The Steakhouse Index Update – 8/24/16

Hello again!  Can you believe it?  It’s Wednesday yet again!  Boy, it feels like this happens once a week!  🙂

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

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:   You may have noticed I’ve avoided the Federal Reserve Bank of New York (FRBNY) “Nowcast” for a month or so.   Frankly, notwithstanding the FRBNY ‘hype’ about its correlation with actual GDP readings, I’ve been a bit disappointed by its inaccuracy.   Per the FRBNY:

“The model produces forecasts that are as accurate as, and strongly correlated with, predictions based on best judgment.”

Yeah, not so much.  I’ve taken two of the Nowcast graphics – one current, one from earlier in the year – and combined them to demonstrate my point:

The red line is the actual GDP for 2016 thru June 30.   Q1 reported 0.8%; Q2, 1.2%.   An average of 1.0% year to date.  Yet the final Q2 Nowcast before the release predicted a GDP reading in the mid-2s.   Way off.

The Nowcast for Q3 is now all the way up to 3.0%.   OK…maybe.   On one hand, I’m a bit skeptical.  But possibly.  Why?

You may recall the breakdown of Q2 GDP:

• Personal Consumption Expenditures (PCE) + $190 billion
  
• Investment – ($64) billion
  
• Net Exports +17 billion
  
• Government Expenditure + $12 billion
  

‘Net exports’ and ‘Government spending’ made a small contribution, but ‘Investment’ was a huge negative.   (Here’s the blog: https://terryliebman.wordpress.com/2016/07/31/wsj-weakest-recover-since-1949/)

It’s entirely possible ‘investment’ will bounce back this quarter.   At least a little.   And I suspect net exports will also make a larger contribution.

As might ‘Government Expenditures.’   Spending is increasing, but not on interest – the cost of financing the national debt, according the the Congressional Budget Office (CBO) in their blog yesterday.  Per the CBO:

“…projected outlays are lower by much more—$1.1 trillion (2 percent)—mainly because CBO anticipates lower interest rates, and thus smaller interest payments….”

But, at the same time, the CBO is forecasting a larger deficit for fiscal 2016, meaning increased spending, which ends September 30 (the end of calendar Q3):

“CBO now estimates that the 2016 deficit will total $590 billion, or 3.2 percent of GDP, exceeding last year’s deficit by $152 billion.   About $41 billion of that increase results from a shift in the timing of some payments that the government would ordinarily have made in fiscal year 2017; those payments will instead be made in fiscal year 2016 because October 1, 2016 (the first day of fiscal year 2017), falls on a weekend.”

Interesting.  So the Q3 GDP figure should be boosted by – at the minimum – an additional $41 billion from a little bookkeeping tweak.   Hmmm….OK.  Annualized, that amount alone will have the effect of increasing Q3 GDP by 0.89%!   Wow.

If you’re interested in reading the entire CBO blog, here’s the URL:  https://www.cbo.gov/publication/51908

What are consumers spending on steaks these days?  Let’s head to the steakhouse for a luscious, mouthwatering, and toothsome (is that even a word?) update to the SHI.

You really have to feel bad for The Capital Grille.   No love, baby, no love.   Per OpenTable, 16 tables were booked there so far today; at Mastros Ocean Club, 122.   Ouch.   Ironically, while Morton’s is not available between 5:45 and 7:00 pm, only 5 tables have been booked by 11 am today.   Apparently Morton’s diners plan ahead.

For the second week running, the current SHI comes in with a reading of negative (-1).   Here are this week’s and last week’s charts:

Which might cause us to question the efficacy or accuracy of the SHI itself.  (Perhaps analysts at the FRBNY might make such a comment as I’ve cast aspersions on their Nowcast, eh?  🙂 )

But fear not.  The apparent stability in the index simply suggests no major change in consumer spending behavior.

Remember:  If, for some unexpected reason, many more tables were available, that could be indicative of a pull-back, or retrenchment in consumer spending.   And the opposite is also true:  If Mortons and Ruth’s Chris were fully booked and, by some miracle, time-slots at the Capital Grill were unavailable, that could indicate a sizable increase in the level of consumer spending.  My conclusion is thus far:  The SHI seems to be working as designed.   Here’s the trending since inception:

The stability of the index readings in the last 6 or 7 weeks is quite interesting.   We’ve seen very little fluctuation at all.

Even more interesting, movement of the SHI seems highly correlated with movement in the VIX:

The VIX is another index, traded at the CBOE, designed to measure the implied volatility in the S&P 500.

As you can see from the above graph of the VIX, beginning in the middle of June, implied volatility has declined.  So…both the SHI and the VIX are suggesting lower volatility, lower risk in the markets.

Hmmm…..  Verrrrrry interesting.   Maybe we’re on to something here!

• Terry Liebman