December Outlook Slightly Brighter

Global Economic Intersection announced Monday that its economic indicator (EEI) had slipped slightly into negative territory for the first time since February 2010. Some other economic indicators have shown improvement over their levels earlier in the second half of 2010. Additional economic factors also show modest improvement, such as the decline of Weekly Initial Unemployment claims to the lowest level (4-week moving average) since August 2008; 1.15 million non-farm payroll jobs added in the first ten months of this year, half in the last four months; the University of Michigan Consumer Confidence level has started creeping up again; and real GDP growth was 3.2% for the last four quarters.

Of course, all the above improvements are far below what is needed for the recovery to come close to being comparable to those in the past. And the Consumer Confidence reading is still far below the level reached in June. Big negatives remain in extremely weak housing markets and a stubbornly high unemployment rate. Overall there is not much to celebrate here, but it is Thanksgiving season and we should not be ungrateful for crumbs.

The more important point is the question: What comes next? For that we look at four economic indicators. These are offering signs that the coming months may be stronger, however modestly, than the past couple of quarters. We will summarize these indicators one at a time.

Conference Board

The Conference Board LEI (Leading Economic Indicator) has been rising the past three months after wobbling in the first half of the year. An analysis of the LEI finds its weakness is that it is dominated by money flows. Such an analysis is overly influenced by Wall Street factors and is light on Main Street influences.

click to enlarge

Monetary factors which are important components of the LEI, such as the money supply and slope of the yield curve, continue to push the Conference Board indicator higher. This is indicating the economy will be stronger in six months than it is now.

ECRI

The widely followed ECRI (Economic Cycle Research Institute) WLI (Weekly Leading Indicator) has been rising since the middle of the summer. It is now at -3.1% (as of November 19), up from -10%. After dropping from a high in March the Weekly Coincident Indicator has leveled out and is up slightly over the past month.

These indicators also support an improved economy in six months.

In this analyst’s view the ECRI WLI represents a balance between the Wall Street economy and the Main Street economy.

Consumer Metric Institute

In the past 30 days the CMI daily index has shown a bottoming pattern. This index is based on consumer durable goods purchases. The graph below shows the annualized rate of the change of the daily index from 90 days ago. This graph is updated daily at the CMI website. Commentary and analysis from CMI is posted as released at Global Economic Intersection.

The CMI consumer tracking index is reflective of the Main Street economy with little influence from the Wall Street economy.

The EconIntersect Economic Index

The economic indicator at Global Economic Intersection, the EEI, is also designed to be balanced between the Wall Street economy and the Main Street economy. It differs in two respects from the ECRI WLI:

1. It is a non-monetary indicator that includes economic activity as measured in such factors as transportation and employment.
2. The EEI correlates with economic activity 30 to 60 days forward whereas ECRI is forecasting economic activity in six months.

Many of the economic factors tracked by EEI have only ten years of data so the history of the indicator goes back only to 2000, as shown in the following graph:

EEI November 2010

This indicator is an oscillator between index values of +1 and -1. A value of zero indicates a forecast of no change in economic activity level one to two months from the present. The indicator is recalculated monthly and reported in the last week of each month.

Consensus of Indicators

Since the four indicators discussed here are actually measuring different parameters of economic activity it should be expected that they will, at times, make contradictory forecasts when one considers the summation of all economic activity. In addition, they correlate to differing time horizons.

However, looking at all four together it is possible to see some consistency, as well as the differences. The data months for the indicators recognize the lead intervals: LEI and ECRI WLI – six months; EEI – one month; CMI – concurrent; and GDP – concurrent, quarterly.

The Conference board was forecasting stronger growth for 4Q/2010 than the other indicators. The 3Q GDP number correlates better with the Conference Board LEI than with the other indicators, but the correlation for 4Q will not be known until the first advanced GDP estimate is released in late January.

How the forecasting indicators are contrasting is better seen when the four are graphed, as shown below.

Both the ECRI WLI and the EEI show a decline forecast for December. The indicators in the center two graphs, LEI and CMI, are rising into December, although no December data is in yet for the CMI concurrent indicator and the December outlook is merely an extension of the pattern from November. Remember, the CMI is still well below zero indicating that consumer activity is still contracting quarter to quarter, but the rate of contraction is slowing significantly in the past few weeks.

The ECRI WLI reached a low point in June (December forecast) and has been rising since, forecasting change in the first half of 2011 to be more positive than the second half of 2010. However, the ECRI WLI is still below zero, so it is reasonable to expect slow growth.

The bottom line is a consensus, or better stated an "average", of the indicators reviewed is that the outlook for the next several months is for continued slow economic growth. The weakness appears most in the indicator elements that reflect the Main Street economy, while financial (or Wall Street) factors appear stronger. Of course, the economy is fragile in its current state and is susceptible to strong reactions to economic shocks that might be shrugged off in better times.