Steak House Index UPDATE 6/29/16

At long last, here we go!   Today we have both the SHI update and the debut of the SHCI!

And, as always, if you need a quick refresher, take a look at the original blog: https://terryliebman.wordpress.com/2016/03/02/move-over-big-mac-index-here-comes-the-steak-house-index/

You may also want to take a look at yesterday’s blog on the ‘Labor Market Conditions Index’ as well as last week’s blog where I introduced the SHCI.  Here are the links:

The Labor Market Conditions Index

SHI Update – June 22, 2016

Why you should care:  The US Department of Commerce ‘Bureau of Economic Analysis’ publishes the most recent GDP figures the instant they’re available.

Here’s the problem:  GDP numbers are not proactive … we seem them months after economic events have occurred.  Which means we can’t make financial/investment choices – personal or business – before the economy turns sour … only after.

Not good.   We want advance notice of an economic decline.   The SHI may help give you that.  Our objective with the SHI is to be predictive, to anticipate when the economy is going to ‘turn’ and give you the ability to take action early – not when changes are 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:   Right about now, I can think of nothing better than enjoying an opulent but tastefully sized filet minion.  And apparently a bunch of other folks are thinking the same thing.  Because unlike my filet minion, this week’s SHI reading is BIG!

This week both Mastros and Mortons are completely booked from 5:45 to 9 pm.  For some odd reason, both Ruth’s Chris and the Capital Grille (The Rodney Dangerfield of Steak Houses) are almost wide open.

Here are this week’s results:

An SHI reading of 16 is quite strong.   Here’s the trend:

This is our third highest reading – since beginning the series.  And it continues the trend of very strong SHI readings for the past 2 months.  Clearly consumers are feeling good about the economy … and are willing to part with a lot of their hard-earned bread.  (See what I did there?  🙂 )  By this metric, the economy is on solid footing.  Now let’s shift our focus to the ‘Steak House Composite Index’.  Another delectable topic!

As I discussed last week, the SHCI is a composite of 3 critical economic health barometers, each drawing from a different perspective.   Combined, they offer us a multidimensional view of the same question:  How strong is the US economy?

As we saw yesterday the latest Labor Market Conditions Index reading is a negative (4.8).  While the SHI – an index that correlates with the ‘consumer spending’ component of the GDP – appears quite strong, the LMCI – which correlates with the condition of the labor market – is a bit on the weak side.  The FED began calculating the LMCI in August of 1976.  The lowest-ever reading of the LMCI was a negative (42.8) back in May of 1980.   The highest-ever reading was a positive 28 in September of 1983.   Interesting.

Recall that the lowest possible reading of the SHI is a negative (44).  and the highest possible is a positive 72.

Our third component of the SHCI is the yield curve.  Specifically, the difference between the 10-year yield (the CMT) and the 3-month yield (again, the CMT).   You will recall this is also a very important metric:  Historically, when the yield curve become inverted, or negative, it can often signal a pending recession.   Here is the original blog on the topic:

How to Predict a Recession. Accurately.

How does the yield curve ‘spread’ look today?  Here’s a snapshot:

Well, the spread between the 10s and 3’s is low – but consistent (as indicated by the red line).   As we’ve discussed before, pretty much every yield on the planet is low right now – thus, any difference between them would be as well.  To me, this is a very neutral reading.

The lowest ‘spread’ since the St. Louis FED began tracking this metric in 1982 was on December 29, 2000 when the 3 month CMT exceeded the 10 year CMT by 79 basis points – so the reading was a negative (.79%).  In 1982, the spread hit a high of 4.86%. (But recall that the 10-year CMT in 1982 was over 14%!)

Today, the spread is a very normal 1.4%.

The SHCI will combine and weigh the three components.  Once again, we will use a consistent methodology:

1. The SHI, as it taps directly into consumer spending, will be weighted at 60%.
2. The LMCI, our labor market health barometer, will be 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.)

If all three of our metrics reached their peak negative value – simultaneously – the SHCI could be as low as a negative (38) or even a bit more.   Alternatively, the highest possible reading is near a positive 58.

Doing the math, today’s SHCI calculates to 11.44.   Which suggests, once again, the economy is on solid footing, but by no measure nearing an ‘overheating’ where the FED might be inclined to raise rates.

• Terry Liebman