SHI – Steak House Index 9/7/16

I don’t know about you, but writing this BLOG each week makes me hungry.   You too?  

Yes, here at the SHI, we only serve the finest cuts of USDA Prime beef seared to perfection, finished with butter and freshly chopped parsley and served sizzling on a 500-degree plate.   Yep, that’s us!

Well, not really.  That is actually a quote from the Ruths’ Chris website.  Here we only serve the finest weekly economic update!  Here, we only satisfy your appetite for knowledge and understanding.

Why You Should Care:  The US BEA publishes the most recent GDP figures the instant they’re available.   Unfortunately for us, it is a trailing index.  The data is old news, a lagging indicator.

Personal consumption expenditures, or PCE, was the strongest component of the last GDP reading.   In fact the vast majority of latest quarter’s 1.2% GDP increase was the result of consumer spending.  Clearly this is an important metric to track. 

The SHI may help us do just that.   I intend the SHI is to be predictive, helping us anticipate when the economy is going to move in a different direction – up or down.  Giving us the ability to take action early – not when course corrections might be too late.

Taking action:  Just keep up with the weekly column. If the index changes appreciably – either showing massive improvement or significant declines – indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time.

Trending is very important…and we’ll watch the trend.

THE BLOG:   For weeks now, the SHI has held quite steady.  Once again, this week, our index remains little changed.  Here I show the last 3 week results (click on the image to enlarge):

You may find the consistency is a bit surprising.   But it wasn’t that long ago that the results were quite different:

On April 27 the SHI was (-23) – a far cry from today’s index reading.   Unlike recent weeks, on 4/27 you could reserve any table for 4 you wanted, Saturday next, at any of our four, high-dollar, delectable eateries.  Unlike recent weeks, Mastros availability exceeded 78%! Not today.  This week, on Saturday you’re not eating at Mastro’s until 9 pm. 

For almost 2 months now, the SHI has vacillated between (-7) on the low and +2 on the high.   A very narrow range when viewed in historical context:

This consistency suggests consumer spending remains robust.  These days, consumers continue to feel flush and are willing the shell out the big bucks to eat juicy steaks at our pricey Orange County steak houses.

Is the SHCI showing the same consistency? Recall that we compile the SHCI immediately following the monthly jobs report.   How is the Steak House Composite Index looking this week?   Let’s take a look … but first, a quick refresher:

The SHCI combines and weighs 3 components using consistent methodology:

1. The SHI, as it taps directly into consumer spending, is weighted at 60%.
2. The LMCI, our labor market health barometer, is weighted at 20%.
3. The ’10/3 spread’ – a barometer of bond market confidence – will also be weighted at 20%.   (However, to ‘right size’ the value in relation to the SHI and the LMCI, we will multiply a positive reading by 10X and a negative reading by 20X.)

As I said in the July 13th update (https://terryliebman.wordpress.com/2016/07/13/steak-house-index-shci-update-7132016/) if all three of our metrics reached their peak values – simultaneously – the SHCI can range from a low of negative 22.1 to a positive 104.

OK…all set?  Let’s take a look at the treasury spread and the LMCI:

• UST 10 Year/3 Month ‘spread’:   Tracking the data, weekly ending Tuesday, our latest FRED reading (yesterday) is 1.25%.   The spread has decreased by .03% since our last SHCI.   Like the SHI…consistent, consistent, consistent.
• Labor Market Conditions Index:  The LMCI is released monthly, on the Monday following the BLS non-farm payroll employment report.  Thus, the latest reading is from just two days ago, September 6th.  You’ll recall, after six months of negative readings, the July reading originally came in at a positive 1.0.   It’s been revised upward – an improvement – and the July LMCI reading is now officially 1.3.  Unfortunately, August didn’t fare so well:  The index fell again, to a negative 0.7%.  Meaning, for the first 8 months of 2016, with the sole exception of July, the LMCI has been completely negative:

Finishing the math, today’s SHCI calculates to 6.56.

Thus, it appears all our index readings are quite consistent.   Does this mean the US economy – at present – is recession-proof?   No.   Remember, recessions usually result from exogenous shocks to the system.  Much like a meteor striking the earth.

But not always.  Sometimes they’re insidious, developing slowly over time, without notice.  It’s signs of this type of recession we’re watching for.

Of course, as I’ve said numerous times in the past, no one indicator or metric can predict future economic performance.  Yes, not even the SHI.  But when viewed in the aggregate, the SHI – at least thus far – seems to be highly correlated with the direction of the economy at large.

The SHI and the SHCI both tell us our US economy is still chugging along, slow and steady.

• Terry Liebman