One blip a trend does not make.
Yes, we’re all eager for any sign of hope on the economic front, and so the slight upturn in our broad measure of the October data looks encouraging. But it’s probably just noise—a refreshing bit of noise from the larger bearish trend, but noise just the same.
We’re talking here of our propriety CS Economic Index, which is an equal-weighted measure of 17 leading, coincident and lagging indicators that track the broad trend in the U.S. economy. Leading indicators make up nearly half of this benchmark’s weight. As our chart below shows, October posted a small rise in the index—the first after four straight monthly declines. (The complete range of monthly economic data for any given month arrives at a lag, and so October’s numbers were only recently complete as of last Friday.)
Alas, it’s not the start of a rebound. A big part of the blip in October can be traced to lower interest rates, which register positively in our index. Normally, lower interest rates dispense a bullish tonic for economic activity now and in the future. Unfortunately, the times are anything but normal. Lower interest rates, although they look encouraging on paper, have lost a fair degree of their stimulative power in the real world at present.
The Federal Reserve, in short, is now pushing on a string, to quote the popular phrase. With fears of deflation and continued economic weakness in 2009, lower interest rates alone won’t change sentiment, at least not for the foreseeable future. That won’t stop the central bank from lowering rates to zero, but no one should expect something approaching free loans to suddenly reverse all that’s befallen sentiment in the U.S. in recent months.
What, then, are we to make of the sharp rise in commercial and industrial loans in October? This lagging indicator rose strongly, which helped boost our CS Economic Index. C&I loans grew by more than 4% in October, and were higher by 15% compared with a year earlier, according to the Fed. As Richard Yamarone (director of economic research at Argus Research) explains in The Traders Guide to Key Economic Indicators, higher C&I loans “are an indication that businesses have a favorable economic outlook, and are willing to build and expand their operations, and finance these plans via loaned monies.” True enough. Most of the time, that is. But in the current climate, higher C&I loans may not be the bullish indicator they otherwise would be.
A recent paper from two Harvard economists advises that fear may be driving the increase in commercial loan making of late (“Bank Lending During the Financial Crisis of 2008”). Companies are increasingly eager to have more cash on hand to fend off disaster, as opposed to investing for growth. As such, a jump in C&I loans may be a sign of distress for the time being. (Hat tip to Jon Hilsenrath of the Wall Street Journal for pointing out this research.)
What about the rise in industrial production in October? The 1.3% jump looks encouraging on its face. But that too is something of an illusion. A big chunk of the rise was tied to the restarting refineries and drilling rigs in and around the Gulf of Mexico after the shutdowns due to hurricanes Gustav and Ike. Factoring out the storms and a strike at Boeing, industrial output would have slipped by 0.7%, according to the Fed via Bloomberg News.
In short, the upward blip in our economic index is just a blip. Our leading index of economic indicators, which continued to fall in October, suggests as much. So too does the red ink in most of the other economic indicators for October. The temporary respite, it seems, will soon give way to additional economic retrenching.