Also posted today: TIME TO GET SCARED?
Chicago Fed National Activity Index Falls Sharply
The Federal Reserve Bank of Chicago reported that its National Activity Index declined to -0.45 during September from 0.15 in August, revised from 0.10. It was the lowest index level since April. The three-month moving average, which smoothes out volatility in the monthly figures, fell to -0.24 last month versus -0.06 in August. The figure remained below the December 2017 high of 0.51. During the last twenty years, there has been a 70% correlation between the Chicago Fed Index and the q/q change in real GDP.
The National Activity Diffusion Index, which measures the breadth of movement in the monthly series, deteriorated to -0.25 from -0.10. That remained below the peak of 0.51 in December 2017.
Declines in each of the component series contributed to last month’s fall in the National Activity Index. The Production & Income series led the declines, falling to -0.37 and reversing an August rise. It was the lowest level since April. The Personal Consumption & Housing Index eased to -0.04 and also reversed the prior month’s improvement. The Sales, Orders & Inventories group eased to -0.02 from -0.01 and remained below the high of 0.21 reached in January. The Employment, Unemployment & Hours series slipped to -0.02 from -0.03. It has been moving sideways since May.
The CFNAI is a weighted average of 85 indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend.
From AdvisorPerspectives:
When the CFNAI-MA3 value moves below -0.70 following a period of economic expansion, there is an increasing likelihood that a recession has begun. Conversely, when the CFNAI-MA3 value moves above -0.70 following a period of economic contraction, there is an increasing likelihood that a recession has ended.
The CFNAI is a coincident indicator. Last week we had the Conference Board’s LEI which needs to turn soon…
U.S. Factory Slump Shows Manufacturing Isn’t the Bellwether It Used to Be Manufacturing firms make up a smaller share of the U.S. economy and labor market than they used to
(…) Manufacturing makes up roughly 11% of the country’s overall gross domestic product, down from about 16% 20 years ago. And factory workers now make up about 8.5% of the overall employed workforce, down from around 13% two decades ago. There are now more local government employees than factory workers.
But it would be a mistake to write off the entire sector as an anachronism, said Susan Houseman, research director at the Upjohn Institute for Employment Research, a think tank. Many service industries depend on manufacturing, like shipping and logistics, warehousing or firms that repair and service equipment, she said.
And contract workers in factories are counted as service employees because their employers are temporary staffing agencies rather than manufacturers, she said. (…)
Manufacturing is still over 30% of the S&P 500 Index.
Although this sector is not as important as it was historically, it is the high value-added component of economic activity, amounting to about a 20% contribution to real GDP in the United States. Even as the manufacturing sector’s role has diminished, it has continued to be a leading indicator of economic activity. (Hoisington Investment Mngt)
The Fed Is Losing Potency Neither consumers nor businesses are responding as forcefully to Federal Reserve rate cuts as they used to
(…) Consider the housing market. Lower mortgage rates have certainly been good for it, driving a rebound in home sales. This in turn has been a plus for the overall economy, just not as much as it might have in the past.
That is because housing represents a smaller share of the economy than it used to. Money spent on residential investment, which includes new-home construction, among other items, now accounts for about 3.7% of gross domestic product. In the 50 years before the last recession that figure averaged 4.9%. Similarly, money spent on furniture and appliances—items that are often bought after a home purchase—also command a smaller share of GDP than they used to.
Another way Fed rate cuts can affect consumer spending is by pushing up the value of assets such as stocks and homes. But wealth effects appear less potent than they used to be, perhaps because stock-market and housing wealth have become more concentrated in the hands of the well-to-do.
Companies also don’t appear to be responding to low rates as forcefully as might be expected. Business investment contributed far less to growth in the second and third quarters than it ought to have considering the drop in interest rates, Morgan Stanley economists estimate.
One explanation is that low borrowing costs won’t induce companies to spend on new equipment if there isn’t enough final demand to put that equipment to use. So if consumer spending isn’t responding as forcefully to lower rates, neither will spending by companies. Add in concerns about global growth, trade tensions and narrowing profit margins, and it is easy to see why companies might not be in a rush to go out and spend. (…)
If the economy is less responsive to Fed rate cuts, the Fed might have to cut rates even more deeply than it used to in order to boost growth. One implication of that is that Wednesday’s expected rate cut might not be the last. Another is that whenever it faces a recession, the Fed could have even less ammunition than seems apparent.
Hoisington Investment’s Quarterly Review and Outlook, Third Quarter 2019:
(…) Despite the evidence that monetary policy works with long lags, the Fed appears to be waiting for a downturn in the coincident economic indicators before attempting to “get ahead” of where the market has priced interest rates. The three-month bill rate, for instance, is rate sensitive to the policy rate (Fed funds) and stood at 1.84% at the end of the quarter, versus the 10-year note yield at 1.68%. This yield curve has been inverted for over four months which has historically been associated with a policy rate which is too high for the current economic conditions.
The proof, of course, is historic. During the period from 1921 to 2008, there were ten inversions of this yield curve each of which preceded the ten recessions. The lags between initial inversion and recession have been variable but the market is presently within the historical lagged periods. The current overrestraint of Fed policy is why 5, 10, and 20-year Treasury security yields have not set new record lows, but it is only a matter of time. (…)
A quick and dramatic shift toward greater accommodation by the Fed could begin to shift momentum from contraction toward expansion. However, policy lags are long and slow to develop, therefore despite the remarkable decline in long term yields this year, we are maintaining our long duration holdings. A shift towards shorter duration portfolios would be appropriate when the forward-looking indicators of expansion, in the U.S. and abroad, begin to appear.
China’s SMI indicators point to a rebound in business activity in October.
Interesting set of charts by World Economics via The Daily Shot. We will get the PMIs starting this Thursday.
• Services:
Source: World Economics
• Manufacturing:
Source: World Economics
- And this one from Richard Bernstein Advisors:
EARNINGS WATCH
Actual earnings growth for the 204 companies having reported is +1.3% on revenue growth of +3.4%. The beat rate is 78%, the surprise factor +4.4% and the blended growth rate –2.0%, down from +0.3% on July 1
By comparison, after 218 reports during Q2, the beat rate was 75%, the surprise factor +4.6% and the blended growth rate +0.5%, down from +0.3% on July 1. Actual earnings growth for the 218 companies having reported was +6.1% on revenue growth of +4.6%.
Trailing EPS are now $163.13, still down from $163.19 at the same time in Q2 and 0.8% lower than the $164.43 and $164.31 at the end of August.and September respectively.
Q4 estimates keep being ratcheted down to +1.9% (+4.2% ex-Energy from +5.0% last week). This is down from +4.1% on Oct.1. and +2.2% last Friday.
Tariffs imposed by President Trump have so far cost U.S. corporations $34 billion, according to data compiled by Tariffs Hurt the Heartland — a coalition of businesses and trade groups that oppose the tariffs — provided first to Axios. (…)
The $34 billion hit that U.S. companies have taken from the Trump tariffs doesn’t include the 15% tax on $112 billion worth of Chinese imports — including clothes and shoes — that went into effect on Sept. 1.
Next week: U.S. tariffs on $250 billion worth of Chinese goods are scheduled to rise to 30% from 25%. (…)
By the end of next week, the total will reach $63B. That is 3.1% of total annual pretax corporate profits in the U.S. and 5.5% of non-financial profits.
Ben Turnbull’s Mad portrait of Donald Trump makes waves
(…) One of the pieces depicts Mr Trump whose striking features were created and shaped from cut-outs of Alfred E. Neuman, the Mad comics cover star whose geeky features are recognisable the world over (MADe in America). The artist says: “Using Mad seemed entirely logical. In fact, given the subject it would have been illogical to use any other. Of course, I wouldn’t describe Trump as being that himself, but since winning the presidency, he’s caused an entire nation to become slightly unhinged—not just his core, but his detractors, too.” (…)
The 0.3 percent advance followed a 0.6 percent drop in January that was larger than initially reported, Commerce Department figures showed today in 
The reading for January was revised down from an initially reported 0.4 percent decrease. December sales were also weaker, now showing a 0.3 percent drop compared with a previously reported 0.1 percent decrease. (…)
Cars and light trucks sold at a 15.3 million annualized pace in February compared with a 15.2 million rate in January, according to 
Do Not Believe It 
During the past week (on March 6), the value of the S&P 500 index closed at yet another all-time high. The forward 12-month P/E ratio for the S&P 500 now stands at 15.4, based on yesterday’s closing price (1877.03) and forward 12-month EPS estimate ($121.86). Given the record high values driving the “P” in the P/E ratio, how does this 15.4 P/E ratio compare to historical averages?