Leading Index Spikes Showing 2020 Economic Growth Acceleration

Consumers Very Confident In Stocks

January University of Michigan consumer confidence index wasn’t surprising. It was strong just like the Conference Board and Bloomberg consumer confidence indexes. The overall index rose 0.5 to 99.8 (up 0.7 from the 1st half of the month). Current conditions index fell 1.1 to 114.4 and the expectations index rose 1.6 to 90.5. 

As you can see from the chart below, this was one of the best readings of the cycle. Cycle peak was 101.4. Some likely are interested in how the coronavirus impacts sentiment. Personally, I’m not expecting much of a change in February. There won’t be many people in America impacted by the virus. The stock market selloff could hurt sentiment, but only if it gets worse.

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Most interesting part of this report was consumers’ opinions on the stock market. Gains in personal finances were reported by 53% of consumers which is the same as the 2018 and 2019 average. While 2018 was a bad year for stocks, the declines were quick, so the average reading wasn’t bad. Those 2 years had the highest average in 50 years. Net change in household income and wealth (net gain % minus net loss %) was 40%. That was near the peaks in 1966 and 2000.

Prior to the decline at the end of the month related to the coronavirus and Bernie’s rise in the poll, the market was overly inflated. University of Michigan survey showed 65.6% of consumers expected stocks to rise. That’s the 2nd highest reading in 20 years. January 2018 had the highest reading as it was 66.7%. 

Consumers certainly had a euphoric outlook on stocks relatively speaking. Just expecting stocks to rise isn’t a huge deal on an absolute basis, but it is for this stat.

Q4 Employment Cost Index

Q4 Employment Cost Index was up 0.7% quarterly which was the same as Q3 and met estimates. Yearly change in the index was 2.7% which was down from 2.8%. The chart below shows the relationship between wages and salaries growth and the prime age employment to population ratio. 

Based on the relationship between the 2 metrics since 1994, wage growth should have been slightly higher. Recently, nominal wage growth has tumbled even though the unemployment rate and jobless claims are still low.

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Economic Growth Set To Improve?

According to JP Morgan, current economic indicators show there is a 37% chance of a recession in the next 12 months. That sounds elevated, but it’s the lowest percentage since late 2018 as the chart below shows. JP Morgan states the yield curve implies a 54.1% chance of a recession. 

Curve inversion stories aren’t as prevalent as when the curve inverted in 2019. Finally, the S&P 500 and BBB spread show there is a 12.5% chance of a recession. I’m going with that as I see no recession in the next 2 years.

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Final NY Fed Nowcast for Q4 was 1.16% growth which widely missed the actual report of 2.1% growth after the Nowcast had gotten the prior quarter’s reading perfectly. This time the St. Louis Fed’s Nowcast was the perfect one. NY Fed’s Q1 Nowcast fell from 1.67% to 1.55%. That would obviously be a disappointment for those expecting a rebound in 2020. 

Atlanta Fed’s reading started at 2.7% and is now at 2.9% because of the ISM manufacturing report and the construction spending report. The estimate for real personal expenditures growth rose from 2.7% to 3%. That would be up from 1.8%. That’s a realistic estimate given the strength in consumer confidence. Estimates for gross private domestic investment growth rose from 5.7% to 5.8%.

ECRI leading index has been spiking recently as it forecasts an economic growth acceleration in 2H 2020. In the week of January 24th, the index was up 0.9 to 151. Highest reading ever was 152.6. Growth rate rose from 5% to 5.9% as you can see in the chart below. That’s the highest growth since March 2018. Growth in the 2nd half of 2018 was fine. The slowdown was mainly in 2019.

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Markit Manufacturing PMI

Difference between Markit Manufacturing PMI and the ISM PMI shrunk dramatically as the ISM PMI spiked and the Markit PMI fell slightly. Markit PMI fell from 52.4 to 51.9 which was 0.2 above the flash reading. Output growth was moderate and unchanged sequentially. 

New orders growth was mild and fell; it was the weakest in 3 months. Size of the workforce increased slightly in what was the slowest pace of hiring in 4 months. Backlogs fell for the first time since September.

One good part of this report was that the 1-year outlook hit a 7 month high. Input costs were up the 2nd highest amount since April even though commodities prices have fallen. Output prices were up fractionally as price growth was the lowest in 3 months. 

Finally, purchasing activity growth fell. This report was much softer than the ISM one, even though technically the Markit PMI was 1 point higher. Sequential changes made their tones different. Chief Business Economist at market stated, "US manufacturing limped into 2020, with falling exports dampening output growth and causing a pull-back in hiring. Weakness looks broad-based.”

Construction Spending Falls

Donstruction spending report did impact the Q1 Atlanta Fed Nowcast. So it's worth mentioning that monthly construction spending growth was -0.2% in December. It fell from 0.7% and missed estimates for 0.5% growth. Yearly growth rose from 4.6% to 5%. Private residential construction and home improvement spending rose. But non-residential construction and public construction spending fell. 

Remember, the weather was warm in December which helped home building. Non-residential construction fell 1.8% and public construction spending was down 0.4%. Obviously, this report will soon cease to matter because it’s not part of Q1. I think housing starts will be strong in Q1. But not as great as the December reading which was way out of line with permits.