Steak House Index Update – 8/10/16

Another week means another steak!  Grab your knife and fork…and let’s dig in!

Now armed with last week’s July non-farm payroll report we’ll also update the SHCI.   

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.

Year to date in 2016, the real US GDP is trending at only 1.0%.   A lackluster reading at best.   Will Q3 be better?   I’d sure like to know in advance, wouldn’t you? 

Personal consumption expenditures, or PCE, was the strongest component of the last GDP reading.   In fact the vast majority of the latest quarter 1.2% GDP increase came from 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:   Yes, the latest non-farm payroll number was strong.  Good.  In the macro, our economy is creating a large number of jobs.   Per the BLS, the official unemployment rate remained steady at 4.9% – by historic standards, very near the economy’s ‘full employment’ level.  Again, good.

But this is the only bright light I see.  Almost every other metric I track seems to be anywhere from mediocre or lukewarm.   I won’t rehash the data here…feel free to read yesterday’s BLOG to get the detail:  https://terryliebman.wordpress.com/2016/08/06/a-good-jobs-report/

My thanks to BLOG follower Anton for his suggestion that one silver lining might be the “…average hourly earnings jumped to +2.9% in July, showing strongest growth since 2009.”  Great observation.

Per the BLS, “average hourly earnings of all employees on private nonfarm payrolls, seasonally adjusted” increased in July to $25.69.  A year ago, in July of 2015, the number was $25.03.   This is an increase of 2.64% when measured year-over-year (YOY).

And, yes this is one of the best numbers since 2009.    Here’s a chart from our friends at FRED showing average hourly earnings growth – as a % change from a year ago – trending since 2007:

The red line marks the latest reading.  Yes, after years of stagnant hourly wage growth between 2010 and 2015, readings of late have been improving.  Good.

Could the recent YOY increases be the start of a larger trend?  Might wages continue to rise – perhaps even quicker – thereby spurring inflation?

It’s possible.   While I might argue the U-6 unemployment rate percentage is still hovering in the high 9s, an official unemployment rate of 4.9% does suggest potential upward wage pressure.   On the other hand, the lack of productivity, corporate profitability and pricing power suggests companies may be unwilling to pay up, even if employees are more difficulty to keep or find.   We’ll have to wait and see.

But if you’re looking for new employees, consider this:

While the aggregate official July unemployment rate was 4.9%, per the BLS certain population segments or ethnicities are doing better or worse.   Take a look:

• adult men (4.6 percent),
• adult women (4.3 percent),
• teenagers (15.6 percent),
• Whites, (4.3 percent),
• Blacks (8.4 percent),
• Asians (3.8 percent),
• and Hispanics (5.4 percent).

Looks to me like there are plenty to teenagers looking for work!  🙂

All this talk about work has made me hungry.   Let’s slice into a steak at Orange County’s favorite prime beef restaurants!

If possible, Mastros is even busier than ever:   This week, the first table opens up at 9:15 pm.  Wow.   Once again, the Capital Grille is wide open.   Morton’s and Ruth’s Chris are performing about the same. Here are this week’s results:

This is a first.  An SHI reading of zero.  Zip.  Interesting.  The last 5 SHI readings have all hovered right around zero…and this one hit it, spot on:

Clearly, we’re in a fairly consistent range.  Let’s take a look at the graph:

The red line is the trend line – and it continues to move up.   The SHI is telling us our economy is showing slight improvement.   Not major, or significant, but slight improvement.  This seems to correlate quite well with the other macro economic metrics we’ve discussed above and in prior blogs.   Slow, steady, lukewarm.

I’m not a big fan of lukewarm steaks, but I do like lukewarm economies.  And lukewarm chocolate chip cookies.   Ahhhhhh……

OK…let’s jump to the SHCI.   How is the Steak House Composite Index looking this week?   Let’s take a look … but first, a quick refresher:

Recall that the SHCI will combine and weigh the three 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 1.28%.   The spread has increased by .18% since our last SHCI.   This indicates a slight steepening of the yield curve…a slightly positive sign for the economy.
• 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 two days ago, Monday the 8th of August.  After six months of negative readings, the July reading came in at a positive 1.0.    And June was ‘adjusted’ upward from a negative 1.9 to a negative 0.1.  All in all, another positive trend.   Not robust, but certainly positive.

Here’s an interesting chart, reflecting LMCI movement over since 1975.   The chart reflects 6-month “average” blocks.  Thus, the first 6-months of 2016 (the red, negative block on the right side of the image) indicates economic weakness…as did the red blocks preceding the recessions (shown in gray.)  I’m optimistic the upward LMCI trend we’re seeing now indicates recessing risk has diminished.

Doing the math, today’s SHCI calculates to 7.88.   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.

Let me summarize.    No one indicator or metric can predict future economic performance.  Yes, not even the SHI.  Sorry.  🙁   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 economy is still chugging along, improving slightly,  slow and steady.

• Terry Liebman