The U.S. Economic Situation – August 23, 2016 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)

“A Special Note On Our Economic Situation”

“Forewarning Pronounced Economic Weakness”

“Thoughts Concerning The Next Financial Crisis”

“Was A Depression Successfully Avoided?”

“Has the Financial System Strengthened Since the Financial Crisis?”

“The Next Crash And Its Significance”

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 August 19, 2016, with a last value of 18552.57):

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

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2182.64 as this post is written

The Yield Curve – August 22, 2016

Many people believe that the Yield Curve is an important economic indicator.

On March 1, 2010, I wrote a post on the issue, titled “The Yield Curve As A Leading Economic Indicator.”

An excerpt from that post:

On the NY Fed link above, they have posted numerous studies that support the theory that the yield curve is a leading indicator.   My objections with using it as a leading indicator, especially now, are various.  These objections include: I don’t think such a narrow measure is one that can be relied upon;  both the yields at the short and long-end of the curve have been overtly and officially manipulated, thus distorting the curve; and, although the yield curve may have been an accurate leading indicator in the past, this period of economic weakness is inherently dissimilar in nature from past recessions and depressions in a multitude of ways – thus, historical yardsticks and metrics probably won’t (and have not) proven appropriate.

While I continue to have the above reservations regarding the “yield curve” as an indicator, I do believe that it should be monitored.

As an indication of the yield curve, below is a weekly chart.  The top plot shows the spread between the 10-Year Treasury and 2-Year Treasury, from January 1, 1990 through August 19, 2016.  The August 19, 2016 value is .82% (1.578% – .76%).   The bottom plot shows the S&P500:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

Additionally, below is a chart showing the same spread between the 10-Year Treasury and 2-Year Treasury, albeit with a slightly different measurement, using constant maturity securities.  This daily chart is from June 1, 1976 through August 19, 2016, with recessionary periods shown in gray. This chart shows a value of .82%:

source:  Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed August 22, 2016:

https://research.stlouisfed.org/fred2/series/T10Y2Y

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2182.64 as this post is written

Updates Of Economic Indicators August 2016

Here is an update of various indicators that are supposed to predict and/or depict economic activity. These indicators have been discussed in previous blog posts:

The August 2016 Chicago Fed National Activity Index (CFNAI) updated as of August 22, 2016: (current reading of CFNAI is .27; current reading of CFNAI-MA3 is -.10):

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The ECRI WLI (Weekly Leading Index):

As of August 19, 2016 (incorporating data through August 12, 2016) the WLI was at 137.8 and the WLI, Gr. was at 8.4%.

A chart of the WLI,Gr., from Doug Short’s ECRI update post of August 19, 2016:

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The Aruoba-Diebold-Scotti Business Conditions (ADS) Index:

Here is the latest chart, depicting the ADS Index from December 31, 2007 through August 13, 2016:

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The Conference Board Leading (LEI), Coincident (CEI) Economic Indexes, and Lagging Economic Indicator (LAG):

As per the August 18, 2016 press release, titled “The Conference Board Leading Economic Index (LEI) for the U.S. Increased,” (pdf) the LEI was at 124.3, the CEI was at 113.9, and the LAG was 121.8 in July.

An excerpt from the August 18 release:

“The U.S. LEI picked up again in July, suggesting moderate economic growth should continue through the end of 2016,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “There may even be some moderate upside growth potential if recent improvements in manufacturing and construction are sustained, and average consumer expectations don’t deteriorate further.”

Here is a chart of the LEI from Doug Short’s Conference Board Leading Economic Index update of August 18:

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I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this blog 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 2179.07 as this post is written

Trends Of S&P500 Earnings Forecasts

S&P500 earnings trends and estimates are a notably important topic, for a variety of reasons, at this point in time.

FactSet publishes a report titled “Earnings Insight” that contains a variety of information including the trends and expectations of S&P500 earnings.

For reference purposes, here are two charts as seen in the “Earnings Insight” (pdf) report of August 12, 2016:

from page 19:

(click on charts to enlarge images)

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from page 20:

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not 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 2187.02 as this post is written

Standard & Poor’s S&P500 Earnings Estimates For 2016 & 2017 – As Of August 11, 2016

As many are aware, Standard & Poor’s publishes earnings estimates for the S&P500.  (My posts concerning their estimates can be found under the S&P500 Earnings label)

For reference purposes, the most current estimates are reflected below, and are as of August 11, 2016:

Year 2016 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $110.85/share

-From a “top down” perspective, operating earnings of N/A

-From a “bottom up” perspective, “as reported” earnings of $101.12/share

Year 2017 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $132.76/share

-From a “top down” perspective, operating earnings of N/A

-From a “bottom up” perspective, “as reported” earnings of $121.97/share

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this blog are aware, I do not 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 2187.02 as this post is written

Walmart’s Q2 2017 Results – Comments

I found various notable items in Walmart’s Q2 2017 management call transcript (pdf) dated August 18, 2016.  (as well, there is Walmart’s press release of the Q2 results and related presentation materials)

I view Walmart’s results and comments as particularly noteworthy given their retail prominence and focus on low prices.  I have previously commented on their quarterly management call comments; these previous posts are found under the “paycheck to paycheck” label.

Here are various excerpts that I find most notable:

comments from Doug McMillon, President and CEO, page 2:

We exceeded our Walmart U.S. comp sales guidance this quarter, with Walmart U.S. delivering comp sales of 1.6 percent, driven by a traffic increase of 1.2 percent. This was our 8th consecutive quarter of positive comp sales and our 7th consecutive quarter of positive traffic. I’m encouraged by what I’m seeing when I visit stores and pleased with how Greg Foran, our leadership team and our associates are executing our plan to win. Our customer satisfaction scores continue to improve, and the team did a great job of managing the flow of inventory again this quarter. Comp store inventory was down 6.5 percent and in-stock levels are up.

comments from Brett Biggs, EVP & CFO, page 9:

Gross margin increased 33 basis points in the quarter. Improved margin rates in food and consumables were a contributing factor. In addition, we had improvement in our cost of goods due to savings in procuring merchandise, lower transportation expense as a result of lower fuel costs and some improvements in shrink. These benefits are somewhat offset by the implementation of the multi-year strategy of incremental price investments.

comments from Brett Biggs, EVP & CFO, page 10:

Operating expenses increased 8.3 percent over last year due primarily to the previously announced associate wage rate increases and investments in technology. We remain focused on managing expenses with an EDLC mindset while elevating the shopping environment for customers. Overall, the SG&A increase was partially offset by improved gross margins, resulting in an operating income decline of 6.2 percent.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2182.22 as this post is written

Chicago Fed National Financial Conditions Index (NFCI)

The St. Louis Fed’s Financial Stress Index (STLFSI) is one index that is supposed to measure stress in the financial system.  Its reading as of the August 11, 2016 update (reflecting data through August 5) is -1.068.

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 August 17, 2016 incorporating data from January 5,1973 to August 12, 2016, on a weekly basis.  The August 12, 2016 value is -.69:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed August 17, 2016:

http://research.stlouisfed.org/fred2/series/NFCI

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The ANFCI chart below was last updated on August 17, 2016 incorporating data from January 5,1973 to August 12, 2016, on a weekly basis.  The August 12 value is .26:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed August 17, 2016:

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 blog 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 2172.01 as this post is written

Recession Probability Models – August 2016

There are a variety of economic models that are supposed to predict the probabilities of recession.

While I don’t agree with the methodologies employed or probabilities of impending economic weakness as depicted by the following two models, I think the results of these models should be monitored.

Please note that each of these models is updated regularly, and the results of these – as well as other recession models – can fluctuate significantly.

The first is the “Yield Curve as a Leading Indicator” from the New York Federal Reserve.  I wrote a post concerning this measure on March 1, 2010, titled “The Yield Curve as a Leading Indicator.”

Currently (last updated August 12, 2016 using data through July) this “Yield Curve” model shows a 9.8505% probability of a recession in the United States twelve months ahead.  For comparison purposes, it showed a 8.1054% probability through June, and a chart going back to 1960 is seen at the “Probability Of U.S. Recession Predicted by Treasury Spread.” (pdf)

The second model is from Marcelle Chauvet and Jeremy Piger.  This model is described on the St. Louis Federal Reserve site (FRED) as follows:

Smoothed recession probabilities for the United States are obtained from a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales. This model was originally developed in Chauvet, M., “An Economic Characterization of Business Cycle Dynamics with Factor Structure and Regime Switching,” International Economic Review, 1998, 39, 969-996. (http://faculty.ucr.edu/~chauvet/ier.pdf)

Additional details and explanations can be seen on the “U.S. Recession Probabilities” page.

This model, last updated on August 5, 2016, currently shows a 3.60% probability using data through May.

Here is the FRED chart (last updated August 5, 2016):

Data Source:  Piger, Jeremy Max and Chauvet, Marcelle, Smoothed U.S. Recession Probabilities [RECPROUSM156N], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed August 14, 2016:

http://research.stlouisfed.org/fred2/series/RECPROUSM156N

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The two models featured above can be compared against measures seen in recent blog posts.  For instance, as seen in the August 11 post titled “The August 2016 Wall Street Journal Economic Forecast Survey“ economists surveyed averaged a 20.95% probability of a U.S. recession within the next 12 months.

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 2184.05 as this post is written