Fed surveys spike in June

There are 5 regional Fed surveys: the Empire State; The Philly Fed; the Richmond Fed's, the Dallas Fed's and the Kansas Fed's.  Normally, even though these surveys don't cover the whole country, the correlation with the ISM (which does cover the whole country) is close.   In June, the average of the 5 (PERDK) and the ISM went in different directions.  It's happened before, but not that often.  

Was it the bottom of the cycle?  Prolly not, but what do I know?

Just thought I'd give you a heads-up.  😉

Fed survey average still falling

 There are 5 regional Federal Reserve Bank surveys, from the Fed branches in Kansas, Richmond, Philadelphia, Dallas and New York.  The simple average of these surveys is well correlated with overall US GDP, and also national surveys such as the one from the Institute of Supply Management (ISM) and S&P Global's PMI survey, even though the 8 states covered by the San Francisco Fed are not included (that Fed branch doesn't do a survey).  There is a Chicago ISM from the same ppl who do the national ISM, but it isn't published early, so it gives us no hint of the national ISM's trends.  It correlates very well with the national ISM.

Conclusion:  the US economy continues to slide into recession, though the rate of descent may have slowed.

YOY GDP likely to be negative in Q1.
As usual, clicking on the charts will produce a clearer image.
Don't ask me why.  I know not.

"Flash' PMI increase in March likely to be a blip.

July ISM likely to slump

The July ISM survey won't be out until Monday.  But it correlates very well with the average of the five regional Federal Reserve's surveys, as you can see in the chart below.  The fit isn't perfect, but it's very close.  So I expect a further decline in the ISM for July.

Will sustained falls in the ISM, Fed surveys, and the PMI survey lead to the Fed stopping its pattern of increasing the Fed Funds rate?   I doubt it.  It hasn't in the past!  The Fed will want to see other confirmatory data, for example, rising unemployment rates, falling employment, falling retail sales.  

Will Russia's invasion of Ukraine, and the likely European recession, stop the Fed from raising rates?  Well, it might.  But it might equally encourage them to keep on upping rates.  Wars are associated with high inflation.  This isn't (yet!) a war where the USA is waging a total war as it was in WW2, where the Fed keep the Fed Funds rate low and massaged the bond market to ensure long rates didn't rise either.

The problem is that the economy responds with a lag to changes in interest rates, and inflation with an even longer lag.  Of course, the Fed knows this.  But it got "behind the curve", waiting too long before it raised interest rates after the economy rebounded from the Covid Crash.  Their fear will be that inflation expectations get embedded into the economy, making it much harder to keep inflation low. 

The balance of probabilities is that they will raise the Fed Funds rate at least twice more.   

All Fed regional surveys falling ....

 .... even Dallas's, despite the oil price.  The unweighted average of the  5 Fed regional surveys (Kansas, Dallas, Richmond, Empire State and Philly Fed) tracks the ISM national survey closely.  In the chart below, this average, and the ISM, are extreme-adjusted then fitted with a 3-month centred moving average.

Dallas Fed falls to record low

The Dallas Fed survey has just recorded the lowest ever value, -70, in March.  It was also the biggest month-on-month fall ever.  The fall was bigger than that seen in other regional Fed surveys, which take place earlier in the month, giving some idea of just how precipitous the decline has been in just the last couple of weeks.  But some of the steeper decline in the Dallas Fed reflects the precipitous plunge in the oil price. Note that, as you'd expect, because the Dallas Fed survey (like the other Fed surveys as well as the PMI and ISM surveys) is a diffusion index, it leads actual economic data by a couple of months.  I have plotted it with a 4 month lag to allow for this. 

Richmond Fed falls in July

There's one more regional US Fed survey (Dallas), due out later today.   According to the Richmond Fed's report,

The composite index for manufacturing activity in the Richmond Fed's district fell from 2 in June to -12 in July, its lowest reading since January 2013, as all three components — shipments, new orders, and employment — registered declines.  Backlogs of orders also fell, reaching a value of −26, its lowest reading since April 2009. Firms reported worsening local business conditions, as this index dropped from 7 to −18, its largest one-month drop on record. However, respondents were optimistic that conditions would improve in the coming months.

The chart below shows the Richmond Fed's index, smoothed with a 7 month linear moving average, relative to the year on year change in real GDP.  It's surprisingly good given that it covers only part of the country.

With an estimate for July's Dallas Fed data, made using a trend-extension program I wrote, this is what the extreme-adjusted average for all 5 Fed districts which produce a survey looks like:

The Dallas Fed reading for July might not be as negative as my trend-extension algorithm calculates, but even if we assume a modest rebound for the Dallas Fed in July, it doesn't change the picture: yes US economic activity stopped falling from January to May but looks as if it's sliding once again.

I've been wondering whether the US economy was picking up, but really, all the latest data suggests it isn't.  We shall see—the Dallas Fed is out later today, and the ISM and the final figure for the PMI will be out in the next couple of days.  It's importance is simple.  The Fed's policy setting committee has said it is "data driven".  If  the data weaken again, the next Fed rate cute will not be the last.  My shorter- as well as my longer-leading indices have turned up, but a rebound in the economy now seems much too soon.  My indices suggest that's still six months away.