Coincident Economic Indicator (CEI)
Measured yr/yr/ my CEI advanced just slightly more then 2.0% through Jul. The indicator has
been flat since May after having hit a recovery period low of +1.0% in mid - 2013. I have been
hoping for better with the strong liquidity story as background. However, since business continues
to hire at a moderate rate of +1.5% and refuses to allow real wage growth, It remains a tough go.
The weak income situation combined with only moderate employment growth acts like an anchor
that bumps up and down off the bottom but holds the pace of the real economy slow. Industrial
output growth has been strong, but with modest progress at the retail level, there may be some
unwanted inventory accumulation.
My top line sales growth proxy -- the yr/yr change in the rate of the dollar value of industrial
production -- hit 7.1 % through Jul. '14. With cost growth more moderate, this suggests a
sizable rise in pretax profits, with the positive leverage coming mainly from strong physical
volume growth. The gains in sales and earnings represent what should emanate from strong
liquidity support and profits at a higher level should persist for a several more months.
However, as the post just below indicates, the strong liquidity environment is set to wane as
QE 3 winds down.
Long T-Bond Yield % Trend As Leading Indicator
The trend of the long Treasury yield % has a spotty record as a lead indicator of the trend of
economic momentum over a hefty span of years, but it has been very useful since 2007. Last
year the TYX rose sharply and correctly anticipated this year's strong improvement in
the pace of industrial output measured yr/yr. With QE growth slowing and set to zero out in
Oct. '14, the yield on the TYX has trended down steadily this year, signaling that bond
players expect the expiration of quantitative easing will lead to an eventual slowdown in the
growth of output. TYX Chart
To add some interest here, it should be noted that the TYX yield is getting "overbought"
relative to its 200 day m/a.
- Peter Richardson
- Retired chief investment officer and former NYSE firm partner with 50 plus years experience in field as analyst / economist, portfolio manager / trader, and CIO who has superb track record with multi $billion equities and fixed income portfolios. Advanced degrees, CFA. Having done much professional writing as a young guy, I now have a cryptic style. 40 years down on and around The Street confirms: CAVEAT EMPTOR IN SPADES !!!