Economic Indicators

Leading Indicators
My weeklies are trending up mildly and remain volatile to reflect up and down swings
of initial employment insurance claims. The weeklies have tended to be strongest in
the Oct. - Apr. time frames in recent years, with 2012 - 13 no exception. The monthly
data on the breadth of new orders have been following the same seasonal pattern, with
new orders also pointing to mild growth.

Coincident Markers
I have used the ISM PMI data for manufacturing for many years to gauge the US economy.
Monthly readings for the composite above 56 suggest robust manufacturing activity. The
mfg. PMI has been in a range of 50 - 55 for the past two years and has recently moved
down to the bottom of this 24 mo. range. The weekly coincident indicator I follow shows
modest progress at +1.5% yr/yr.

Economic Power Index (EPI)
This indicator simply adds the monthly yr/yr % change of the real wage to that of civilian
employment growth. A reading of +4% is a nicely strong one. Unfortunately the EPI has not
been up to the +4% level since early 2007. It is currently running about +1.7% before an
important adjustment for the recent 2.0% increase in the payroll tax. That adjustment takes
the EPI for April to -0.3%, which is weak although not fatal as consumers can draw down
savings and leverage up to maintain stronger spending although it is distressing to know
that so many have to add debt to meet incremental spending needs.

You should note that decelerating and/or weak real hourly earnings have typically shown
up during bear stock markets. When the higher payroll tax is subtracted from the real wage,
the US is showing a current -1.5% . Note well that the last time the US had a string of negative
real wage readings was in 2011, when stocks did experience a sharp correction. Purchasing
power that is under pressure in real terms can often be fodder for economic and financial
misfortunes.

Economic Slack Measure
The rapid disappearance of slack in the economy in terms of production capacity, falling
unemployment and a rise in capital costs is a fundamental signal for an approaching stock
market top and eventual business downturn. The reduction of slack in this recovery has
come from deep levels and  has been mild. So, there is plenty of room for the economy to
expand further without causing normal cyclical stresses. As for the stock market, it is the
deficiencies like deceleration of the real wage, reduced business pricing power and
modest output growth that need concern us.

Economic Forecaster Guest
The long Treasury yield often gives a helpful picture of collective perception regarding the
direction of economic momentum and the prospects for cyclical inflation pressure. $TYX

Since last summer, when the Fed re-introduced the prospect of further QE, the yield on the
long guy has drifted higher as the bond players anticipated eventual faster economic growth
and a potential re-acceleration of cyclical inflation pressure. As economic data cooled in
late winter, the market reversed as folks had second thoughts about the state of the economy.
There has been a clear break in the trend toward a higher yield on concern the big QE
program was not going to lead to sustained, accelerated growth. Notice the big hiccup after
this week's data. An eventual rise above 3.25% -- should it occur -- would signal that
the growth story is back in play and that the Fed may again have second thoughts about
heavy QE.