Leading Index Perks Up Signaling Slowdown End Is Near

Leading Index - Weekly Index’ Growth Rate Improves Substantially

Before I review the latest economic reports, let’s look at the big jump in the ECRI leading index’s growth rate. It is one of the most important factors in my analysis of the economy. 

As you can see from the chart below, the yearly growth rate improved from -3.7% to -2.9% in the week of March 8th. This improvement occurred because the comparison got easier as the index only increased 0.2 points.

Since this index is supposed to be 2-3 quarters ahead of the economy, it is still projecting weakness in Q2 and Q3 as it was highly negative in late 2018 and early 2019. However, this improvement is a signal there is light at the end of the tunnel. The slowdown could end in late 2019 or early 2020. 

If there ends up being a recession (a low probability in my opinion), it will be quick. The improvement supports the stock market rally this year as stocks are supposed price in the next 6 months of the economy. This index is almost ready to support the stock market hitting a record high. Also, this index’s growth rate could become positive as the S&P 500 hits a record high.

The ECRI coincident index’s growth rate fell to 1.9% from 2.2%. It was 2.9% in October. Q1 GDP growth being weak and potentially the low point of the year is baked in to the stock market. Very few economists see quarter over quarter growth of above 2% in Q1.

Leading Index - February Import And Export Prices

Import and export prices improved because petroleum prices were up. Import prices were up 0.6% monthly which beat estimates for 0.4% growth. That’s very impressive because the January reading was revised from -0.5% to 0.1%. 

As you can see from the chart below, import prices were down 1.3% yearly after falling 1.7% in January. This price growth is historically low even though it improved slightly. Export prices were also up 0.6% monthly which tripled the consensus and was better than the -0.5% growth last month. The yearly growth rate was 0.3% which followed -0.2% growth.

Export agricultural prices were up 0.3% monthly and fell 0.2% yearly. Rising import prices from Canada pushed the overall reading higher. This pressure came from petroleum. Monthly prices for Canadian imports were up 2.3% in February and 8.3% in January. Yearly prices were only up 0.6%. 

Chinese import prices were basically flat as there was no change in February on a monthly basis and a 0.3% decline in January. Yearly prices fell 0.7%. Prices for food imports fell 0.8% monthly and 3.4% yearly. Petroleum prices were up 4.7% and finished goods prices were almost flat. Export capital goods prices were up 0.2% and 0.4% in the past 2 months with yearly growth of 1.6%.

Leading Index - Solid New Home Sales

Investors looking for improvement in the housing market in the spring. Which means the reports from the winter don’t make or break my thesis. However, it’s nice to see solid results. 

December new home sales report was revised from 621,000 to 652,000. January reading was 607,000 as you can see from the chart below. This missed estimates by 5,000. Best news is the 3 month moving average increased 19,000 to 629,000 which is the best level since June 2018.

New home sales should improve since the consumer has excess savings, inflation is modest, wages are accelerating, interest rates have fallen, and home prices are increasing at a slower rate. Median new home sales were down 0.6% monthly and 3.8% yearly to just $317,000. Discounts helped sales in January.

This report was brought down by the South and pushed up by the West on a monthly basis. West had new home sales growth of 27.8% monthly, but saw sales decline 3.2% on a yearly basis. South was the reverse as monthly sales fell 15.1%. But yearly sales increased 6.1%. 

There were 342,000 new home sales in the South, showing us how big that market is. Overall, yearly new home sales were down 4.1%. Because supply only fell 1.5% to 336,000, inventory increased from 6.3 months to 6.6 months.

Leading Index - Weak Industrial Production Report

It’s no surprise the industrial production report was weak. Most manufacturing surveys like Markit and ISM showed manufacturing growth weakened in February. The U.S. economy will rely on the service sector in the next few months. That's why the consumer will be more important than ever.

Monthly industrial production was up 0.1% which missed the consensus for 0.4% growth. January reading was revised from -0.6% to -0.4%. Manufacturing was down 0.4% which missed estimates for 0.4% growth and improved slightly from the 0.5% decline last month. Capacity to utilization rate fell from 78.3% to 78.2% which missed estimates for 78.5%.

As you can see from the chart below, industrial output growth was 3.5% yearly which is down from above 5% growth 6 months ago. 

2019 could be a reverse of 2018 as the housing market could be strong while the manufacturing sector is weak. Manufacturing growth was only 1% yearly. Mining output was up 12.5% yearly and 0.3% monthly. Utilities output was up 3.7% after posting 2 straight declines. 

That volatility is related to the weather as February was colder. March has been seasonally cold which could increase utility output. Business equipment fell 1% and motor vehicle output fell 0.1%; both were the 2nd straight declines.

Leading Index - Conclusion

Leading index is improving which suggests at the worst growth will be better in the 2nd half than the 1st half of 2019. Inflation is still low. 

While new home sales missed expectations, the 3 month average improved. Price weakness should lead to demand increasing in the spring. The manufacturing sector was weak in Q1 2019. That was supported by the February industrial production report. 

If the service sector is strong, we could see solid GDP growth in 2019 even with manufacturing being weak. The biggest question for manufacturing is when the slowdown will end. This slowdown still isn’t nearly as bad as the 2015-2016 slowdown on a yearly basis. I’ll be reviewing the March regional Fed manufacturing reports to see if the sector’s growth rate is recovering. 

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