SHI Update 6/14/17: Point to the Future!

Sorry.   I meant to say, “The future is … NEAR!”  My mistake. 🙂

The only thing clear is this:  Forecasting the future path of the US economy is dangerous work indeed.  Well, dangerous to ones ego, anyway.

But I take on this task for one reason:  It’s important – to me – to understand the economic landscape and keep my finger firmly on the economic pulse of our nation and other developed nations around the globe.  My businesses requires that I constantly make decisions.   My data analysis, I’m hoping, helps me make those decisions.   And, if you agree with my findings and conclusions, perhaps they will help you too.  As you know, I have strong opinions on some topics … but on others, my feelings on others are a bit more tepid, less certain.   Of course, my predictions are just that:  predictions.  They are not intended as assurances.  They are simply both possibilities and probabilities of future events.   However, the future can quickly unfold very differently that anyone expects or predicts.

For example, this morning the 10-year Treasury yield was hovering around 2.20% – about where it’s been for a few days.   Then a shooter opened fire on a congressional baseball game and immediately the 10-year yield fell almost 10 basis points:

No one could, or would, predict such a heinous, diabolical act; nor, could anyone have foretold the instantaneous drop in long-term yields.   After the decline, everyone can explain it.   But accurately forecasting this movement would have been impossible.

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 bedrock of the world’s economy.   Is it expanding or contracting?

Nominal global GDP is about $76 trillion.   US GDP is almost $19 trillion.  Is it growing or shrinking?  If it’s growing … how rapidly?   How might this information impact our daily financial and business decisions?

The objective of the SHI is simple: To predict the GDP direction ahead of official economic releases.  While the objective is simple, the task is not.  BEA publishes GDP figures the instant they’re available.  Unfortunately, the data is old, 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 US 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:

Just a few hours after this horrible shooting, the FED raised their “target” for the FED funds rate by 25 basis points, to 1.25%.   Thus, today, the US Treasury yield curve unexpectedly flattened by about 35 basis points. 

On May 2nd, the 10-year/3-month spread was 1.47%.   Yesterday, it was 1.23%.   Today, it is 0.88%.   From an economic perceptive, this move is troubling.  No, our yield curve is not yet inverted…but the continued spread erosion suggests we’re moving closer to the end of our economic expansion.

In her press conference earlier today, Janet Yellen commented:  “Policy is not on a pre-set course.”   Meaning, the FED adapts their policy decisions based on evolving business and economic conditions.  But make no mistake:   EVERY single FED rate increase DIRECTLY and immediately impacts millions of Americans.   Long-term rates may be unaffected (or less affected), but the credit cards, home loans, student loans, etc., all tied to variable, short-term indices will increase in rate by 25 basis points today or in the very near future.  Life just got more expensive for millions of folks.  (I talked about this issue more extensively in a prior blog:  https://www.steakhouseindex.com/shi-update-51017-flying-high/)

The FED has now increased the funds rate by 25 basis points in 3 consecutive quarters.   I believe this 0.75% short-term rate increase is one reason we’re seeing a slow-down at our pricey eateries.   Once again, this week the SHI is definitely showing further weakness:

One year ago, the SHI was strong.  Today, with a reading of positive 3, the SHI “gap” (same week, last year minus same week, this year) has improved somewhat, but it remains significant.   Restaurant reservations in our elegant restaurant set have definitely slowed.    Mastros has regained its footing, but once again you can reserve a table for 4 in any time slot at Mortons.   Yes, the Capital Grille too.   Interestingly, the Capital Grille was “off line” today at 11:00 AM.   OpenTable.com was not generating any results.  So I called the restaurant.   The receptionist assured me that while “6:30 is filling up quickly,” every 15 minute time slot was available for a party of 4 this Saturday.  Here is the long-term SHI trend:

So, I’m sure you’re wondering:  Does the SHI trend we’re seeing above definitively suggest US GDP is slowing?   

Yes, I believe it does.  But – and here’s the rub – “slowing” does not mean our long-running expansion has become a contraction.   Not yet.   When we combine the SHI trend with the 3 consecutive quarterly 25-basis point FED rate increases (75 bp in total), and the myriad of other economic headwinds we’re facing, I expect economic softening.  A little.

What does this all mean to you and me?  Right now, not much is changing – yet.  But I feel change is coming — I see dark clouds forming far, far out on the horizon.   FED rate increases will act as a catalyst.  While Q2 GDP may come in strong (release date:  July 28th), I believe current economic trends suggest Q3 will be meaningfully weaker.  I will plan accordingly.

Thanks for tuning in.

• Terry Liebman