Mapping the top economic indicators – june 2017

Before I start today’s post, I’d like to announce my plans for an economic trends newsletter. The newsletter will expand on the topics and concepts of using economic indicators to track the economy and more importantly to improve investing results through their use in quant or TAA investing systems. I’m looking for a handful or so of beta testers to flesh out the details of the newsletter for a few months before it goes live. If you’re interested drop me an email. On to today’s post…

In this post we’ll update the top 6 economic indicators as of mid June 2017. The final indicator for May was released this morning. Each of the 6 indicators is updated with May data. For background on the top 6 see here.

The table below shows the current heatmap for the top 6 indicators.

Overall, we have the same picture we’ve had for a while now. All of the 6 indicators remain green for this month. 2 of the indicators showed improvement, 4 showed some deterioration. None are even near a warning signal. This also means that there is no trigger for the COMP indicator which means there is no possibility for the SPY-COMP system to trigger this month. Here is a brief update on each of the 6 indicators.

• Unemployment rate (UER) – the UER dropped another tenth to 4.3% in May. The 12 mo SMA stands at 4.7%. No signs of trouble here.
• Real retail sales – the year over year change slowed again this month to 1.91%. Still quite a bit above last year’s lows but not blowing any doors off either
• Industrial production, durable consumer goods – another improvement this month to a growth of 3.7%, confirming last month’s strong number.
• Permits – May’s number was slightly weaker than expected. This is a very noisy indicator. That’s why we use the year over year change in the 3 month SMA. That also slowed, but is still showing growth.
• Leverage – this is the best indicator for any market trouble outside of recessions. It currently stands at -0.64, similar to last month’s -0.68.
• Yield curve narrowed again this month to 114 bps as of yesterday’s close. The yield curve has given back all of its gains since the election and then some. It is at a new low for this economic expansion cycle. Something to keep an eye on. This is a very early potential indicator if it goes negative.

A mixed bag for the month but nothing is signaling cause for recessionary concern. At least for now. The flattening of the yield curve is the latest freakout in the financial blogosphere. I’ll just say two things about the yield curve. First, it is the inversion, not the flattening of the curve that matters. Second, it is a very early indicator of trouble once it flattens. In the COMP model we have to shift the signal out 6 months forward to get any useful recessionary indicator to aid in the SPY-COMP system. Below is the a chart of the Yield curve (10yr 3 month spread) showing the inversions before recessions. I also drew a line at 100bps to show that even crossing 100bps is nothing urgent to worry about.

That’s it for this month. In summary, all 6 individual economic indicators are currently green. No change from last month.