Friday, September 23, 2022

Broad-Based Indicators Of Economic Activity

The Chicago Fed National Activity Index (CFNAI) and the Aruoba-Diebold-Scotti Business Conditions Index (ADS Index) are two broad-based economic indicators that I regularly feature in this site.

The short-term and long-term trends of each continue to be notable.

The Advisor Perspectives’ post of September 23, 2022, titled “The Philly Fed ADS Index Business Conditions Index Update” displays both the CFNAI MA-3 (CFNAI on a 3-month Moving Average) and ADS Index (91-Day Moving Average) from a variety of perspectives.

Of particular note, two of the charts, shown below, denote where the current levels of each reading is relative to the beginning of recessionary periods, as depicted by the red dots.

The CFNAI MA-3:

(click on charts to enlarge images)

CFNAIMA3 -.09

The ADS Index, 91-Day MA:

ADS Index 91DMA .11

Also shown in the aforementioned post is a chart of each with a long-term trendline (linear regression) as well as a chart depicting GDP for comparison purposes.

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I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 3673.10 as this post is written

Markets During Periods Of Federal Reserve Intervention – September 23, 2022

In the August 9, 2011 post (“QE3 – Various Thoughts“) I posted a chart that depicted the movements of the S&P500, 10-Year Treasury Yield and the Fed Funds rate spanning the periods of various Federal Reserve interventions since 2007.

For reference purposes, here is an updated chart (September 22, 2022) from the Advisor Perspectives’ site post of September 22, 2022 (“Treasury Snapshot…):

The S&P500 and Federal Reserve Intervention

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3670.48 as this post is written

Long-Term Charts Of The ECRI WLI & ECRI WLI, Gr. – September 23, 2022 Update

 As I stated in my July 12, 2010 post (“ECRI WLI Growth History“):

For a variety of reasons, I am not as enamored with ECRI’s WLI and WLI Growth measures as many are.

However, I do think the measures are important and deserve close monitoring and scrutiny.

Below are three long-term charts, from Advisor Perspectives’ ECRI update post of September 23, 2022 titled “ECRI Weekly Leading Index Update.”  These charts are on a weekly basis as of the September 23, 2022 release, reflecting data through September 16, 2022.

Here is the ECRI WLI (defined at ECRI’s glossary):

ECRI WLI 145.3

This next chart depicts, on a long-term basis, the Year-over-Year change in the 4-week moving average of the WLI:

ECRI WLI YoY of the Four-Week Moving Average

This last chart depicts, on a long-term basis, the WLI, Gr.:

ECRI WLI,Gr. -10.6 Percent

_________

I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 3675.07 as this post is written

The U.S. Economic Situation – September 23, 2022 Update

Perhaps the main reason that I write of our economic situation is that I continue to believe, based upon various analyses, that our economic situation is in many ways misunderstood.  While no one likes to contemplate a future rife with economic adversity, current and future economic problems must be properly recognized and rectified if high-quality, sustainable long-term economic vitality is to be realized.

There are an array of indications and other “warning signs” – many readily apparent – that current economic activity and financial market performance is accompanied by exceedingly perilous dynamics.
I have written extensively about this peril, including in the following:
Building Financial Danger” (ongoing updates)
My analyses continues to indicate that the growing level of financial danger will lead to the next stock market crash that will also involve (as seen in 2008) various other markets as well.  Key attributes of this next crash is its outsized magnitude (when viewed from an ultra-long term historical perspective) and the resulting economic impact.  This next financial crash is of tremendous concern, as my analyses indicate it will lead to a Super Depression – i.e. an economy characterized by deeply embedded, highly complex, and difficult-to-solve problems.

For long-term reference purposes, here is a chart of the Dow Jones Industrial Average since 1900, depicted on a monthly basis using a LOG scale (updated through September 21, 2022, with a last value of 30,183.78):

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

DJIA 1900 - September 21, 2022 30183.78

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3693.73 as this post is written

Thursday, September 22, 2022

Jerome Powell’s September 21, 2022 Press Conference – Notable Aspects

On Wednesday, September 21, 2022 FOMC Chairman Jerome Powell gave his scheduled September 2022 FOMC Press Conference. (link of video and related materials)

Below are Jerome Powell’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Powell’s Press Conference“ (preliminary)(pdf) of September 21, 2022, with the accompanying “FOMC Statement” and “Summary of Economic Projections” dated September 21, 2022.

Excerpts from Chairman Powell’s opening comments:

Today, the FOMC raised its policy interest rate by 3/4 percentage point, and we  anticipate that ongoing increases will be appropriate. We are moving our policy stance  purposefully to a level that will be sufficiently restrictive to return inflation to 2 percent. In  addition, we are continuing the process of significantly reducing the size of our balance sheet. I will have more to say about today’s monetary policy actions after briefly reviewing economic  developments. 

The U.S. economy has slowed from the historically high growth rates of 2021, which  reflected the reopening of the economy following the pandemic recession. Recent indicators  point to modest growth of spending and production. Growth in consumer spending has slowed  from last year’s rapid pace, in part reflecting lower real disposable income and tighter financial  conditions. Activity in the housing sector has weakened significantly, in large part reflecting  higher mortgage rates. Higher interest rates and slower output growth also appear to be  weighing on business fixed investment, while weaker economic growth abroad is restraining  exports. As shown in our Summary of Economic Projections, since June FOMC participants  have marked down their projections for economic activity, with the median projection for real GDP growth standing at just 0.2 percent this year and 1.2 percent next year, well below the  median estimate of the longer-run normal growth rate. 

also:

Despite elevated inflation, longer-term inflation expectations appear to remain well  anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as  well as measures from financial markets. But that is not grounds for complacency; the longer the  current bout of high inflation continues, the greater the chance that expectations of higher  inflation will become entrenched.

also:

At today’s meeting the Committee raised the target range for the federal funds rate by  3/4 percentage point, bringing the target range to 3 to 3-1/4 percent. And we are continuing the  process of significantly reducing the size of our balance sheet, which plays an important role in  firming the stance of monetary policy.

Over coming months, we will be looking for compelling evidence that inflation is moving  down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate; the pace of those increases will  continue to depend on the incoming data and the evolving outlook for the economy. With today’s action, we have raised interest rates by 3 percentage points this year. At some point, as the stance of monetary policy tightens further, it will become appropriate to slow the pace of increases, while we assess how our cumulative policy adjustments are affecting the economy and inflation. We will continue to make our decisions meeting by meeting and communicate our  thinking as clearly as possible.

Excerpts of Jerome Powell’s responses as indicated to various questions:

STEVE LIESMAN.  Thank you, Mr. Chairman, Steve Liesman, CNBC. Can you talk about how you factor in the variable lags on inflation and the extent to which the outlook for rates should be seen as linear in the sense that you keep raising rates. Well, can you envision a time when there’s a pause to kind of look at what has been wrought in the economy from the rate increases? Thank you. 

CHAIR POWELL.  Sure, so of course monetary policy does famously work with long and variable lags. The way I think of it is our policy decisions affect financial conditions immediately, in fact, financial conditions have usually been affected well before we actually announce our decisions. Then changes in financial conditions begin to affect economic activity fairly quickly, within a few months. But it’s likely to take some time to see the full effects of changing financial conditions on inflation. So, we are very much mindful for that. And that’s why I noted in my opening remarks that at some point, as the stance of policy tightens further, it will become appropriate to slow the pace of rate hikes while we assess how our cumulative policy adjustments are affecting the economy and inflation. So that’s how we think about that. Your second question, sorry, was?

STEVE LIESMAN.  Is there a point in time you could see pausing? Is it linear when you keep raising rates, or is there, oh sorry– I should know better than to not talk with a microphone.

CHAIR POWELL.  I should know better than to answer your second question. 

STEVE LIESMAN. Well there you go. Is it linear? Do you keep raising rates or is there a pause that you could envision where you kind of figure out what has happened to the economy and give time to catch up in the real economy, the rate increase time to catch up with the real economy? Thank you. 

CHAIR POWELL.  So I think it’s very hard to say with a precise certainty the way this is going to unfold. As I mentioned, what we think we need to do and should do is to move our policy rate to a restrictive level that’s restrictive enough to bring inflation down to 2 percent, where we have confidence of that. And what you see in the SEP numbers is people’s views as of today, as of this meeting, as to the kind of levels that will be appropriate. Now those will evolve over time and I think we’ll just have to see how that goes. There is a possibility certainly that we would go to a certain level that we’re confident in and stay there for a time. But we’re not at that level, clearly today we’re just, we’ve just moved I think probably into the very lowest level of what might be restrictive and certainly in my view and the view of the Committee, there’s a ways to go. 

also:

CRAIG TORRES. Craig Torres from Bloomberg. Chair Powell, you talked about some ways the higher interest rates are affecting the economy, but we’ve also seen a resilient labor market with durable consumption, strong corporate profits, and I’m wondering what your story is on the resilience of the economy, after all, you and your colleagues said well, we started tightening in March when we were talking about interest rates in the future, and indeed, treasury rates moved up, so we should have had a lot of tightening taking affect. Why is the economy, in your view, so resilient and does it mean that we might need a possibly higher terminal rate. 

CHAIR POWELL. You’re right, of course, the labor market in particular has been very strong. But there are, the sectors of the economy that are most interest rate sensitive are certainly showing the effects of our tightening and of course the obvious example is housing, where you see declining activity of all different kinds and house price increases moving down. So we’re having an effect on interest sensitive spending, I think through exchange rates we’re having an effect on experts and imports, I think so, all of that’s happening but you’re right, and we’ve said this, this is a strong, robust, economy, people have savings on their balance sheet from the period when they couldn’t spend and where they were getting government transfers, they’re still very significant savings out there, although not as much at the lower end of the income spectrum, but still, some savings out there to support growth that the states are very flush with cash, so there’s good reason to think that this will continue to be a reasonably strong economy. Now the data, the data sort of are showing that growth is going to be below trend this year. We think of trend as being about 1.8 percent or in that range. We are forecasting growth well below that and most forecasters are. But you’re right, there’s certainly a possibility that growth can be stronger than that. And that’s a good thing because that means the economy will be more resistant to a significant down turn. But of course we are focused on the thing I started with, which is getting inflation back down to 2 percent. We can’t fail to do that, I mean if we were to fail to do that, that would be the thing that would be most painful for the people that we serve. So, for now, that has to be our overarching focus and you see that, I think, in the SEP, in the levels of rates that we’ll be moving to, reasonably quickly, assuming things turn out roughly in line with the SEP. So that’s how we think about it. 

MICHAEL MCKEE. Thank you, Mr. Chairman. In a world of euphemisms that we live in here, with below trend growth and modest increase in unemployment, I’m wondering if I can ask you a couple of direct questions for the American people. Do the odds now favor, given where you are and where you’re going with interest rates, favor a recession, 4.4 percent unemployment is about 1.3 million jobs, is that acceptable job loss? And then, given that the data you look at is backward looking, and the lags in your policy are forward looking and you don’t know what they are, how will you know, or will you know, if you’ve gone too far?

CHAIR POWELL. So, I don’t know what the odds are. I think that there’s a very high likelihood that we’ll have a period of what I’ve mentioned is below trend growth, by which I mean much lower growth and we’re seeing that now. So the median forecast now I think this year among my colleagues and me, was 0.2 percent growth. So that’s very slow growth. And then below trend next year I think the median was 1.2, also well below so that’s a slower, that’s a very slow level of growth and it could give rise to increases in unemployment but I think that’s, so that is something that we think we need to have and we think we need to have softer labor market conditions as well. We’re never going to say that are too many people working, but the real point is this, inflation, what we hear from people when we meet with them is that they really are suffering from inflation. And if we want to set ourselves up really light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that, there isn’t. So, what we need to do is get rates up to the point where we’re putting meaningful downward pressure on inflation, and that’s what we’re doing. And we don’t certainly, certainly don’t hope, we certainly haven’t given up the idea that we can have a relatively modest increase in unemployment, unless we need to complete this task. 

MICHAEL MCKEE. But how will you know, or will you know if you’ve gone too far? 

CHAIR POWELL. It’s hard to, hypothetically deal with that question. I mean again, our really tight focus now continues to be ongoing rate increases to get the policy rate up where it needs to be. And as I said, you can look at this SEP as today’s estimate of where we think those rates would be, of course they will evolve over time. 

also:

NICOLE GOODKIND. Thank you, Chairman Powell. Nicole Goodkind, CNN Business. Existing home sales have fallen for seven months straight, mortgage rates are at their highest level since 2008, yet mortgage demand increased this week and housing prices are still elevated. At the end of your June press conference, you mentioned plans to reset the housing market. I was wondering if you could elaborate on what you mean when you say reset and what you think it will take to actually get there.

CHAIR POWELL. So when I say reset, I’m not looking at a particular, specific set of data or anything, what I’m really saying is that we’ve had a time of a red hot housing market, all over the country, where famously houses were selling to the first buyer at 10 percent above the ask, before even seeing the house. That kind of thing. So, there was a big imbalance between supply and demand and housing prices were going up at an unsustainably fast level. So the deceleration in housing prices that we’re seeing should help bring sort of prices more closely in line with rents and other housing market fundamentals and that’s a good thing. For the longer term what we need is supply and demand to get better aligned so that housing prices go up at a reasonable level, at a reasonable pace, and that people can afford houses again, and I think we, so we probably in the housing market have to go through a correction to get back to that place. There’s also, there are also longer run issues though with the housing market. As you know, we’re, it’s difficult to find lots now close enough to cities and things like that, so builders are having a hard time getting zoning and lots, and workers and materials, and things like that. But from a sort of business cycle standpoint, this difficult correction should put the housing market back into better balance.

NICOLE GOODKIND. [ Inaudible ] Shelter made up such a large part of this hot CPI report that we saw. Do you think that there is lag and that we will see that come down in the coming months? Or do you think that there’s still this imbalance that needs to be addressed? 

CHAIR POWELL. I think that shelter inflation is going to remain high for some time. We’re looking for it to come down, but it’s not exactly clear when that will happen. So, it may take some time, so I think hope for the best, plan for the worst. So I think on shelter inflation you’ve just got to assume that it’s going to remain pretty high for a while. 

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3678.58 as this post is written 

Chicago Fed National Financial Conditions Index (NFCI)

The St. Louis Fed’s Financial Stress Index (STLFSI3) is one index that is supposed to measure stress in the financial system. Its reading as of the September 22, 2022 update (reflecting data through September 16, 2022) is -1.9120:

STLFSI3

source: Federal Reserve Bank of St. Louis, St. Louis Fed Financial Stress Index [STLFSI3], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed September 22, 2022: https://fred.stlouisfed.org/series/STLFSI3

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Below are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on September 21, 2022 incorporating data from January 8, 1971 through September 16, 2022 on a weekly basis.  The September 16 value is -.19464:

NFCI -.19464

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 22, 2022:  
http://research.stlouisfed.org/fred2/series/NFCI

The ANFCI chart below was last updated on September 21, 2022 incorporating data from January 8, 1971 through September 16, 2022, on a weekly basis.  The September 16, 2022 value is -.04348:

ANFCI

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed September 22, 2022:  
http://research.stlouisfed.org/fred2/series/ANFCI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 3767.46 as this post is written

Monday, September 19, 2022

CEO Confidence Surveys 3Q 2022 – Notable Excerpts

On September 12, 2022, the Business Roundtable released its most recent CEO Economic Outlook Survey for the 3rd Quarter of 2022.   Notable excerpts from this September 12, 2022 release, titled “Business Roundtable Q3 CEO Economic Outlook Index Signals Continued U.S. Slowdown“:

Business Roundtable today released its Q3 2022 CEO Economic Outlook Survey, a composite index of CEO plans for capital spending and employment and expectations for sales over the next six months. The overall Index declined 12 points from last quarter to 84, its long-run average and well above the expansion or contraction threshold of 50.

also:

In their fourth estimate of 2022 U.S. real GDP growth, CEOs projected 2.3% growth for the year.

On August 17, 2022, The Conference Board released the Q3 2022 Measure Of CEO Confidence.   The overall measure of CEO Confidence was at 34, down from the previous reading of 42. [note:  a reading of more than 50 points reflects more positive than negative responses]

Notable excerpts from this August 17, 2022 Press Release include:

The Q3 survey asked CEOs to describe the economic conditions they are preparing to face over the next 12-18 months.  An overwhelming majority—81%—said they were preparing for a brief and shallow recession, with limited global spillover, while only 7% said they do not expect a recession. Thus far, however, CEOs do not seem to be experiencing the recessionary conditions that typified recent contractions. In fact, three-quarters of CEOs say demand has risen or held steady over the past three months.

also:

Current Conditions

CEOs’ assessment of general economic conditions deteriorated further in Q3:

  • Just 6% of CEOs reported economic conditions were better compared to six months ago, down from 14% in Q2 2022.
  • 77% said conditions were worse, up from 61%.

CEOs remained pessimistic about conditions in their own industries in Q3:

  • 25% of CEOs reported that conditions in their industries were better compared to six months ago, up slightly from 24%.
  • Conversely, 48% said conditions in their own industries were worse, up from 37%.

Future Conditions

CEOs’ expectations about the short-term economic outlook weakened in Q3:

  • Just 7% of CEOs said they expected economic conditions to improve over the next six months, down from 19% in Q2.
  • 73% expected conditions to worsen, up from 60%.

CEOs’ expectations regarding short-term prospects in their own industries declined further in Q3:

  • 20% of CEOs expected conditions in their own industry to improve over the next six months, down from 28%.
  • 48% expect conditions to worsen, up from 34%.

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Additional details can be seen in the sources mentioned above.

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 3891.24 as this post is written

Friday, September 16, 2022

The Negative Real Fed Funds Rate And Its Significance

On January 9, 2017 I wrote a post titled “Low Interest Rates And The Formation Of Asset Bubbles.“  As discussed in that post – and for other reasons – the level of the Fed Funds rate – and whether its level is appropriate – has vast importance and far-reaching consequences with regard to many aspects of the economy and financial system.

Along these lines, below is an updated long-term chart indicating the Real Fed Funds Rate [FRED FEDFUNDS – CPIAUCSL] , with a last value of -5.91923% through August 2022. [FEDFUNDS = 2.33% as of the September 1, 2022 update; CPIAUCSL = 8.2% as of the September 13, 2022 update]

Of particular note is the post-2000 persistently negative Real Fed Funds rate:

Real Fed Funds Rate -5.91923 Percent

source: Board of Governors of the Federal Reserve System (US), Effective Federal Funds Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed September 16, 2022: https://fred.stlouisfed.org/series/FEDFUNDS

source: U.S. Bureau of Labor Statistics, Consumer Price Index: All Items in U.S. City Average, All Urban Consumers [CPIAUCSL], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed September 16, 2022: https://fred.stlouisfed.org/series/CPIAUCSL

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 3850.50 as this post is written