The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to decline slightly +0.09 in Monday’s update for July, according to The Capital Spectator’s median econometric forecast. The projection is marginally below the previously released +0.13 reading for June, which reflected above-average economic growth relative to the historical trend. Only values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate for July, CFNAI’s three-month average is expected to remain at a level that’s historically associated with growth at a moderately above-trend pace.
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This week’s upbeat data on housing has inspired a new round of charges that the Federal Reserve “is clearly behind the curve.” Economist Scott Grannis proclaims: “Great news: the Fed is likely to raise rates sooner rather than later.” He explains that “nominal GDP has been growing at about a 4% pace for most of the past four years, yet the Fed has kept short-term rates extremely low. This is unsustainable.”
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Today’s weekly update on new unemployment filings is a fresh reminder that it’s hard to be a pessimist on the US labor market these days. Jobless claims fell a healthy 14,000 last week to a seasonally adjusted 298,000—close to last month’s post-recession low of 279,000. More importantly, the longer-term trend continues to look encouraging. Although the short-term volatility for this series can be confusing, the big-picture view is quite clear: layoffs are winding lower. That’s been true for some time and today’s releases offers another dose of the same.
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Looking for recessions is an obsession for some folks. Every wobbly update, every release of bad news is a new excuse to see trouble around the next bend. But crying fire in the theater of business-cycle analysis has been a fruitless pursuit for several years and there’s no sign in the current lineup of data that suggests the near-term future will be any different. The macro profile for the US continues to trend positive in the July update of a diversified set of 14 economic and financial indicators. In fact, the near-term projections for the overall trend reflect a stronger run of data for the months ahead.
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New residential housing construction bounced back in July. Although the consensus forecast was looking for a handsome rebound, the actual results were substantially better than expected. Housing starts revived to a 1.093 million annualized rate last month, which is well above the revised 945,000 pace for June. Newly issued building permits also posted a strong improvement in July. The bottom line: the worst fears for the housing sector have crumbled in the wake of today’s release from the US Census Bureau.
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Making informed choices about active managers has never been anyone’s idea of a picnic, but ongoing developments in R packages eases the burden. Consider the essential work of factor analysis, which is a statistical technique for identifying the sources of risk and return in a portfolio through an objective prism. If nothing else, performing this task is the antidote to marketing hype that permeates the world of investment management. The gold standard for analyzing equity portfolios is regressing the returns against the Fama-French data set (FF), which is updated regularly at Professor Ken French’s web site. In the old days, the chore of downloading FF data, copying it into Excel, and running the analysis was quite tedious and time consuming, as this 2001 how-to article by Bill Bernstein reminds. If you had a deft hand in spreadsheet analysis, maybe you could slice and dice a fund’s history in ten minutes. Fast forward 13 years and you’ll find that factor analysis has become a snap. Using the R code I’ve written below, we can download the necessary data and run the analysis in less than ten seconds for each fund.
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Phil DeMuth at Conservative Wealth Management (and the author of several finance titles, including The Affluent Investor) just posted a Q&A at Forbes.com with yours truly on a topic that receives slightly more than average attention at The Capital Spectator: the business cycle. A sample of the discussion follows below. For the full interview, jump over to Forbes.
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The benchmark 10-year Treasury yield closed under 2.35% last week, the lowest in more than a year. Oil prices are soft as well these days, with the spot price for West Texas Intermediate slipping into the mid-$90 range for the first time since early February. Some pundits are also pointing to last week’s flat retail sales report for July as a signal for arguing that the US economy is headed for trouble. The New York Post over the weekend “reviewed” the numbers and decided to invoke the “R” word, advancing this gem of empirical analysis to drum up fear on Main Street: “During recessions and weak growth, energy prices do fall.”
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Housing starts are expected to total 937,000 in tomorrow’s update for July, based on The Capital Spectator’s median econometric point forecast (seasonally adjusted annual rate). The projection represents a moderate increase vs. the previously reported 893,000 for June.
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The Capital Spectator is sneaking out this afternoon for one final summer holiday for the remainder of the week. The usual fun resumes on Monday, August 18. Meantime… cheers!