Yearly Leading Indicators Growth Barely Positive

Jobless Claims Stay Modestly Elevated

Last week jobless claims rose. Claims were revised higher by 2,000 to 227,000. Estimates didn’t change anything. Furthermore, the number of claims in the latest report showed the increase stayed (no states were estimates in this report). There were 227,000 claims again which was 10,000 above the consensus. So there is no reason to worry about a recession because of this report. But there is cause for concern mainly because most economic data hasn’t been good.

You don’t see the Atlanta Fed calling for 0.4% GDP growth because the data has been strong. 4 week moving average of claims rose from 217,500 to 221,000 which is the highest level since June. This isn’t great news because this past report is the sample week for the employment report. There was a 9,000 increase compared to the October sample week. 

We could see a weak jobs report which could take the air out of this strong rally. November employment report comes out on December 6th. If this report shows weakness, I won’t be worried about a recession. But if there are negative revisions, it will be problematic.

Continuing claims have been increasing, but less than initial claims. They lag by a week, so that might be why. They increased to 1.695 million which pushed the 4 week average to 1.693 million which is the highest average since August. You can see in the top chart above continuing claims are extremely low and have flatlined. The bottom chart shows claims are up modestly year over year. I don’t see this as an issue yet because they are still very low. 

We need to see a bigger spike that’s sustained longer before I fear a recession. It would be surprising if claims didn’t increase at all given how weak the economy appears to be in Q4. Now, I’m an optimist and I’m only calling for growth to be between 1.5% and 2%. That shows how weak estimates are.

Philly Fed Manufacturing Report Improves

Despite the slight weakness in the Empire Fed manufacturing report, economists still believed the Philly Fed manufacturing index would increase. This time they were correct as the index improved from 5.6 to 10.4. That was above estimates for 7 and the high end of the estimate range which was 8.7. 

Keep in mind that these reports are often way off from estimates. It’s not uncommon for big jumps and declines which come in above or below the high and low end of the estimate range. This report doesn’t suddenly mean the manufacturing sector is doing great. It just means there’s a higher percentage chance that the manufacturing ISM improves this month.

The market expects the manufacturing sector to bottom in Q4, so there are only 2 bad months left to be had. And the economy should show some evidence of a turnaround soon. This Philly Fed reading does just that. Also, remember that the regional Fed indexes have been above the ISM PMI. Their optimism in November, might not lead to an improved PMI. 

Finally, remember that the Markit manufacturing PMI showed improvement while the service sector PMI fell. ISM manufacturing PMI could play catch-up to all those reports next time. (The November Markit flash report comes out on Friday). It will be impacted by how firms see the trade negotiations going. Lately, they have been going poorly, so that might hurt the ISM reading. We will see their opinions on the trade war in the quotes included in the report.

Headline indicator in the Philly Fed report isn’t a composite. It’s just the Fed asking firms about their general business activity. 30.3% said they saw an increase and 19.9% said they saw a decrease. This explains how its possible that the new orders and shipments indexes both fell sharply. 

New orders index fell from 26.2 to 8.4 and the shipments index fell from 18.9 to 9.8. It’s not this month that was weird. The previous month’s data was odd. This month the new orders and shipments indexes fell in line with the general conditions survey. It was weird to see the new orders index at 26.2 last month while the general activity index was only at 5.6.

Just like the Empire Fed report, the expectations index rose. It went from 33.8 to 35.8. The new orders index rose 0.4 to 40.3 and the shipments index fell 1.5 to 41.4. Exactly the opposite of the Empire Fed report, the capex index was down sharply as it fell from 36.4 to 19.4. This makes the average a wash.

Leading Indicators Near Recessionary

Leading indicators report is nearly giving off a recessionary warning since its yearly growth fell to just 0.3% in October. This is the same reading as September and exactly where it bottomed at in 2016. Anything negative would be a recession call. There have been false alarms, but it’s important to be aware of what could happen when this warning bell rings. 

6 month trend went negative for the first time in 3 years. Past 2 jobless claims reports were weak in November. This will hurt the November report and potentially push yearly growth lower.

September report was negatively revised to show -0.2% monthly growth which was down 1 tenth. The October monthly growth rate beat estimates for -0.2% as it was -0.1%. Declines were driven by weakness in manufacturing new orders, average weekly hours worked, and jobless claims. 

An improved Philly Fed index had a decline in its new orders index. If the ISM new orders reading falls further, it will the leading indicators index. Earlier this year, I stated this slowdown looks like the prior 2 in this expansion. I still believe that, but I think this one will be the worst of the 3 by a small amount. 

However, I will lose confidence in my thesis is the leading index’s yearly growth rate goes negative. It might this year. Remember, the stock market is in this index and the S&P 500 was up 2.04% in October. A turnaround in stocks this month or next month could push yearly growth negative. S&P 500 is currently up 2.17% in November.

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