Weekly High Frequency Indicators Show That The Coronavirus Recession Is Here

Purpose

I look at the high frequency weekly indicators because while they can be very noisy, they provide a good nowcast of the economy and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available. They are also an excellent way to “mark your beliefs to market.” In general, I go in order of long leading indicators, then short leading indicators, then coincident indicators.

A Note on Methodology

Data is presented in a “just the facts, ma’am” format with a minimum of commentary so that bias is minimized.

Where relevant, I include 12-month highs and lows in the data in parentheses to the right. All data taken from St. Louis FRED unless otherwise linked.

A few items (e.g., Financial Conditions indexes, regional Fed indexes, stock prices, the yield curve) have their own metrics based on long-term studies of their behavior.

Where data is seasonally adjusted, generally it is scored positively if it is within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it is not seasonally adjusted, and there are seasonal issues, waiting for the YoY change to change sign will lag the turning point. Thus I make use of a convention: data is scored neutral if it is less than 1/2 as positive/negative as at its 12-month extreme.

With long leading indicators, which by definition turn at least 12 months before a turning point in the economy as a whole, there is an additional rule: data is automatically negative if, during an expansion, it has not made a new peak in the past year, with the sole exception that it is scored neutral if it is moving in the right direction and is close to making a new high.

For all series where a graph is available, I have provided a link to where the relevant graph can be found.

Recap of monthly reports

For what it’s worth, February housing data remained strongly positive in permits, starts, and existing home sales, causing a slight improvement in the Index of Leading Indicators. Industrial production rebounded, although only slightly in manufacturing. Retail sales, both nominal and real, declined significantly. All of this was before the impacts of the coronavirus began to be felt in the wider economy.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.13%, up +1.05 w/w (1-yr range: 3.29-5.18)
• 10-year Treasury bonds 0.88%, down -0.11% w/w (0.54-2.79) (new all time low intraweek)
• Credit spread 4.25%, up +1.16% w/w (1.96-3.09) (new 10 year high)

(Graph at FRED Graph | FRED | St. Louis Fed)

Yield curve

• 10 year minus 2 year: +0.55%, up +0.08% w/w (-0.04 – 0.47) (new 1 year high)
• 10 year minus 3 month: +0.83%, up +0.13% w/w (-0.52 – 0.70) (new 1 year high)
• 2 year minus Fed funds: -0.33%, up +0.92% w/w

(Graph at FRED Graph | FRED | St. Louis Fed)

30-Year conventional mortgage rate (from Mortgage News Daily) (graph at link)

• 4.15%, up +.15% w/w (3.13-4.63)

BAA Corporate bonds and Treasury bonds turned positive several months ago. That corporate bonds recently fell to yet another new expansion low would ordinarily be extremely bullish into Q1 2021, but the spike to nearly five-year highs would ordinarily mean this is a negative. Together, these make corporate bonds a neutral, while Treasuries remain a positive.

The spread between corporate bonds and Treasuries has exploded negative. The yield curve continued to whipsaw this week as all three measures are now solidly positive. Mortgage rates being were at all-time lows less than two weeks ago, but have now also spiked enough that they are a neutral.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps -1% w/w to 280 (231-315) (SA)
• Purchase apps 4 wk avg. up +5 to 276 (SA)
• Purchase apps YoY +11% (NSA)
• Purchase apps YoY 4 wk avg. +11% (NSA)
• Refi apps -10% w/w (SA)

*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted

(Graph at here)

Real Estate Loans (from the FRB)

• Up +0.3% w/w
• Up +4.6% YoY (2.8-4.7)

(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed)

Purchase applications generally declined from expansion highs through neutral to negative from the beginning of summer to the end of 2018. With lower rates since early 2019, their rating climbed back to positive. Meanwhile, lower rates have led to a decadal high in refi, so this metric has become a positive.

For two weeks in 2019, the growth rate in loans fell below +3.25%, and so went back from positive to neutral, but then rebounded to positive and has generally stayed there since.

Money supply

M1

• +0.9% w/w
• +0.2% m/m
• +7.1% YoY Real M1 (-0.1 to 7.1) (new one year high)

M2

• +0.4% w/w
• +1.0% m/m
• +5.9% YoY Real M2 (2.0-5.9) (tied for one year high)

(Graph at FRED Graph | FRED | St. Louis Fed)

In 2018 and early in 2019, real M1 turned neutral and very briefly negative. Real M2 growth fell below 2.5% almost all during 2018 and early 2019, and so was rated negative. Last year, both continued to improve, and for the past few months, both have turned and remained positive.

Corporate profits (estimated and actual S&P 500 earnings from I/B/E/S via FactSet.com)

• Q4 2019 actual, down -0.03 to 41.77, down -1.0% q/q, down -2.5% from Q4 2018 peak
• Q1 2020 estimated, down -0.51 to 38.15, down -8.7% q/q, down -11.0% from Q4 2018 peak

(Graph: P. 30 at here)

FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. Based on the preliminary results, I expanded the “neutral” band to +/-3% as well as averaging the previous two quarters together, until at least 100 companies have actually reported.

Q1 earnings have been downgraded over-3% just in the past three weeks. Needless to say, this metric is negative.

Credit conditions (from the Chicago Fed) (graph at link)

• Financial Conditions Index up +.10 (less loose) to -0.48
• Adjusted Index (removing background economic conditions) up +.17 (less loose) to -0.23
• Leverage subindex up +.05 (less loose) to -0.03

The Chicago Fed’s Adjusted Index’s real break-even point is roughly -0.25. In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. Through last week, all three metrics had shown looseness and so were positives for the economy. This week all three rose into “neutral” territory.

Short leading indicators

Trade weighted US$

Both measures of the US$ were negative early in 2019. In late summer, both of improved to neutral on a YoY basis. The measure against major currencies took a major spill recently. Both measures had recently been neutral. This week, as both gained more than 5% YoY, both have turned negative.

Commodity prices

Bloomberg Commodity Index

• Down -2.41 to 61.10 (61.10-83.08) (New 12 month low)
• Down -24.5% YoY

(Graph at Bloomberg Commodity Index)

Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)

• 92.33, down -9.02 w/w (92.33-124.03) (New 12 month low)
• Down -19.1% YoY

Commodity prices surged higher after the 2016 presidential election. Both industrial metals and the broader commodities indexes declined to very negative into 2019. Industrial metals briefly improved enough to be scored neutral and then positive, but both are back to (as of the past two weeks, extremely) negative.

Stock prices S&P 500 (from CNBC) (graph at link)

In 2019 stocks made repeated new 3-month and all-time highs, right up into February. With the past two weeks’ crash, they made a new 3-month and 1-year lows. Since in the past three months there have been both new 3-month highs and lows, in my discipline – which does not know whether the next three months will be L-, V-, or some other shape, this makes this metric neutral.

Regional Fed New Orders Indexes

(*indicates report this week)

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. It was “very” positive for most of 2018, but cooled beginning late last year. All during 2019 it had been waxing and waning between positive and flat, until it turned negative in January. In February there was a strong positive spike, which I interpreted to mean that manufacturers were trying to lock in supplies in advance of what they anticipate will be major disruptions. This month, this has fallen apart and the average is the most negative it has been at least since 2016.

Employment metrics

Initial jobless claims

• 281,000, up +70,000
• 4-week average 232,500, up +19,500

(Graph at FRED Graph | FRED | St. Louis Fed)

In November 2018, initial claims briefly spiked, and did so again at the end of January 2019 (probably connected to the government shutdown). They made new 49-year lows in April. The numbers weakened near the end of 2019, but improved strongly in January and February. As of this week, the 4 week average of claims was 15% above its low last year. On a monthly average, YoY claims were almost 5% higher. Both of these meet my thresholds to count this as a negative.

Temporary staffing index (from the American Staffing Association) (graph at link)

• Down -1 to 86 w/w
• Down -6.9% YoY

Beginning in November 2018, this index gradually declined to neutral in January and has been negative since February. Since the beginning of the third quarter it has generally had its worst YoY readings since 2016, and finally exceeded them to the downside five months ago. This week was the worst except for one week last fall since the Great Recession. Needless to say, I expect the YoY comparisons to worsen below -7%.

Tax Withholding (from the Dept. of the Treasury)

• $255.0 B for the last 20 reporting days vs. $243.6 B one year ago, up +$11.4 B or +4.7%

YoY comparisons with the exception of only three weeks have been positive since February 2019. The decline in tax withholding probably will start to show up next week.

Oil prices and usage (from the E.I.A.)

• Oil down -$9.17 to $23.80 w/w, down -60.1% YoY (new 18 year low)
• Gas prices down -$.12 to $2.25 w/w, down -$0.32 YoY (one year low)
• Usage 4-week average up +2.1% YoY

(Graphs at This Week In Petroleum Gasoline Section)

After bottoming in 2016, generally prices went sideways with a slight increasing trend in 2017 and 2018. Prices bottomed in January 2019, peaked at the end of April and slowly declined through the rest of the year. At the beginning of this year, they went higher YoY, but since have abruptly turned lower; thus they have turned positive. Gas prices have generally declined since May 2019 and are now near 20 year lows. Usage was positive YoY during most of 2019, but has oscillated between negative and positive for the last several months. It was positive again this week.

Bank lending rates

• 1.220 TED spread up +0.75 w/w (graph at link) (new five year high)
• 0.092 LIBOR up +0.92 w/w (graph at link) (new three year low)

Both TED and LIBOR rose in 2016 to the point where both were usually negatives, with lots of fluctuation. Of importance is that TED was above 0.50 before both the 2001 and 2008 recessions. After being whipsawed between being positive or negative in 2018, since early 2019 the TED spread remained positive – until this week, when it turned negative again. LIBOR has been negative and remains so.

Coincident indicators

Restaurant reservations YoY (from Open Table)

• Feb 20 -2%
• Feb 27 -3%
• Mar 5 -8%
• Mar 12 -32%
• Mar 19 -92%

I will update this for the duration of the coronavirus outbreak. The last day that restaurant reservations were positive YoY was February 24. The sharp break downward began on March 9.

Consumer spending

• Johnson Redbook up +8.5% YoY (15 month high)
• Retail Economist -0.5% w/w, +3.0% YoY

Both the Retail Economist and Johnson Redbook Indexes were positive all during 2018. The Retail Economist measure decelerated early in 2019. Since last May, it has varied between neutral and weakly positive. This week it was positive again. Johnson Redbook fell sharply at the beginning of 2019 before improving to positive beginning in spring and remaining there since. Notes accompanying both reports this week indicated that they reflected consumers stocking up on necessities one week ago. I expect these to look very different next week.

Transport

Railroads (from the AAR)

• Carloads down -5.1% YoY
• Intermodal units down -9.1% YoY
• Total loads down -7.6% YoY

(Graph at Railfax Report – North American Rail Freight Traffic Carloading Report)

Shipping transport

In autumn 2018 rail started to weaken precipitously, probably due to tariffs. It rebounded strongly in January 2019, but since then has been almost uniformly negative, and worsened. Two weeks ago I wrote that “disruption in the supply chain might only result in YoY comparisons remaining negative, but any intensification in the YoY downturn would be a sign of supply chain disruption.” That has happened the past two weeks. Meanwhile, and contrarily, except for coal and metallic rose, rail car transport ex-intermodal actually “increased” YoY this week.

Harpex made new three-year highs in mid-2019, and remained near those highs until the beginning of this year. It has declined about 75 points. BDI traced a similar trajectory, making new three-year highs into September 2019, then declining to new three-year lows at the beginning of February. It has rebounded since then, but is still a negative. I would expect international shipping disruptions due to coronavirus to result in new lows in prices in these two measures.

I am wary of reading too much into price indexes like this, since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.

Steel production (from the American Iron and Steel Institute)

• Down -1.3% w/w
• Down -1.8% YoY

Beginning in spring 2018, this was positive. In 2019 the YoY comparison abruptly declined to less than 1/2 of its top range over 10% YoY, and was neutral generally during summer 2019. By autumn, it was almost exclusively negative. Since the beginning of this year, it has been positive except for three weeks, including this week. If coronavirus disrupts production, negative YoY comparisons are what I would expect.

Summary And Conclusion

Among the coincident indicators, both measures of consumer spending and tax withholding are positive. Harpex is neutral. The Baltic Dry Index, rail, steel, the TED spread and LIBOR are negative, as is this week’s new entry of restaurant reservations.

Among the short leading indicators, only gas and oil prices and gas usage are positives. Stock prices and the Chicago Financial Conditions Index and the US$ are neutral. Temporary staffing, the spread between corporate and Treasury bonds, both measures of the US$, initial claims, the regional Fed new orders indexes, and both industrial and overall commodities are negative.

The situation remains different among the long leading indicators. Treasuries, purchase mortgage applications, real M1 and real M2, real estate loans, the yield curve, and mortgage refinancing are all positives. The Chicago Fed Adjusted financial index and Leverage subindex turned neutral. Corporate bonds and mortgage rates also tuned from positive to neutral. Corporate profits are negative.

Both the nowcast and the short-term forecast have both now turned decisively negative. By contrast, the long-term forecast remains positive.

We still have not seen the negative coronavirus impacts in all metrics (especially consumer spending and tax withholding). I expect those to appear next week. But the High Frequency Indicators show that the Coronavirus Recession is here. The low interest rates and positive housing metrics in the long leading indicators are telling us that once the crisis passes, whenever that may be, conditions are favorable for the underlying economy.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.