STREETTALK ECONOMIC OUTPUT COMPOSITE INDEX (EOCI)
The EOCI Index is showing severe weakness in the composite index which leads to concern about slower economic growth in the near future. Historically when the index (right hand scale) dips below 35 the economy is usually entering into a recessionary phase. With the recent read of 35.99 on the index concerns are elevated about the economy in the coming months.
As a reminder the index is a composite average of the Chicago Fed National Activity Index, Chicago PMI, ISM Composite Index, Empire State Manufacturing Index, Philadelphia Fed Index, Dallas Fed Manufacturing Index, Kansas City Fed Index, NFIB Small Business Index and the Leading Economic Indicator Index. The goal of the index is to get a global view of the economy rather than individual snapshots from around the country. The index, not surprisingly, carries a very high correlation to annual changes in GDP growth.
While today’s Philadelphia Fed index showed a minor uptick after the sharp slowdown over the past couple of months. The index came in this month at 3.2, only a bit above break-even zero to indicate very slight growth compared to June. But this is better than June’s reading of minus 7.7 and is in line with the soft reading in May of 3.9. The majority of this months read most likely reflected seasonal adjustments that will evaporate in the August number. The sub-components were uninspiring as well with new orders essentially flat, at 0.1 to show little change from June’s depressed level of minus 7.6. Backlogs were at a negative 16.3 for a second month in a row and also show a steep contraction and indicate that manufacturers in the region are keeping themselves busy by working down business in their pipeline. This is another reason why we are worried about the coming months.
The leading economic indicators also came in slightly better this month but overall are still showing real weakness. The bulk of the index is centered around financial measures (money supply and interest rate spread) which are are giving a lift to the index with the top factor for June being an increase in money supply followed by the yield spread between long rates and short rates with the latter being kept near zero by the Federal Reserve. Everything else in the index from building permits to vendor performance to consumer expectations are either very soft or negative which doesn’t bode well for the coming months.
Expectations from mainstream analysts, or maybe it is just a lot of hoping, is that we are currently in a “soft patch” economically due to severe weather, Japan and the debt crisis. However, the composite economic indicator is telling us that there is something much more substantial going on. Due to the fact that there are so many components to the composite index it will take several strong months of growth to meaningfully turn the index back to positive. Barring another stimulus program to drag forward future consumption the indicator is warning us that more economic weakness lays ahead.