Note: All indexes and indicators shown here are experimental in nature and are not to be used for decision-making purposes. As the saying goes, 'beware of geeks bearing formulas'.
Overall, economic activity was seen somewhat weaker in the first quarter of 2018 compared to the previous quarter, as had been expected. Economic activity is expected to become more robust once again moving into the second and third quarters of 2018, however.
Current Conditions Index
The Current Conditions Index showed a downshift in economic strength in the first quarter of 2018 compared to the last quarter of 2017, with the March 2018 value coming in roughly one unit lower than that seen in December. This fits with the narrative of the U.S. being in the late stage of this current economic expansion, as monetary policy begins to meaningfully tighten and the above-potential growth seen for much of 2017 moderates some.
Weighted Economic Leading Indicator
The Weighted Economic Leading Indicator, which aims to depict economic conditions with a roughly six month lead time, anticipated the current slow-down back in the second half of 2017. Since then, the indicator has ramped back up again, now substantially higher than lows recorded last year. This signals the likelihood of a rebound in economic strength in the second and third quarters of 2018, likely extending into Q4 (as it appears right now). However, the current values remain substantially below those seen from 2010-2013, indicating that this expansion is indeed nearing its end. Thus, while a rebound in economic activity is expected in 2018 Q2 and Q3, the risk of contractionary conditions will increase if this rebound cannot sustain itself.
New Housing Activity Index
The New Housing Activity Index confirms what the industry appears to be reporting amidst the current housing shortage- that housing activity is merely moving along, and is not at a robust level. As such, a continuation of the housing supply shortage is expected for the remainder of 2013. The index could move lower still if mortgage rates continue to rise, potentially turning away buyers already afflicted by rising home prices. Through 2018 Q3, however, the housing market looks to be stable.
Excess in Stock Markets Indicator
After peaking at nearly 20.00 in early 2018, the stock market gyrations in February sent the Excess in Stock Markets Indicator back on the decline. Despite this, the metric remains elevated, and still not far from the 30.00 watermark, historically a level reached when "excess" in stock markets was significant (i.e. the 1987 stock market crash). Given the spread between the red and blue lines, as well as the still-elevated nature of the metric, stock markets still look to have areas of excess present. Further volatility throughout 2018 can be expected, particularly against a backdrop of tightening monetary policy by global central banks and a late-stage expansion in the U.S.
Derived Recession Probabilities
Lastly, the two gauges of recession probabilities I maintain continue to stay well below the 50% mark. The primary Derived Probability gauge held steady month-over-month at ~27%, while the experimental companion to that gauge (the gray line) fell further to a more-than-two year low of ~20%. This fits in with the indicators reviewed above, highlighting the expectation of continued benign economic conditions through 2018 Q2 and Q3, potentially Q4 as well. This could certainly change with the advent of a U.S./China trade war, aggressive tightening of global monetary policy, or a sustained slowdown in the European Union and/or China.
Andrew
Overall, economic activity was seen somewhat weaker in the first quarter of 2018 compared to the previous quarter, as had been expected. Economic activity is expected to become more robust once again moving into the second and third quarters of 2018, however.
Current Conditions Index
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| Note: The CCI depicts the magnitude of the current stage of the business cycle. In other words, the high positive values seen in 2013 are indicative of the presence of an expansion with little likelihood for a recession, while current lower values are indicative of a later-stage expansion. |
The Current Conditions Index showed a downshift in economic strength in the first quarter of 2018 compared to the last quarter of 2017, with the March 2018 value coming in roughly one unit lower than that seen in December. This fits with the narrative of the U.S. being in the late stage of this current economic expansion, as monetary policy begins to meaningfully tighten and the above-potential growth seen for much of 2017 moderates some.
Weighted Economic Leading Indicator
The Weighted Economic Leading Indicator, which aims to depict economic conditions with a roughly six month lead time, anticipated the current slow-down back in the second half of 2017. Since then, the indicator has ramped back up again, now substantially higher than lows recorded last year. This signals the likelihood of a rebound in economic strength in the second and third quarters of 2018, likely extending into Q4 (as it appears right now). However, the current values remain substantially below those seen from 2010-2013, indicating that this expansion is indeed nearing its end. Thus, while a rebound in economic activity is expected in 2018 Q2 and Q3, the risk of contractionary conditions will increase if this rebound cannot sustain itself.
New Housing Activity Index
The New Housing Activity Index confirms what the industry appears to be reporting amidst the current housing shortage- that housing activity is merely moving along, and is not at a robust level. As such, a continuation of the housing supply shortage is expected for the remainder of 2013. The index could move lower still if mortgage rates continue to rise, potentially turning away buyers already afflicted by rising home prices. Through 2018 Q3, however, the housing market looks to be stable.
Excess in Stock Markets Indicator
After peaking at nearly 20.00 in early 2018, the stock market gyrations in February sent the Excess in Stock Markets Indicator back on the decline. Despite this, the metric remains elevated, and still not far from the 30.00 watermark, historically a level reached when "excess" in stock markets was significant (i.e. the 1987 stock market crash). Given the spread between the red and blue lines, as well as the still-elevated nature of the metric, stock markets still look to have areas of excess present. Further volatility throughout 2018 can be expected, particularly against a backdrop of tightening monetary policy by global central banks and a late-stage expansion in the U.S.
Derived Recession Probabilities
Lastly, the two gauges of recession probabilities I maintain continue to stay well below the 50% mark. The primary Derived Probability gauge held steady month-over-month at ~27%, while the experimental companion to that gauge (the gray line) fell further to a more-than-two year low of ~20%. This fits in with the indicators reviewed above, highlighting the expectation of continued benign economic conditions through 2018 Q2 and Q3, potentially Q4 as well. This could certainly change with the advent of a U.S./China trade war, aggressive tightening of global monetary policy, or a sustained slowdown in the European Union and/or China.
Andrew
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