February 2017 Economic Forecast: Outlook Again Improves, Trend Line Up

Econintersect’s Economic Index again improved but the value remains in the territory of weak growth. The index remains well below the median levels seen since the end of the Great Recession. But there are several indications in the data we view of better dynamics in the future. Six-month employment growth forecast indicates little change in the rate of growth.

Analyst Summary of this Economic Forecast

We are continuing to forecast marginal improvement of the economy – with the economy remaining in snail’s pace growth. At least the trend lines show an ever-improving economy.

The current data is being compared against relatively soft year-over-year historical data – and this is most of the reason that the index value is improving.

This month the internals of our index were more aligned in positive territory – with only the government contribution to Main Street not contributing a positive value. Barring an unexpected turn of events – we expect our index in the future to continue to moderately strengthen.

This month the special indicators (see section below) are indicating a flat economy (rate of growth within a tight and unchanging range).

Our 6-month employment forecast is forecasting little improvement in the rate of employment growth.

This index is not designed to guess GDP – or the four horsemen used by the NBER to identify recessions (industrial production, business sales, employment and personal income). It is designed to look at the economy at the Main Street level.

The graph below plots GDP (which has a bias to the average – not median – sectors) against the Econintersect Economic Index.

The consumer portion of the economy over the last year has outperformed the business sector – but the current trend is an improving business sector but a softening consumer portion.

Consumer spending growth is higher than household income growth, and spending growth is on an uptrend. As the spending to income ratio is relatively high, there seems to be little room for improvement in the rate of spending growth. Note that the quantitative analysis which builds our model of the economy does not include personal income or expenditures data sets.

Another data point – the relationship between retail sales and employment remains insignificantly in positive territory. Historically, negative territory indicates a slowing economy. Note that neither employment nor retail sales are part of our economic model.

Econintersect checks its forecast using several alternate monetary based methods – and the checked forecasts show marginally improving economic growth.

Note that all the graphics in this post auto-update. The words are fixed on the day of publishing, and therefore you might note a conflict between the words and the graphs due to backward data revisions and/or new data which occurs during the month.

This post will summarize the:

special indicators,

leading indicators,

predictive portions of coincident indicators,

review of the technical recession indicators, and

interpretation of our own index – Econintersect Economic Index (EEI) – which is built of mostly non-monetary “things” that have been shown to be indicative of the direction of the Main Street economy at least 30 days in advance.

our six-month employment forecast.

Special Indicators:

The consumer is still consuming. The ratio of spending to income has been elevated since Jan 2013. There have been only four periods in history where the ratio of spending to income has exceeded 0.92 (April 1987, the months surrounding the 2001 recession, from September 2004 to the beginning of the 2007 Great Recession, and for periods since late 2013 thru 2014). A high ratio of spending to income acts as a constraint to any major expansion in consumer spending. The current trend since the beginning of 2016 is the consumer spending a larger portion of their income.

Seasonally Adjusted Spending’s Ratio to Income (an increasing ratio means Consumer is spending more of Income)

The St. Louis Fed produces a Smoothed U.S. Recession Probabilities Chart which is currently giving no indication of an oncoming recession.

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)

Econintersect reviews the relationship between the year-over-year growth rate of non-farm private employment and the year-over-year real growth rate of retail sales. This index is currently positive. When retail sales grow faster than the rate of employment gains (above zero on the below graph) – a recession is not imminent. However, this index has many false alarms – and is currently suggesting little economic growth.

Growth Relationship Between Retail Sales and Non-Farm Private Employment – Above zero suggests economic expansion

The growth rate of real gross domestic product (GDP) is the headline view of economic activity, but the official estimate is released with a delay. Atlanta’s Fed GDPNow forecasting model provides a “nowcast” of the official estimate prior to its release. Econintersect does not believe GDP is a good tool to view what is happening at Main Street level – but there are some correlations. In the previous 30 days, GDPnow is saying economic growth will improve..