March 2018 Economic Forecast: Marginal Improvement

Econintersect’s Economic Index (EEI) marginally improved but remains in territory associated with modest economic growth.

Analyst Summary of this Economic Forecast

Last month was a terrible month for the data we used in making our forecast. This month was significantly better with our single month in territory associated with strong growth. But as we use a 3 month rolling average as the basis of our forecast – there was only a marginal improvement.

Even though not in our forecast, we remain concerned about the HISTORICALLY HIGH elevated spending to income ratios which paints a picture of a consumer spending all of its income – with little room for additional spending or ability to weather rainy days (or say hurricanes and earthquakes). 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 declined and is closing in on negative territory. Historically, when this ratio is in negative territory it 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 economic growth.

Our 6-month employment forecast indicates an improving trend line in the rate of employment growth.

Note that the majority of 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 new data and / or backward data revisions and/or new data.

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.

This post will summarize the:

Special Indicators:

The consumer is still consuming. The ratio of spending to income has been very elevated since September 2016. There have been only three extended periods in history where the ratio of spending to income has exceeded 0.92 (the months surrounding the 2001 recession, from September 2004 to the beginning of the 2007 Great Recession, and since September 2016).

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 remains 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.

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

GDPNow

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 correlations.

Latest forecast: 3.2 percent — February 16, 2018

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2018 is 3.2 percent on February 16, unchanged from February 14. The nowcast of first-quarter real residential investment growth fell from -0.6 percent to -1.7 percent on February 15 after the industrial production release from the Federal Reserve Board of Governors and the Producer Price Index release from the U.S. Bureau of Labor Statistics. The nowcast increased to 0.6 percent after this morning’s new residential construction release from the U.S. Census Bureau.

z forecast8.png or source

Nowcast

The New York Fed also has introduced its own economic projection called Nowcast. Its current forecast: