to start signaling that rates will be going higher and not after a considerable time.

July Existing Home Sales and Leading Indicators, Weekly Jobless Claims

KEY DATA: Home Sales: +2.4%/ Leading Indicators: up 0.9%; Claims: 298,000 (down 14,000)

IN A NUTSHELL:  “It looks like the economy is approaching escape velocity.”

WHAT IT MEANS: There were a lot of numbers released today and they all were really good.  First, there was existing home sales, which rose solidly in July.  The pace of demand is back to October after having posted four consecutive increases.  While the level is not spectacular, it is probably within ten percent of a solid market.  The huge levels posted during the mid-2000s should be viewed as aberrations not targets.  Increases were in all regions except the Northeast, which was flat.  As for prices, they continue to moderate.  After peaking last August at a 13.4% rise over the year, the gain is now under 5%.

 

Looking forward, the Conference Board’s Index of Leading Indicators popped in July.  This measure is accelerating as there were 0.6% increases in both May and June.  Gains in both the coincident (current conditions) and lagging indicators support the view that the economy is in really good shape.  And then there were the weekly jobless claims number, which got back to “normal”, that is, below 300,000.  Last week’s pop was a surprise and assumed to be due to a non-seasonally adjustable pattern of vehicle production shutdowns.  That we moved back to such a low rate is an indication that the labor market is really in good shape.

There were two other reports released that also point to a strengthening economy.  The Philadelphia Fed’s Business index surged in August, as did expectations.  Supporting the view that manufacturing is really cooking was the Markit flash August number which jumped to its highest level in 4.5 years.  The report noted that “robust manufacturing growth momentum has been sustained through the third quarter”.

MARKETS AND FED POLICY IMPLICATIONS:  Janet Yellen speaks tomorrow morning and that is the focus of attention.  Her talk takes on even more importance given the growing indications that the economy is beginning to break out of its sluggish growth mode.  While waiting for wage gains is not exactly the equivalent of sitting on a bench waiting for Godot, it is not really the best way to run monetary policy.  Wages is a lagging, lagging indicator and monetary policy needs to look forward.  The economic data are pointing to stronger growth than the Fed has been forecasting, which is hardly a surprise.  I always use the Fed’s numbers as a lower bound for growth.  Of course, I have been aggressively optimistic this year and seeing the possibility that my forecast could actually turn out to be correct makes me a bit giddy, so I will limit my criticism of the Fed.  That said, I have argued that wage gains are coming sooner than later and that the Fed will be compelled to raise rates earlier than many have expected.  Today’s data reinforces that view.  These data should make investors happy, but only when they realize that it’s the economy not the Fed that should be driving prices.