SHI Update 2/15/17: Economic Soup

This week, I say we have soup with our steak!   Winter is still here, there’s a chill in the air, Punxsutawney Phil saw his shadow, so soup sounds good to me.

In many respects, our US economy is like a robust soup.  Our basic ingredients are small in number, but the myriad of seasonings added are varied, complex and each adds its own flavor.   The right amount, at the right time, has a meaningful impact.

Our GDP economic soup recipe is simple:  It requires just the right dose of job growth and inflation.  Too much, or too little, and the soup is imbalanced, tasteless.  And then we have the myriad seasonings that flavor the soup:

• Industrial production index; Manufacturers inventories; ISM manufacturing indicies; capacity utilization

• Productivity; Corporate profits; Investment in non-residential structures; durable equipment investment

• CPI and PPI readings; PCE readings; commodities
  

• Housing Starts; Existing Home Sales

• Imports; exports; Foreign Exchange rate

• Non-farm payroll; JOLTS; LMCI

• Yield spreads; ‘Break-even’ inflation rates; TIPS; Inflation expectations

• Consumer Sentiment; Consumer Expectation; Consumer Confidence

And the list goes on.  They ALL go into the soup.  And, of course, our soup is on the stove with the flame below on low, constantly simmering to bring the ingredients together into a thick, well-seasoned, robust accompaniment to our NY Strip!   And, as you’ll see below, today’s soup is quite tasty!

Welcome to this week’s Steak House Index update.

Remember: The Steak House Index BLOG has its own URL – https://www.steakhouseindex.com/ The reading experience on the site is much better than in the email form. I suggest you click the link and give it a try!

As always, if you need a refresher on the SHI, or its objective and methodology, I suggest you open and read the original BLOG: https://terryliebman.wordpress.com/2016/03/02/move-over-big-mac-index-here-comes-the-steak-house-index/)

Why You Should Care: The US economy and US dollar are the foundation of global economics: our nominal GDP is over $18.8 trillion a year. Is it growing or shrinking? Is it possible to know – before the quarterly GDP releases from the BEA?

The objective of the SHI is simple: To predict the direction of this behemoth ahead of official economic releases. But while the objective is simple, the task is not.

BEA publishes GDP figures the instant they’re available. Unfortunately, it is a trailing index. The data is old news; it’s a lagging indicator.

‘Personal consumption expenditures,’ or PCE, is the single largest component of the GDP. In fact, the majority of all GDP increases (or declines) usually result from (increases or decreases in) consumer spending. Thus, this is clearly an important metric to track.

I intend the SHI is to be predictive, anticipating where the economy is going – not where it’s been. Thereby giving us the ability to take action early. Not when it’s too late.

Taking action: Keep up with this weekly BLOG update. If the SHI index moves appreciably – either showing massive improvement or significant declines – indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time.

The BLOG:   Soup is a perfect “food metaphor” while offering up this week’s Steakhouse Index update.   And the metaphor is actually quite accurate.  The ingredients that come together within our economy do create a soup of sorts.   Or perhaps a beef stew.   🙂

No one ingredient determines the outcome, or flavor; only when we consider all together, in a cohesive fashion, do we get the entire picture.

For example, at 5:30 am today (CA time) we received the latest CPI reading.   Up 0.6% in January.   The largest 1-month increase in the CPI since February of 2013 – almost 4 years ago.   Taken by itself, one might surmise inflation in increasing at an alarming rate.   Let’s throw this number into the soup pot simmering on the stove.   Because the simple fact is this:   The vast majority of the increase is due to “energy cost” (gasoline) increases – up over 7% during the month.   One year ago, the opposite was true:  The gasoline component of the January 2016 CPI declined by more than 7%.

So we have to consider many more ingredients in the economic soup before we decide if we smell change in the aroma.

And sniffing that aroma, I believe we do!   Rest assured, not run-away change, but a direction shift nonetheless.   I think we can now safely conclude:

• deflation concerns are likely a thing of the past.

• the rate of inflation appears to be increasing slowly.

• GDP performance is likely to be consistently better.

But again, let me repeat:  The direction of change seems more consistent today.   But by no means run-away.   One major macro-economic constraint remains:  US demographics.

Think of it this way.   No matter how fast a driver wants to go, his top speed is limited by the car he’s driving.   Donald Trump may want to crank up GDP growth to 4% or higher, but that “speed” exceeds the potential of the car.   Not only does our economy not have a young workforce the size needed to drive significant growth, a growing portion of our population is extracting more from the economy than they’re creating.  As they should.  They’re retired.

So, all in all, given our structural constraints, things are looking good!   Check out this weeks SHI reading:   A positive 41!  Even higher than last week!  Baby boomers may not be buying expensive steaks and wine at Mastros, but the Millennial’s certainly are!   Our high-priced eateries are booked!  Check out the Capital Grille!   Impressive, right?   🙂

This is an impressive trend.  And speaking of trends, here are all the SHI readings since we began tracking the index:

We’ve been tracking the SHI for almost a year now.   Shortly, we’ll be able to do ‘year-over-year’ comparisons of data from the same week of 2016 vs. 2017.   But I’ll give you a preview:  As the graph below tells us, 2017 is reflecting much stronger SHI readings than 2016.

The red line above is a 6-month moving average.   The direction is clear:  UP.   Assuming the SHI is actually an accurate barometer for consumer spending, the improvement is obvious.

This week our FED Chair, Janet Yellen, is once again testifying before the ‘House Financial Services Committee’, an experience I’m sure she would compare to BBQ ing a steak.  One where she’s the steak.

Listening to her testimony during the flailing and grilling, as she navigates the partisan political commentaries and nonsensical economic theories from the congressmen, one consistency becomes clear from her statements:  Economic conditions are good and improvement is likely to continue.   I agree.

I’m not concerned about over-heating.  Even though the SHI is generating some really strong readings.   But the economic soup is definitely simmering at a higher temperature.

• Terry Liebman