My primary gauge for economic momentum -- the yr/yr % change of the dollar cost of industrial
production -- Was +6.5% through May. It has understandably decelerated from the strong initial
recovery "bounce" of nearly 10% seen in mid-2010. Monthly yr/yr readings so far in 2012 have
been in a range of +6.0 - +7.5%. Modest improvement in US output has been offset by weaker
export sales. A swing below +5% would signify possible downturn trouble. This measure has
supported expectations for profit margin expansion until very recently as a decleration of inflation
has led to reduced pricing power. Price vs. cost work for business now suggests the development
of slight downward pressure on profit margins.
This year started strongly, but my weekly and monthly shorter term leading indicators are pointing
to a further slowing of recovery momentum ahead.
My economic coincident indicator combines the yr/yr % change of four key factors -- real retail
sales, industrial production, civilian employment and the real wage. I equal weight them in
the calculation. The economy is strong at +4.0%, and is expanding normally at 3.0%. The latest
reading through May was a subpar +2.6%, and this reflects still low but improving employment
growth of 1.8% plus a 0.0% change in the real wage. The combination of a flat real wage and
sluggish employment growth does not support the idea of faster economic growth on a more
sustained basis.
My longest lead time cyclical indicator is Federal Reserve bank credit (FBC). It is down yr/yr
on an inflation adjusted basis. This signals to me that the economy must grow more credit
dependent to expand, often a normal development. With fiscal policy more constrained and with
my proxy for private sector credit demand rising only in range of 2 - 3%, I am not encouraged
by the credit situation, which is indeed recovering too slowly.
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