ECRI Weekly Leading Index: November 18 2011

The latest release of the Economic Cycle Research Institute’s (ECRI) Weekly Leading Index weakened slightly falling to 121.8 from last week resulting in the all important annualized “growth” component showing a value of -7.9 and continuing suggest a recession call on the part of the ECRI’s economics staff .

The chart above shows the ECRI’s Weekly Leading Index growth component since 2001.

Notice that this index has turned notably negative which, along with an erosion in many other key macro-economic series, appears to be signaling that the probability of recession is high.

For a very entertaining debate over the ECRI leading index and the recent recession call watch this clip of ECRI's Chief Operations Officer Lakshman Achuthan on CNBCs Squawk Box.

Hong Kong Bubble?: Hong Kong Residential Property Prices September 2011

Today, the University of Hong Kong released their Hong Kong Residential Real Estate Series (HKU-REIS) indicating that, in September, the price of residential properties declined a whopping 2.62% since August but still climbed 15.15% above the level seen in September 2010.

It appears that after a stunning run of monthly increases that saw prices increase dramatically, prices are beginning to show a notable pullback with all measures declining on the month.

The HKU-REIS is a set of property price indices constructed monthly using a “modified” repeat-sale methodology similar to that of the S&P/Case-Shiller indices yet suited to the Hong Kong property market.

New Residential Construction Report: October 2011

Today’s New Residential Construction Report showed that in October, both single family permits and starts increased from September with both measures continuing to show tepid results when compared on a year-over-year basis.

Single family housing permits, the most leading of indicators, increased 5.1% from last month to 434K single family units (SAAR), increasing 6.6% above the level seen in October 2010 but remaining an astonishing 75.86% below the peak in September 2005.

Single family housing starts increased 3.9% to 430K units (SAAR), but dropped 0.9% below the level seen in October 2010 and a stunning 76.41% below the peak set in early 2006.

With the substantial headwinds of elevated unemployment, epic levels of foreclosure and delinquency, mounting bankruptcies, contracting consumer credit, and falling real wages, an overhang of inventory and still falling home prices, the environment for “organic” home sales remains weak and likely very fragile.

Philadelphia Feeling: Federal Reserve Bank of Philadelphia Business Outlook Survey November 2011

The latest release of the Federal Reserve Bank of Philadelphia Business Outlook Survey (BOS) for November indicated a weakening in the regions manufacturing activity with the current activity index falling to a level of 3.6 while the future activity index improved to a level of 41.9.

While about half the component measures turned down in November, more data is needed in order to get a more complete sense of how the economy is trending.

The following chart shows the current and future activity indexes both with their corresponding 3-month moving averages. The red line marks the threshold between contraction and expansion for these diffusion indexes.

Extended Unemployment: Initial, Continued and Extended Unemployment Claims November 17 2011

Today’s jobless claims report showed a decline to both initial and continued unemployment claims as a slight rising trend was firmly called into question for initial claims.

Seasonally adjusted “initial” unemployment declined 5,000 to 388,000 claims from last week’s revised 393,000 claims while seasonally adjusted “continued” claims declined by 57,000 resulting in an “insured” unemployment rate of 2.9%.

Since the middle of 2008 though, two federal government sponsored “extended” unemployment benefit programs (the “extended benefits” and “EUC 2008” from recent legislation) have been picking up claimants that have fallen off of the traditional unemployment benefits rolls.

Currently there are some 3.45 million people receiving federal “extended” unemployment benefits.

Taken together with the latest 3.21 million people that are currently counted as receiving traditional continued unemployment benefits, there are 6.67 million people on state and federal unemployment rolls.

Homebuilder Blues: NAHB/Wells Fargo Home Builder Ratings November 2011

Today, the National Association of Home Builders (NAHB) released their latest Housing Market Index (HMI) showing that all measures increased in November with the composite HMI index climbing to 20 while the "buyer traffic" index remained near record lows as home builders continue to plod through the weakest activity seen in generations.

While all indicators made notable increases in November, it's important to note that conditions still remain at epically distressed levels.

The new home market will likely not resume any significant form of healthy function until the considerable overhang of inventory is cleared.

Production Pullback: Industrial Production October 2011

Today, the Federal Reserve released their monthly read of industrial production and capacity utilization showing mild improvement with total industrial production increasing 0.68% from September and rising 3.92% above the level seen in October 2010.

Capacity utilization increased 0.59% from September climbing just 2.72% above the level seen in October of 2010 to stand at 77.76%

It's important to recognize that though the "recovery" is well over two years old, both industrial production and capacity utilization are notably below the peaks set in late 2007.

Reading Rates: MBA Application Survey – November 16 2011

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages as well as the volume of both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

The latest data is showing that the average rate for a 30 year fixed rate mortgage (from FHA and conforming GSE data) increased 1 basis points to 4.13% since last week while the purchase application volume declined 2.3% and the refinance application slumped 12.20% over the same period.

With rates at or near generational lows (including the 10-year T-Bill) and the FOMC members becoming more dovish by the day, it will be interesting to see where rates will go as clear details of QE3, likely to be focused more on long term rates, are revealed.

The following chart shows the average interest rate for 30 year and 15 year fixed rate mortgages since 2006 as well as the purchase, refinance and composite loan volumes (click for larger dynamic full-screen version).

The Empire State Manufacturing Survey: November 2011

The Empire State Manufacturing Survey consists of a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Today’s report showed an improvement for both current and future assessments of manufacturing activity with the current activity index climbing to a weak 0.61 while future activity jumped to just 39.02.

Current prices paid declined to 18.29 while current new orders weakened to -2.07 and assessments of future new orders improved to 35.37.

Conspicuous Correlation: Retail Sales October 2011

Today, the U.S. Census Bureau released its latest nominal read of retail sales showing a 0.5% increase from September and an increase 7.2% on a year-over-year basis on an aggregate of all items including food, fuel and healthcare services.

Nominal "discretionary" retail sales including home furnishings, home garden and building materials, consumer electronics and department store sales increased 0.86% from September and increased 3.79% above the level seen in October 2010 while, adjusting for inflation, “real” discretionary retail sales increased 0.12% over the same period.

On a “nominal” basis, there had appeared to be “rough correlation” between strong home value appreciation and strong retail spending preceding the housing bust and an even stronger correlation when home values started to decline.

The following chart shows the year-over-year change to nominal discretionary retail sales and the year-over-year change to nominal the S&P/Case-Shiller Composite home price index since 1993 and since 2000.

As you can see there is, at the very least, a coincidental change to home values and consumer spending during the boom and then the bust, but as home values have continued to decline, retail spending has remained low but has not continued to consistently contract.

Looking at the chart below (click for full-screen dynamic version), adjusted for inflation (CPI for retail sales, CPI “less shelter” for S&P/Case-Shiller Composite) the “rough correlation” between the year-over-year change to the “discretionary” retail sales series and the year-over-year S&P/Case-Shiller Composite series seems now even more significant.

OECD Composite Leading Indicators: September 2011

Note... be sure to bookmark the OECD Dashboard for a real-time view of all the OECD composite indices.

The Organization for Economic Co-Operation and Development (OECD) publishes a wealth of data tracking the fundamental economic dynamics of the world’s largest economies.

The OECD leading indicator, industrial production, business confidence and consumer confidence series all disclose important and timely clues to the state of each respective economy or group of economies.

The latest monthly results indicate that economic conditions in the global economy have weakened notably with the total leading index declining 0.17% since August dropping 0.55% below the level seen in September 2010 while two more timely indicators of business and consumer confidence slumped dramatically.

Total Business confidence plunged 0.59% since September (more timely data) falling 2.42% below the level seen in October 2010.

Total Consumer confidence dropped 0.31% since September (more timely data) slumping 2.57% below the level seen in October 2010.

China's Engine: September 2011

Looking at the latest release of the OECD economic indicators for China, it appears that the massive jump in economic activity seen since the panicky period of late 2008 took a notable pause throughout most of 2010 and after having shown some growth into late 2010, is now back on the decline (note... this is a highly revised series that has been swinging between expansion to contraction with each monthly release).

China’s leading economic indicator suggests that economic activity slowed in September showing a month-to-month decline of 0.03% bringing the latest level 0.84% below the level seen in September 2010.

The Fall of Greece: September 2011

Looking at the most recent OECD economic indicators, Greece makes by far the weakest showing in all the Eurozone as it continues to plod through tremendously difficult economic times.

Industrial production is epically weak, consumer confidence has dropped off a cliff, business confidence is collapsing and the leading index is turning down fast dropping 0.3% since August and 5.76% below the level seen in September 2010.

For October (more timely data), consumer confidence collapsed 0.84% from September and dropped 1.95% below the level seen in August 2010 while business confidence plummeted 0.5% from September and slumping 0.88% below the level seen in October 2010.

Industrial production remains epically weak while jumping 11.05% between June and July 2011 (much less timely data) remaining near the lowest levels seen since the late 1990s.

Outstanding Contraction!: Commercial Paper Outstanding October 2011

The Commercial Paper (CP) market is essentially a private debt market used by corporations as a generally cheaper means of funding typical recurring operations than drawing on a line of bank credit.

Commercial paper, as financial instrument, is by no means a recent innovation and, in fact, you can read about how the CP market was affected by the many historic financial shocks experienced by the U.S. (read Panic on Wall Street: A History of America’s Financial Disasters)

Although the Federal Reserve was able to artificially bring CP rates down significantly since the shocking 615 basis point spread blowout (A2/P2 spread) of late 2008, they had not been successful in preventing an overall contraction in the CP market.

The Federal Reserve calculates and published the total amount of CP outstanding every week and for October commercial paper generally pulled back continuing its decent from a recent high set back in July and declining at notable rate of 17.10% on a year-over-year basis to $949.30 billion, a level that is still notably lower than even the worst periods of the last two recessions.

University of Michigan Survey of Consumers November 2011 (Preliminary)

Today's final release of the Reuters/University of Michigan Survey of Consumers for November indicated improvement in consumer sentiment with a reading of 64.2 but falling 10.34% below the level seen last year while one year inflation expectations went flat at 3.2%.

The Index of Consumer Expectations (a component of the Conference Board's Index of Leading Economic Indicators) rose to 56.2, and the Current Economic Conditions Index climbed to 76.6.

It's important to recognize that consumer sentiment has seriously eroded over the past few months with the current results remaining near levels not seen since 1980, a major indication that consumers are in the process of tightening even further on spending.