Leading Indicators - ECRI Leading Growth Falls
Leading Indicators - This Friday was the one time per month we get an update on both the ECRI leading index and the Conference Board leading index. To be clear, the ECRI leading index is weekly and the Conference Board index comes out with data on the prior month. Since we’re in the middle of May, the April data came out.
Even though these aren’t measuring the same time-frame, they are valuable to review in concert because no indicator has a monopoly on future projections. You can review the older ECRI data to get an ‘apples to apples’ comparison.
As you can see from the chart below, in the week of May 10th, the ECRI leading index’s yearly growth rate fell from 0.8% to 0.2%. It is clearly following the stock market and financial conditions as there was a correction early in May. The index fell slightly from 146.9 to 146.7.
Comparisons will keep getting easier for the next few months. If later this year, growth isn’t in the double digits, I will be disappointed. Tecent positive growth streak suggests the slowdown will end late this year. However, because growth is low, it means there won’t be a sharp recovery.
Instead, growth will go from below the long term trend, to the long term trend. That’s not a disaster, but not much of an acceleration either.
New Record For The Conference Board Leading Index
Leading Indicators - The Conference Board leading indicator has recently been behind the curve of the ECRI leading indicator, but it hasn’t predicted a recession in this entire expansion, so it has a great 10 year track record. Specifically, the index was up 0.2% monthly which missed estimates for 0.3% growth.
Growth was spurred by gains from the stock market, the leading credit index, and consumer expectations for business conditions. This index is at a new record high, but it is pointing to a slowdown in mid to late 2019. The manufacturing sector hurt the index.
As you can see from the chart below, the 6 month average of the 6 month rate of change increased 1%. The box in the corner reviews the number of months it has gone negative before recessions.
A slight further decline in this growth would trigger a recession warning. A recession could come anywhere from the next 2 months to the next 15 months. The Conference Board stated in its press release that economic growth will moderate toward 2% by the end of the year.
Given how hard the stock market has rallied this year, I think it’s possible the growth rate shown below would be negative if stocks were down year to date.
Improved Philly Fed Index
Leading Indicators - Just like the Empire Fed manufacturing survey, the Philly Fed index improved. This signals the May manufacturing ISM might increase.
As you can see from the chart below, the general business conditions index increased from 8.5 to 16.6 which destroyed estimates for 9.3 and the high end of the estimate range which was 11. It’s not a surprise economists were only expecting a small increase because the manufacturing sector was weak in April.
Up until this point, the only source of optimism was the Empire Fed index. Now with two positives, I expect the ISM PMI to increase.
Most of the indexes in this report were strong. Shipments increased from 18.4 to 27.6. However, new orders fell from 15.7 to 11. Of the 9 categories, 5 increased.
A falling inventory index isn’t necessarily a bad thing. The 6 month expectations index increased slightly from 19.1 to 19.7. The capex index fell from 30.9 to 23.3. New orders also fell from 23.9 to 21.3.
Leading Indicators - Beware Of Strong Consumer Confidence
May preliminary University of Michigan consumer confidence reading showed promise as it increased from 97.2 to 102.4 which destroyed estimates for 97.5 and the high end of the estimate range which was 97.8.
As you can see in the chart below, this was the best reading since January 2004. I was already thinking that retail sales growth would rebound in May after the weakness related to the Easter seasonal adjustment in April. This supports my optimism.
Specifically, the expectations component increased 8.6 points to 96 which is also a 15 year high. This makes the bearish investors who focused on the difference between expectations and current conditions look foolish. The current index was only up 0.1 to 112.4. Therefore, the gap between the 2 indexes closed.
Beware - this report survey was taken before the recent tariffs were initiated.
Leading Indicators - The 25% U.S. tariffs on $250 billion worth of Chinese goods will cost households $400 and tariffs on all goods will cost households $800. That will surely change consumers’ minds.
It’s possible that if consumers pull back on spending because of the tariffs, that President Trump will get rid of them.
As you can see from the chart below, for middle income earners, the tariffs take away all the gains had by the Tax Cuts and Jobs Act.
If the consumer sentiment index only focused on people who unfavorably mentioned tariffs, the expectations index would be 25 points lower. The percentage of consumers mentioning tariffs peaked at 35% last July. Now only 16% of consumers cited tariffs. That’s interesting because more tariffs are now in place.
Leading Indicators - This just shows how the media can impact consumer sentiment.
Fears become reality. That’s why debt ceiling debates and government shutdowns have big effects on the consumer even though they aren’t huge issues for private workers.
Tariff mentions in the survey started to increase again after the latest trade war news. If it gets above the July high, consumer sentiment will decline sharply. I’m very interested to see how much the final University of Michigan survey falls from the preliminary one.
In line with this perspective, year ahead inflation estimates increased 0.3% to 2.8% which is a 6 month high. 5 year inflation expectations increased 0.3% to 2.3%. Obviously, tariffs are a problem because they increase inflation. This latest round of tariffs will affect consumer goods more. I expect it to be a big issue when consumers learn how much more goods are going to cost.
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