In no particular order, the indicators are the manufacturing ISM survey, initial jobless claims, unit motor vehicle sales, employee tax withholding receipts and the Fed’s Senior Loan Officer Survey (SLOS).
Monthly? Weekly? Daily?
The ISM and unit vehicle sales are published monthly, while jobless claims, released yesterday, are reported weekly. Employee tax withholding receipts are the timeliest – they are released daily, and the Fed’s SLOS is the least timely – reported quarterly.
Besides the fact that all of these aforementioned indicators are highly correlated with broader economic activity, they have one clear benefit. The data either do not get revised, as is the case with tax receipts, or if they do, the revisions are relatively small.
This is instrumental to gauging the health of the economy because such top tier economic indicators as nonfarm payrolls, retail sales and GDP are oftentimes susceptible to massive revisions.
Distorted upwards revision
For example, nonfarm payrolls have been revised up for seven consecutive months by an average of 31,000; and over the past four quarters, the average absolute revision to real GDP growth from first to last print has been a sizeable 103 basis points. What are the five indicators we are watching telling us?
The manufacturing ISM edged up 0.5 to 53.7 in March from February, producing a quarterly average of 52.7. This is down from 56.7 in Q4 2013 and 55.7 in Q3 2013 but higher than 50.8 in Q2 2013.
March’s unit motor vehicle sales were up a significant 6.9% from February, reaching sales of 16.4 million and matching its post-recession high. This had the effect of keeping the Q1 selling rate unchanged compared to Q4 2013’s pace (15.7 million), which is impressive in light of how weak the quarter started.
The story has been similar for jobless claims and tax receipts. Initial jobless claims were 326,000 for the week ending 26 March. This had the effect of keeping its four-week moving average at 320,00, which is close to its post-recession low. Remember, we saw a weather-related bulge in claims from December to February when they averaged 342,000 per month.
Easing loans
The year-over-year change in employee tax receipts has been running over 7% in April, which is roughly a point faster than where they were growing last year at this time. And, the current growth rate is up from the low single digits that we saw at the beginning of the year. The gains in tax receipts suggest non-farm payrolls are likely to continue to be revised higher in the near term.
The Q1 Fed SLOS was released in early February. There are many different data series within the report. We focus mainly on three series: two that measure whether lending standards are being tightened for commercial and industrial (C&I) as well as residential real estate loans, and another that measures commercial banks’ willingness to extend consumer credit.
Healthy outlook
Lending standards on C&I loans continue to ease, which has not been the case for residential mortgages, although residential loan officers are much less stringent than where they were during the financial crisis. Easy C&I standards are one reason why loan growth in this category has been so robust.
Over the past three months, C&I loans have grown at a 16% annualised rate, a post recession high. Moreover, banks’ willingness to lend to consumers remains elevated, which is a positive for future spending, especially big-ticket items such as vehicles.
The bottom line? The five indicators we are most closely watching point to an economy that is on the mend.
