Philly Fed - What The ECRI Leading Index Means For Stocks

Previously, we looked at how stocks act when the ECRI leading index is down 6% or more for the first time in 12 months. That analysis makes sense in this specific situation because the index recently fell over 6% year over year.

ECRI also has a chart where they show recent corrections have all occurred when it determined the U.S. economy was in a slowdown. Knowing that stocks tend to correct during slowdowns discounts the notion that corrections are completely random as many pundits claim.

The pundits just don’t see the slowdowns, so they don’t know what’s happening. In this latest downturn, the stock market reacted much quicker than the high yield market.

However, Treasury yields fell. During the stock market recovery, high yield bonds rallied, while Treasuries haven’t reacted.

The chart below is the most complete picture of how stocks and the ECRI leading index are correlated.

It shows both series going back to 1968. They are highly correlated when the ECRI leading index is pushed forward 13 weeks. To be clear, the stock market correction already occurred. Interestingly, stocks bottomed before the ECRI leading index did.

Furthermore, stocks have recovered quicker. This situation is similar to the treasury curve. Usually, the economy falls into a recession over one year after the curve inverts, and the stock market falls before the recession. In this case, stocks fell before the inversion. The 10-year 2-year yield curve still hasn’t inverted.

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Philly Fed - A Tail Of 2 Philly Fed Readings

Interestingly, even though the Empire Fed manufacturing reading was very strong and other soft economic reports have been weak, the Philly Fed manufacturing report was strong.

As you can see from the chart below, the Philly Fed general conditions index increased from 9.1 to 17. That beat estimates for 10 and the high end of the range which was 14. Monthly industrial production growth hasn’t always correlated with the Philly Fed index. I use the regional Fed manufacturing reports to project the ISM manufacturing PMI.

Lately, the soft data has been too negative. So the industrial production report could be stronger than these soft reports in January. One thing that’s certain is that industrial production won’t be held down by utilities. January wasn’t an unseasonably warm month like December.

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Let’s look at the details of the Philly Fed manufacturing report.

New orders index increased from 13.3 to 21.3. Even after the recent rebound in oil prices, both inflation gauges fell. Prices paid index fell from 38.9 to 32.7 and the prices received index fell from 29 to 24.8. The 6-month expectations for general conditions increased from 29.9 to 31.2.

It appears manufacturers in this Fed district aren’t as worried about the trade war as others signaled they are.

The expectation for new orders fell from 38.5 to 32.2. Expectations for inflation cratered as the prices paid index went from 60.9 to 39.9. Prices received index fell from 47.9 to 34.1. The capex index fell from 34.5 to 31.6.

Philly Fed non-manufacturing index was completely different from the manufacturing one.

It was much worse. That’s interesting because the ISM reports showed manufacturing was much weaker than services. The current regional activity diffusion index fell from 7.7 to just 1.0.

As you can see from the chart below, the current activity index based each individual firm fell from 6.4 to 0.2. That’s the weakest reading since October 2011. That’s not to say the economy is definitely the weakest since 2011. This is a survey with a small sample size.

Last year I reviewed some reports which showed this slowdown was the weakest since the financial crisis. It’s still difficult to conclude either way because the shutdown has prevented over 24 reports from coming out.

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As the chart above shows, the index which measures individual businesses’ assessment of the future fell from 43.2 to 22.9. The current new orders index crashed from 17.5 to -3.1.

Unlike the inflation readings in the manufacturing index, these increased. The prices paid reading increased from 21.2 to 26.3 and the prices received index increased from 7.5 to 14.9. The two capex readings went in opposite directions. Capex for physical plants increased from 14.3 to 17.9 and capex for equipment and software fell from 23.1 to 18.8.

Philly Fed - Weak December Housing Market: January Recovery?

We will review 3 housing reports in this section. Two show improvement in January and one shows a collapse in December.

It seems like the housing market was a disaster in November and December of last year. I don’t think the decline in interest rates affected the housing market quick enough to alter the December numbers.

As you can see from the chart below, existing home sales fell 10.3% year over year. Monthly existing homes sales fell 5.4% as they went from 5.33 million to 4.99 million, missing estimates for 5.225 million.

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Existing home prices fell 1.4% monthly to $253,600. They were up only 2.9% yearly. Single-family sales fell 5.5% and condo sales fell 12.9%.

Midwest sales fell 11.2% even though this region is the most affordable. The West was the best as sales fell 1.9%. Supply on the overall market fell by 10.9%. This shows us the sales problem is caused by weakness in supply and demand. Maybe some sellers pulled back because of the price weakness. Inventory increased from 3.7 months to 3.9 months.

Philly Fed - Good news from January comes from the housing market index and the weekly MBA applications index.

HMI was up from 56 to 58. The 6-month expected sales index was up 3 points to 64. Current sales index was up 2 points to 63. Traffic index was only up 1 point to 44 which is very weak. West was up 5 points to 70. The South, Midwest, and Northeast were 61, 49, and 48.

Composite applications index has been up 23.5% and 13.5% in the past two weeks. Purchase index was up 17% and 9%, and the refinance index was up 35% and 19%. The purchase index is the highest since April 2010. Refinance index is the highest since March 2018.

The bull case for housing is price growth has slowed, wages are up, and interest rates have fallen. 30 year fixed rate fell from 4.94% in November to 4.45% now.