Mish's Global Economic Trend Analysis

Future Expectations Made Six Months Ago vs. Today's Reality
Rate Hike Odds Shift to January 2016; 16.1% Chance of Hike in October
Fed Wimps Out: Rates Unchanged: Life Support
Philadelphia Fed Manufacturing Survey "Something Very Wrong"
Alternative ISM for Metalworking, Plastics, Composites Suggests Economic Contraction

Future Expectations Made Six Months Ago vs. Today's Reality

Posted: 17 Sep 2015 10:22 PM PDT

On Thursday, I noted Bloomberg's comment "Something Very Wrong" with the manufacturing sector.

More completely, Bloomberg stated "There may very well be something wrong with the manufacturing sector, at least in the Northeast where the Empire State index has been in deep negative ground for the last two months followed now by a minus 6.0 headline for the Philly Fed index."

With that comment, let's dig deeper into the latest Philadelphia Fed Business Outlook Survey.

Here is a chart that shows current conditions compared to manufacturer's expectations six month's from now.

Current vs. Future Activity

Future is Bright!

The Philadelphia Fed reported ...

Future Indexes Remained Generally Optimistic

The survey's broadest indicator of future growth edged slightly higher this month. The future general activity index increased 1 point, to 44.0, its highest reading since January. The future index for new orders, at 44.4, decreased 2 points, while the future shipments index, at 41.4, increased 4 points. Furthermore, 28 percent of the firms expect expansion in their workforce over the next six months, while 10 percent expect a reduction.

Future Expectations vs. Reality

To check the usefulness of these future projections, I downloaded the data, then shifted the look-ahead projections by six months and plotted those forecasts vs. current conditions.

The above chart shows what manufacturers expected six months ago vs. what actually happened.

A major portion of the time, look-ahead sentiment vs. reality are inversely correlated. Note in particular, the sharp rise in expectations vs. the actual sharp decline (third purple box) that started in November or December of 2014.

Northeast?

As for Bloomberg's comment "There may very well be something wrong with the manufacturing sector, at least in the Northeast" here are some thoughts also posted earlier.

Dallas Region: Dallas Fed Region Activity Plunges Well Below Any Forecast
Kansas City Region: Kansas City Region Activity Remains in Deep Contraction
Richmond Region: Regional Manufacturing Expectations From Mars.

Mike "Mish" Shedlock

Rate Hike Odds Shift to January 2016; 16.1% Chance of Hike in October

Posted: 17 Sep 2015 02:57 PM PDT

In the press conference following today's wimpy rate hike decision by the Fed, chair Janet Yellen responded to a reporter's question about the possibility of a hike in October.

Yellen stated that October was still on the table because every meeting is a "live meeting", and if the Fed hiked it would conduct an impromptu press meeting following the decision. Her answer reflects the fact there is no scheduled press conference following the October meeting.

What a joke.

The market effectively laughed in her face. Not only does the market not see a hike in October, it does not see one in December either, in spite of the fact that Yellen stated the majority of the FOMC participants still see a hike this year.

The CME Fedwatch sees things a bit differently.

16.1% Chance of Hike in October

45.3% Chance of Hike in December

Rate Hike Odds Discussion

Bear in mind the CME odds represent quarter point hikes even though the Fed Fund Futures very slowly price in hikes of an eighth of a point.

Fed Fund Future Calculations

To arrive at an implied "30 day" average interest rate, subtract the "last" column in the table below from 100.

Fed Fund Futures September 2015-March 2016

Looking at futures alone, not options, one has to go all the way out to January 2016 before the implied Fed Funds rate edges above 0.25%.

Fed Fund Futures July 2016-January 2017

I suppose the next hike could be to 0.25-0.50% but then one does not see 0.50% happening until a July-August 2016 timeframe!

The Fed Fund futures do not see rates getting as high as 0.75% until January 2017.

I highlighted +0.125 in October 2016. That column reflects the implied change from yesterday to today. +0.125 just happens to represent precisely 1/8 of a point hike.

Today the market took away an eighth of a point hike, over one year into the future, with the implied rate 13 months from now a mere 0.62%, about 5/8ths of a percent.

Baby Steps

These implied baby-step moves are why I stated that rate hikes, if they come would be in 1/8 point increments. I had the odds of 1/8 point hike today at roughly 50-50.

The Fed could move in quarter point announcements, yet let the implied rates creep up effectively moving in 1/8 point steps, but that would mean a long time between numerous meetings before anything changes at all.

Point is Moot

The above point about eighth of a point hikes vs. quarter points hikes was likely made moot today.

By December, the economic data is likely to be weakening so much, that the Fed may not hike until the next recession is over.

Mike "Mish" Shedlock

Fed Wimps Out: Rates Unchanged: Life Support

Posted: 17 Sep 2015 11:33 AM PDT

Today the Fed wimped out, once again, after signaling for a year that it is ready to hike. In a Déjà Vu Statement the Fed said virtually nothing.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Life Support

Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad.

Actions speak louder than words. The Fed could not even manage a baby hike. There was only one dissent.

What does the Fed's wimpy action imply about the real risks? And what success does the Fed have other than creating a stock and junk bond bubble?

Finally, what will the Fed do if volatility goes up instead of down?

Mike "Mish" Shedlock

Philadelphia Fed Manufacturing Survey "Something Very Wrong"

Posted: 17 Sep 2015 10:18 AM PDT

Some are just beginning to figure out there are manufacturing sector troubles.

The late-to-the party quote of the day comes from Bloomberg who just now realized "There may very well be something wrong with the manufacturing sector."

The quote is in response to the Philadelphia Fed Business Outlook Survey where the Consensus Opinion was for a "respectable" 6.3 reading but the actual reading was -6.0, well below the consensus range of 2.50 to 10.50.

There may very well be something wrong with the manufacturing sector, at least in the Northeast where the Empire State index has been in deep negative ground for the last two months followed now by a minus 6.0 headline for the Philly Fed index. This is the first negative reading since February 2014.

But the headlines for both of these reports, which are not composite scores of separate components, are sentiment scores of sorts, rough month-to-month assessments of general conditions. A key positive in today's is continued strength in new orders which rose 3.6 points to 9.4. Unfilled orders, nevertheless, have been trending into contraction, at minus 6.6 for the third straight negative reading.

But some details are very strong with shipments at plus 14.8 and employment at plus 10.2 for a 5-month high. In a negative signal also seen in the Empire State report, prices received, that is prices for final goods, is in contraction at minus 5.0.

The Fed is wondering whether global volatility and stock market losses are affecting consumer confidence. Early data this month from regional Feds suggest the effects may also be extending to business sentiment.

Surprise, Surprise

The Philadelphia Fed surprise comes on the heels of Shocking Weakness in Empire State Manufacturing Report, released on Tuesday.

There are even bigger troubles in the Dallas Fed and Kansas City Fed regions due to the collapse in oil prices.

For example Dallas Fed Region Activity Plunges Well Below Any Forecast

Also note Kansas City Region Activity Remains in Deep Contraction

And what about the Richmond region?

I'm glad you asked. For the answer, please consider Regional Manufacturing Expectations From Mars.

Today we learn "There may very well be something wrong with the manufacturing sector, at least in the Northeast".

Mike "Mish" Shedlock

Alternative ISM for Metalworking, Plastics, Composites Suggests Economic Contraction

Posted: 17 Sep 2015 12:17 AM PDT

About a week ago I received an interesting email from reader Steve Kline Jr.

Kline is Director of Market Intelligence at Gardner Business Media, Inc., a B2B media company that conducts surveys similar to the ISM.

Steve writes ...

Hello Mish

I own B2B media company that published trade magazines for manufacturing since 1928. Since 2006 we have conducted our own monthly survey that functions just like the ISM index.

We get about 500 responses a month from all kinds of durable goods manufacturers. So, it's a little more narrowly focused than the ISM. But, we don't seasonally adjust the data. And, I've noticed over time that the Fed tends to revise capacity utilization data to reflect the changes in our backlog index. The Fed usually does this six to 12 months after the fact.

Basically, in every industry we track there is an accelerating contraction over the last four to five months. Most indices are at their lowest point since late 2012.

We do this for metalworking, plastics, composites, and a couple other processes. The metalworking index started in December 2006. The others started in December 2011. There are far more metalworking facilities in durable goods manufacturing than facilities in the other industries. The index can also be broken down by industries (aerospace, automotive, medical, etc.), region of the country, and plant size. We're working on a data visualization in Tableau for this.

I'll put a chart together of the ISM and our index (may take some time as I'm headed to Taiwan for a presentation on the state of American manufacturing.) I will say that one of the participating companies in the ISM has said our index is a better representation of their business than the ISM, particularly over the last two years or so (perhaps due to the seasonal adjustments of the ISM). It is an industrial supplies company.

Steve

In a followup Email Steve wrote ...

Hello Mish

As I said previously, our metalworking business index goes back to December 2006. Our durable goods index started in 2001. We have a database of over 100,000 manufacturers, mostly in the durable goods space. Of the manufacturers in our database, more than half are in the metalworking industry. Some of these facilities may do more than metalworking though.

It's interesting that our metalworking business index fluctuated around the ISM from the time it started until the first or second quarter of 2012. Since that time, our metalworking business index has been decidedly lower than the ISM. Off the top of my head, there are a couple of possible reasons for this:

1. We include exports in our total index. While the ISM asks about exports I don't think they include the exports sub-index in their total index.

2. Our survey probably includes many smaller manufacturers that don't participate in the ISM. The ISM is limited to the same 300 companies every month (at least that's my understanding). We send an email survey to every plant we have an email address for. We average about 500 responses per month (about 300 or so in the metalworking index). The responses by plant size are representative of the universe. Since 2012, and particularly over the last 18-24 months, the index at smaller facilities has been much worse than the index at larger facilities. Just in the last two months, the index at large facilities has started to fall. So, it will be interesting to see if the ISM converges with our index again.

3. We do not seasonally adjust our data while the ISM does. I seem to recall they adjusted their seasonal adjustment sometime in the last few years.

I hope to have a way for those interested to subscribe to this data later this year.

Steve

Here are a couple of charts.

Gardner MetalWorking Index vs. ISM