US Leading & Coincident Economic Indicators

I’m not a big fan of leading economic indexes (LEIs). They can be quite misleading. They are constructed by well-intentioned economists with the intention of providing an early warning that a recession is coming in a few months or assurance that the economy is likely to expand in coming months. These man-made indexes combine a bunch of indicators that purportedly lead the business cycle. When they fail to do so, the men and women who made these indexes recall them, retool them, and send them back out for all of us to marvel at how well these new improved versions would have worked in the past. I can accurately predict that when they fail in the future, they will be recalled and redesigned yet again.

This just happened to the US LEI. The Conference Board has made the first major overhaul of the components of the LEI since it assumed responsibility of the index in 1996. It replaced real money supply with its proprietary leading credit index, and the ISM supplier delivery index with the new orders index. In place of the Thomson Reuters/University of Michigan consumer expectations measure, it will now use an equally weighted average of its own consumer expectations index and the current measure. Also, the nondefense capital goods gauge was tweaked to exclude commercial aircraft.

The impact of these changes has been shocking, and really questions the credibility of constructing LEIs. The old LEI rose to a new record high in November, exceeding the previous cyclical peak (where it hovered during 2006 and 2007) by 12.7%. The new LEI edged back up in December to its previous high for the year during July, but that’s 13.1% below the previous cyclical peak!

What about the ECRI Weekly LEI? It tended to track both the old and the new monthly LEIs prior to 2009. Since then, they’ve all diverged though the weekly index is now more in sync with the new one than the old one. Still, the weekly LEI has been very volatile and gave a misleading warning of a recession during both 2010 and 2011 (so far). (More for subscribers.)

US Oil Rig Count, Production, & Imports

The latest batch of US economic indicators was mixed last week. Thursday’s initial unemployment claims and durable goods orders data were upbeat, while Friday’s GDP report was lackluster. The best news wasn’t widely reported. I have started to monitor the Baker Hughes weekly and monthly census of the number of drilling rigs actively exploring for or developing oil or natural gas in the United States. Here are the latest developments:

(1) The weekly rig count rose to 2,008 during the week of January 27. The monthly rig count remained around 2,000 for the fourth month in a row during January. That matches the previous record high during September 2008, which was led by gas rigs. The rebound from 2009 has been led by oil rigs, which are up from a low of 187 during May 2009 to a high of 1,208 during January, the highest since 1987, when the oilfield services company separated oil and gas counts.

(2) The surge in oil rigs is starting to pay off in higher US production. Crude oil field production rose to 5.67mbd during the week of January 20, based on the 52-week moving average. That’s up from an August 25, 2006 low of 4.87mbd, and the most since May 28, 2004. (More for subscribers.)

 

S&P 500 Revenues, Margins, & Earnings

Most industry analysts who cover the S&P 500 companies are turning more upbeat about the outlook for revenues for this year and next year. However, the same cannot be said for their earnings forecasts. How can this divergence be explained? Obviously, they expect profit margins to narrow. The happy spin on this story is that analysts expect that their companies will be hiring more workers because their business has been so good that they must expand their payrolls. That will squeeze profit margins. But it will also boost sales. I don’t know if industry analysts are thinking this way, but it certainly explains the following facts on the ground:

(1) Revenues: After falling from a peak of $1,116 per share during the week of August 25, 2011 to $1,080 during the week of November 24, consensus expected S&P 500 revenues for 2012 flattened out around that level through the week of January 19. The 2013 consensus has been rising since late last year to a record high of $1,145.

(2) Earnings: Despite the stabilization in 2012 revenues expectations and their upturn for 2013, consensus expected earnings for the S&P 500 were at new lows for both years last week. This year’s estimate was down to $106.51, and next year’s was down to $118.96.

(3) Profit Margins: I use the consensus revenues and earnings data to calculate profit margins for the S&P 500 and its 10 sectors. These consensus expected margins have been falling for both years since last summer and are currently down to 9.7% for 2012 and 10.4% for 2013.

(4) Sectors: I also slice and dice the data for the 10 sectors of the S&P 500. Through the week of January 19, there remain upward trends in both 2012 and 2013 revenue estimates for the following: Consumer Discretionary (new highs), Consumer Staples (new highs), and Health Care (new highs). Flattening out recently are Energy, Industrials, Information Technology, and Utilities. Heading down are Financials and Materials. (More for subscribers.)

US Economic Indicators

The regional business surveys conducted by the Federal Reserve Banks of New York, Richmond, and Philadelphia are available through January now. The overall indexes were upbeat, but they are seasonally adjusted. A few economists have recently argued that seasonal factors may be exaggerating the strength of the economy because they were distorted by the severity of the economic downturn in late 2008 and early 2009. The weather has also been unusually mild this winter. However, the details of the latest business surveys suggest that the fundamentals really are improving:

 

(1) New York Fed finds lots of strength in latest survey. The Empire State Manufacturing Survey indicates that manufacturing activity expanded in New York State in January. The general business conditions index climbed five points to 13.5, the best reading since April 2011, just before the soft patch. The new orders index rose eight points to 13.7, the highest since May 2011.

The six-month outlook continued to gain momentum in January. The future general business conditions index rose nine points to 54.9, its highest level since January 2011. This index has risen over 40 points since October.

On a series of supplementary survey questions, 51% of respondents indicated that they expect their workforces to increase over the next 6-12 months, while just 9% predicted declines in the total number of workers--results noticeably more positive than in the June 2011 survey. High expected sales growth was widely deemed to be the most important factor among those who planned to add workers.

(2) Richmond’s Fed survey was on the positive side. Manufacturing activity in the central Atlantic region advanced somewhat faster in January after firming in December. All broad indicators--shipments, new orders, and employment--landed in positive territory, with manufacturers noting their first increase in worker numbers since September. The manufacturing index rose to 12--up from 3 in December and 0 in November. Most other indicators were also positive, including capacity utilization.

Looking forward, assessments of business prospects for the next six months were more optimistic in January. The index of expected shipments increased nine points to 36, expected orders gained 11 points to finish at 32, and backlogs added eight points to 14.

(3) Philadelphia Fed survey also mostly upbeat. The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, edged up slightly from a revised reading of 6.8 in December to 7.3 in January. The new orders index remained positive for the fourth consecutive month but declined from a revised reading of 10.7 in December to 6.9 this month.

The future general activity index increased from a revised reading of 40 in December to 49 this month. The index has increased for five consecutive months and is now at its highest reading in 10 months. The current employment index has now been positive for five consecutive months, though it was virtually unchanged in January from last month’s reading. The percentage of firms reporting an increase in employment (21%) was higher than the percentage reporting a decline (10%). Among firms planning to increase employment over the next six to 12 months, the most frequently cited reason influencing this decision was the expectation of high sales growth.

So what worries me? I am concerned about the recent weakness in petroleum usage and electricity output in the US. The former fell during the week of January 13 to 18.98 million barrels a day (using the 52-week moving average to smooth out this volatile series). That’s down from a recent peak of 19.31mbd during the week of April 29, and the lowest usage since the week of July 11, 2010. Electricity output (also based on its 52-week average) was remarkably flat over the past year, but then dropped sharply during the first two weeks of this year. Maybe it’s just the weather. (More for subscribers.)

Global Oil Demand

Despite Iran’s saber rattling, the price of oil hasn’t soared. The price of a barrel of Brent has been hovering around $110 since last summer. That’s even after President Barack Obama signed a bill imposing tougher sanctions on Iran at the end of last year. The price didn’t go up after the Iranians publicly threatened to close the Strait of Hormuz and warned Saudi Arabia not to fill any expected gap in oil demand when the world stops buying Iranian crude. According to a report in today’s Al Arabiya News, Iranian boats with men armed with machine guns on board were recently sent to the waters near the Saudi oil-production areas. Yet the price of oil hasn’t budged much from $110. Spain’s foreign minister said on Monday that Saudi Arabia has promised that it will make up for supplies of oil lost as a result of EU sanctions on Iran, and will do so at the same price.

If it weren’t for all the saber rattling, the price of oil would probably be falling. Oil Market Intelligence just released the latest data for global oil demand through December. It is weak. While the 12-month average rose to a record high of 89.3 million barrels per day (mbd) last year, the growth rate fell to 1.1% y/y. That’s down from a recent peak of 3.4% during January 2011, and the weakest since April 2010.

Demand is especially weak among the Old World countries of the US, Western Europe, and Japan--where crude oil usage has slipped back down in recent months to the 2009 recession low. On the other hand, demand in the New World rose to a record high of 51.5mbd last year, exceeding Old World demand by 36%. The growth rate of the former was 2.8% last year versus a decline of 1.2% for the latter.

The weakest oil demand, not surprisingly, is in Western Europe. It dropped to 14.3mbd, the lowest since the end of 1994. It had peaked at a record 15.7mbd during the fall of 2006. Crude oil usage also turned down in the US during the second half of last year. The 12-month average was down to 19.0mbd during December from last year’s peak of 19.3mbd during March. (More for subscribers.)