Weekly Indicators: Corporate Profits For Q2 Expected To Increase Sharply

Purpose

I look at the high frequency weekly indicators because while they can be very noisy, they provide a good nowcast of the economy, and will telegraph the maintenance or change in the economy well before monthly or quarterly data is available. They are also an excellent way to “mark your beliefs to market.” In general, I go in order of long leading indicators, then short leading indicators, then coincident indicators.

A Note on Methodology

Data is presented in a “just the facts, ma’am” format with a minimum of commentary so that bias is minimized.

Where relevant, I include 12-month highs and lows in the data in parentheses to the right. All data taken from St. Louis FRED unless otherwise linked.

A few items (e.g., Financial Conditions indexes, regional Fed indexes, stock prices, the yield curve) have their own metrics based on long-term studies of their behavior.

Where data is seasonally adjusted, generally it is scored positively if it is within the top 1/3 of that range, negative in the bottom 1/3, and neutral in between. Where it is not seasonally adjusted, and there are seasonal issues, waiting for the YoY change to change sign will lag the turning point. Thus, I make use of a convention: data is scored neutral if it is less than 1/2 as positive/negative as at its 12-month extreme.

With long leading indicators, which by definition turn at least 12 months before a turning point in the economy as a whole, there is an additional rule: data is automatically negative if, during an expansion, it has not made a new peak in the past year, with the sole exception that it is scored neutral if it is moving in the right direction and is close to making a new high.

For all series where a graph is available, I have provided a link to where the relevant graph can be found.

Recap of monthly reports

May data started out with a sharply bifurcated jobs report, showing a big increase in employment, but a continued increase in the unemployment rate as well. The ISM manufacturing report retreated into contraction again, but the non-manufacturing report showed increased expansion.

Construction spending in April declined slightly, but residential construction spending increased slightly. New factory orders, including both durable goods orders and core capital goods orders, all increased.

Long leading indicators

Interest rates and credit spreads

Rates

• BAA corporate bond index 5.78%, down -0.23% w/w (1-yr range: 5.43-6.80)
• 10-year Treasury bonds 4.43%, down -0.07% w/w (3.30-4.93)
• Credit spread 1.35%, down -0.16% w/w (1.36-2.42).

(Graph at Moody’s Seasoned Baa Corporate Bond Yield | FRED | St. Louis Fed.)

Yield curve

• 10 year minus 2 year: -0.45%, up +0.17% w/w (-1.07 – -0.17)
• 10 year minus 3 month: -0.91%, down -0.02% w/w (-1.89 – 0.21)
• 2 year minus Fed funds: -0.45%, unchanged w/w.

(Graph at 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity | FRED | St. Louis Fed.)

30-Year conventional mortgage rate (from Mortgage News Daily) (graph at link)

• 7.15%, down -0.14% w/w (6.61-8.03).

With no new highs in interest rates since last October, their rating improved to neutral at the end of February. That continued to be the case despite recent significant increases, which have somewhat reversed in the past several weeks. All the yield curve measures remain negative. In general, the yield curve is far less steeply inverted than it was late last year.

Housing

Mortgage applications (from the Mortgage Bankers Association)

• Purchase apps down -4% to 137 (125-162) (SA)
• Purchase apps 4 wk avg. down -2 to 140 (SA)
• Purchase apps YoY -13% (NSA)
• Purchase apps YoY 4 wk avg. -12% (NSA)
• Refi apps down -7% w/w (SA)
• Refi apps YoY up +5% (SA)

*(SA) = seasonally adjusted, (NSA) = not seasonally adjusted

(Graph at Our Charts.)

Real Estate Loans (from the FRB)

• Down less than -0.1% w/w
• Up +2.1% YoY (2.2% – 11.9%) (new 12 month low).

(Graph at Real Estate Loans, All Commercial Banks | FRED | St. Louis Fed.)

Mortgage rates, like bond yields, made multi-decade new highs over six months ago. Additionally, purchase mortgage applications last made a new long-term low at the same time. They have meandered in a relatively tight range since – continuing slightly higher than their bottom last autumn – warranting a neutral rating. Refinancing has traced a similar trajectory, but actually has often turned significantly higher YoY, albeit from nearly non-existent levels one year ago. This week, they were still higher by enough to warrant a continued positive rating.

Late last year, real estate loans sank below 1/2 of their 12-month-high, the last housing indicator to turn negative, and have generally continued to worsen. They paused for several months, but in both of the last two weeks made renewed YoY lows.

Money supply

The Federal Reserve has discontinued this weekly series. Data is now only released monthly. April data was released one week ago:

• M1 m/m down -0.1%, YoY Real M1 down -6.9% (worst: -14.9% 4/23)
• M2 m/m up +0.1%, YoY Real M2 down -2.8% (worst -9.4% 4/23).

No recession has happened without a YoY real M1 negative, or YoY real M2 below +2.5%. Real M2 fell below that threshold in March 2022. Real M1 also turned negative as of May 2022.

Although both of these are still negative, they are both the “least bad” they have been since 2022. On an absolute level, the post-pandemic bottom for real M1 was in February; for real M2 it was last October).

Corporate profits (Q1 actual + estimated) from I/B/E/S via FactSet at p. 25)

• Q1 2024 98% actual +2% estimated unchanged at 56.49, up +1.7% q/q
• Q2 2024 estimated at 59.38, up +5.1% q/q.

FactSet estimates earnings, which are replaced by actual earnings as they are reported, and are updated weekly. The “neutral” band is +/-3%. I also average the previous two quarters together, until at least 100 companies have actually reported (which occurred for Q1 this week). This metric went negative with poor Q4 profits, but Q1 profits improved significantly, improving the rating is neutral. With the initiation of estimated Q2 profits this week, the average of the two quarters is +3.5%, warranting a change of rating to positive.

Credit conditions (from the Chicago Fed) (graph at link)

• Financial Conditions Index up +.04 (less loose) to -0.54 (-0.03 – -0.62)
• Adjusted Index (removing background economic conditions) up +.07 (less loose) to -0.51 (+0.16 – -0.59)
• Leverage subindex down -0.06 (looser) to -0.08 (+1.61 – -0.51).

In these indexes, lower = better for the economy. The Chicago Fed’s Adjusted Index’s real break-even point is roughly -0.25. In the leverage index, a negative number is good, a positive poor. The historical breakeven point has been -0.5 for the unadjusted Index. If this index goes below -0.60, its rating will change to positive. In the past six months, the leverage index turned neutral and then negative, but has since returned to neutral. The adjusted index had improved beyond its breakeven point, briefly turning positive and then oscillating between neutral and positive. This week it is positive again, while the unadjusted index is in its neutral range.

Short leading indicators

Economic Indicators from the late Jeff Miller’s “Weighing the Week Ahead

• Miller Score (formerly “C-Score”): up +14 w/w to 230, +11 m/m (154 9/22/23 – 315 on 6/14/23)
• St. Louis Fed Financial Stress Index: up +0.1040 to -0.8634 (-0.3493 10/20/23 – -.9676 5/31/24)
• BCIp from Georg Vrba: down -3.5 w/w to +49.9 as of 6/6/24 iM’s Business Cycle Index (100 is max value, below 25 is recession signal averaging 20 weeks ahead).

The Miller Score is designed to look 52 weeks ahead for whether a recession is possible. Any score over 500 means no recession. This number fell below that threshold at the beginning of August 2021, so not only is it negative, but we are now well into the “recession eligible” time period.

The St. Louis Financial Stress index is one where a negative score is a positive for the economy, and during its limited existence, has risen above zero before a recession by less than one year. It remains very positive.

The BCIp, deteriorated sharply earlier last year below its recession-signaling threshold, but then improved sufficiently so that IM rescinded the recession signal. The signal then activated again for several months, but as of several months ago, IM once again stated that their system no longer forecasts a recession.

Trade weighted US$

• Up +0.46 to 122.48 w/w, up +1.9% YoY (last week) (broad) (117.41–124.64) (Graph at Nominal Broad U.S. Dollar Index
• Up +0.25 to 104.92 w/w, up +1.3% YoY (major currencies) (graph at link) (99.58–107.35).

Early in 2023 both measures of the US$ turned positive. Five months ago, for the first time since then, the US$ as to major currencies turned slightly higher YoY, changing its rating to neutral, and was then joined by the broad measure. Both briefly reverted to positive, but both have since returned to neutral. If either go higher by more than 5% YoY, that will change their rating to negative.

Commodity prices

Bloomberg Commodity Index

• Down -1.17 to 101.82 (95.40 -108.24)
• Up +0.8% YoY.

(Graph at https://www.marketwatch.com/investing/index/bcom?countrycode=xx.)

Bloomberg Industrial metals ETF (from Bloomberg) (graph at link)

• 153.03, down -7.55 w/w (132.17 -172.06)
• Up +10.6% YoY.

Both of these measures have improved in the last several months, and industrial commodities surged to new 12 month highs several weeks ago before backing off significantly. Both of these, for a few weeks, were close to the top of their 12-month ranges, so were positive, but now both have retreated to the middle portion of that range, so this week the rating changed back to neutral.

Stock prices S&P 500 (from CNBC) (graph at link)

Since we have had multiple new all-time highs, but no new lows in the past 3 months, this indicator is positive.

Regional Fed New Orders Indexes

(*indicates report this week) (no reports this week)

• Empire State down -0.3 to -16.5
• Philly down -20.1 to -7.9
• Richmond up +3 to -6
• Kansas City down -7 to -13
• Dallas up +3.1 to -2.2
• Month-over-month rolling average: up +1 to -9.

The regional average is more volatile than the ISM manufacturing index, but usually correctly forecasts its month-over-month direction. Since spring 2022, these gradually declined to neutral and then negative. Recently, they became “less negative,” but reversed in the last several months. The indexes had shown solid improvement earlier this year, then retreated two months ago, then improved again to close to neutral last month, and in the past several weeks faded. Throughout, they have remained negative.

Employment metrics

Initial jobless claims

• 229,000, up +8,000 w/w
• 4-week average 222,250, down -750 w/w.

(Graph at St. Louis FRED.)

Claims for most of the past few months have been lower than they were one year ago, warranting a positive rating, despite an apparent uptrend starting four weeks ago.

Temporary staffing index (from the American Staffing Association) (graph at link)

• Unchanged at 89 w/w
• Down -10.6% YoY (low -12.9%- high -4.8%).

During 2022, the comparisons at first slowly and then more sharply deteriorated, and by early last year had turned negative. After improving somewhat, since last autumn YoY comparisons faded again. It remains frankly recessionary. I suspect this is a secular change and giving a false signal as a result.

Tax Withholding (from the Department of the Treasury) https://fsapps.fiscal.treasury.gov/dts/issues

• $274.2 B for the month of May this year vs. $267.5 B one year ago, +$6.7 B or +2.5%
• $266.4 B for the last 20 reporting days this year vs. $245.0 B one year ago, +$21.4.B or +8.7% YoY.

After being negative briefly in late 2022, in January 2023, these turned back positive, and stayed very positive until November. Since then, they have oscillated between being negative and positive for several weeks at a time. Since March, they have returned to being positive to very positive, with the sole exception of one week in May.

Oil prices and usage (from the E.I.A.)

• Oil down -$1.80 to $75.28 w/w, up +8.4% YoY ($67.12 – $93.68)
• Gas prices down -$.06 to $3.52 w/w, up +$0.02 YoY
• Usage 4-week average down -1.0% YoY.

(Graphs at This Week In Petroleum Gasoline Section – U.S. Energy Information Administration (EIA).)

Several months ago, oil prices briefly were in the bottom 1/3rd of their 3-year range, and so turned positive. They reversed back and forth repeatedly since then. Two weeks ago, they declined enough to change back from neutral to positive, and remained positive this week.

Gas prices are closer to the lows of their 3-year range, and so are positive. Mileage driven, but except for two weeks in March, has been negative YoY since February, and had its worst YoY negative reading three weeks ago.

Note: given this measure’s extreme volatility, I believe the best measure is against their 3-year average.

Bank lending rates

• 5.33 Secured Overnight Financing Rate (SOFR), unchanged
• 5.44 LIBOR unchanged w/w (0.10130–5.47) (graph at link)

The TED Spread has been discontinued, and LIBOR is in the process of being discontinued. At the suggestion of a reader, I have begun to track the SOFR instead. Unfortunately, SOFR has only been existing since 2018, so there is no track record as to how it might behave around normal recessions (vs. the pandemic). Over the past 5 years, it does appear to have matched the trend in LIBOR.

But because of its very brief track record, although I will report it I will not be including it in my list of indicators in the conclusion, at least for now.

Coincident indicators

St. Louis FRED Weekly Economic Index

• Up +0.15 to 2.36 w/w (Low 1.03 June 10, 2023 – high 2.36 June 7, 2024).

This measure remained in a neutral range during most of 2023 before breaking above 2.0 last December, changing its rating to positive, and again for several weeks off and on this year, oscillating between neutral and positive. It was positive again this week.

Restaurant reservations YoY (from Open Table) State of the Restaurant Industry | OpenTable

• 7-day average +3% YoY, vs. +4% one week ago.

This index went on hiatus for six weeks, and I discontinued coverage. This week it resumed, but it appears that previous data, which had averaged -3% to -7% YoY earlier this year, has been substantially revised, and now retroactively averages +4% for most of this calendar year. With that big caution, I have reinstated coverage.

Consumer spending

• Johnson Redbook up +5.8% YoY, 4-week average +6.0% (high 6.0% May 31, 2024; low -0.4% July 13, 2023) United States Redbook Index.

The Redbook index briefly turned negative last summer, before rebounding. Comparisons faded somewhat during December, before rebounding again after Christmas, then fading in February, and rebounding since. This week was off by less than -0.1% to the highest comparison yet in the past year, set last week. The link above goes to a 5-year graph to best show the comparison.

Consumer inflation by Truflation (Independent, economic & financial data in real time on-chain)

• Down -0.44 to +2.24% YoY (High 3.34% 9/19/23 – Low 1.34% 2/2/24).

This recent addition is a daily update to inflation, similar to the “billion prices project” of the last decade (which required a subscription). I have not added this to my list below of coincident or leading indicators, but needless to say it is an up-to-the-moment reading on this significant indicator.

Real Consumer Spending

• Up +3.8% YoY (12 month high 4.0% 2/2/24; 12 month low -1.4% May 2023).

This metric premiered at the beginning of this year. One of my most important mantras is that consumption leads employment. Real retail sales have a long history of doing so, but are only reported on a monthly basis.

The weekly result is derived simply by subtracting YoY inflation as measured by Truflation by the YoY change in nominal consumer spending as measured by Redbook. While it will be somewhat noisy, it should anticipate changes in the monthly measures ahead of time. It backed off from the 12-month high it set in February, but has gradually rebounded since, and remained positive this week.

Transport

Railroads (from the AAR)

• Carloads down -5.9% YoY
• Intermodal units up +10.7% YoY
• Total loads up +2.4% YoY.

(Graph at Railfax Report – North American Rail Freight Traffic Carloading Report.)

Shipping transport

• Harpex up +152 to 1627 (810–1627) (new 12 months high)
• Baltic Dry Index up +68 to 1869 (919-3369) (graph at link).

Rail data has been very volatile since early 2023, with lots of volatility from positive to negative and back again. This week it was mixed again.

Harpex was as high as nearly 4500 almost 2 years ago, but declined as low as 810 in December of last year before rising almost relentlessly since, setting repeated 12-month highs in the past two months. The usual interpretation for this is that demand is straining against supply, showing a strong global economy, and thus very positive.

Similarly, the BDI was in a generally declining trend throughout 2022 before bottoming at a three-year low of 530 in February 2023. The overall trend has been higher since then, rising to a high of 3346 in December, probably reflecting the Houthi attacks on shipping in the Red Sea. This year its low was 1309 in January, and its recent high was 2419 in March. Its current reading is near the midpoint of its one-year range, so is a neutral.

I am wary of reading too much into price indexes like this, since they are heavily influenced by supply (as in, a huge overbuilding of ships in the last decade) as well as demand.

Steel production (American Iron and Steel Institute)

• Up +0.5% w/w
• Down -0.5% YoY.

This metric was negative for most of 2022, then gradually improved in 2023. Several months ago it returned to negative, then rebounded to neutral, then to positive seven weeks ago, before declining to negative again. This week it is close enough to the “zero” point to warrant an improvement in rating to neutral once more.

Summary And Conclusion

Below are this week’s spreadsheets of the long leading, short leading, and coincident readings. Check marks indicate the present reading. If there has been a change this week, the prior reading is marked with an X:

Click to enlarge

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The most significant change this week was among the long leading indicators, where corporate profits have turned back positive after several quarters of being neutral or negative. The big negatives remain the yield curve and real money supply.

Both the short leading indicators and the coincident indicators have generally been improving over the past few months, albeit with some noise. The tone of the short leading indicators remains slightly positive and coincident indicators very positive.

The sectors I am watching most closely are manufacturing and construction. Last week I wrote that I would be paying heightened attention to both the ISM manufacturing and services reports for any sign of further weakness. The former did show more weakness, but it was more than overbalanced by renewed strength in services. On balance, the default case for the economy for the remainder of this year remains “soft” rather than “hard” landing.