While the concept of Americans’ incomes can be defined in a number of ways, many prominent measures continue to show disconcerting trends.

One prominent measure is the Employment Cost Index (ECI).

Here is a description from the BLS document titled “The Employment Cost Index:  what is it?“:

The Employment Cost Index (ECI) is a quarterly measure of the change in the price of labor, defined as compensation per employee hour worked. Closely watched by many economists, the ECI is an indicator of cost pressures within companies that could lead to price inflation for finished goods and services. The index measures changes in the cost of compensation not only for wages and salaries, but also for an extensive list of benefits. As a fixed-weight, or Laspeyres, index, the ECI controls for changes occurring over time in the industrial-occupational composition of employment.

On January 28, 2022, the latest ECI report was released.  Here are two excerpts from the BLS release titled “Employment Cost Index – December 2021“:

Compensation costs for civilian workers increased 1.0 percent, seasonally adjusted, for the 3-month period ending in December 2021, the U.S. Bureau of Labor Statistics reported today. Wages and salaries increased 1.1 percent and benefit costs increased 0.9 percent from September 2021. (See tables A, 1, 2, and 3.)

also:

Compensation costs for civilian workers increased 4.0 percent for the 12-month period ending in December 2021 and increased 2.5 percent in December 2020. Wages and salaries increased 4.5 percent for the 12-month period ending in December 2021 and increased 2.6 percent for the 12-month period ending in December 2020. Benefit costs increased 2.8 percent over the year and increased 2.3 percent for the 12-month period ending in December 2020. (See tables A, 4, 8, and 12.)

Below are three charts, updated on January 28, 2022 that depict various aspects of the ECI, which is seasonally adjusted (SA):

The first depicts the ECI, with a value of 148.1:

source: US. Bureau of Labor Statistics, Employment Cost Index: Total compensation: All Civilian [ECIALLCIV], retrieved from FRED, Federal Reserve Bank of St. Louis, accessed January 28, 2022: 
https://research.stlouisfed.org/fred2/series/ECIALLCIV/

The second chart depicts the ECI on a “Percent Change from Year Ago” basis, with a value of 4.0%:

The third chart depicts the ECI on a “Percent Change” (from last quarter) basis, with a value of 1.0%:

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4343.83 as this post is written

Each month I have been highlighting various estimates of U.S. recession probabilities.  The latest update was that of January 6, 2022, titled “Recession Probability Models – January 2022.”

While I don’t agree with the methodologies employed or the probabilities of impending economic weakness as depicted by these and other estimates, I do believe that the results of these models and estimates should be monitored.

Another probability of recession is provided by James Hamilton, and it is titled “GDP-Based Recession Indicator Index.”  A description of this index, as seen in FRED:

This index measures the probability that the U.S. economy was in a recession during the indicated quarter. It is based on a mathematical description of the way that recessions differ from expansions. The index corresponds to the probability (measured in percent) that the underlying true economic regime is one of recession based on the available data. Whereas the NBER business cycle dates are based on a subjective assessment of a variety of indicators that may not be released until several years after the event , this index is entirely mechanical, is based solely on currently available GDP data and is reported every quarter. Due to the possibility of data revisions and the challenges in accurately identifying the business cycle phase, the index is calculated for the quarter just preceding the most recently available GDP numbers. Once the index is calculated for that quarter, it is never subsequently revised. The value at every date was inferred using only data that were available one quarter after that date and as those data were reported at the time.

If the value of the index rises above 67% that is a historically reliable indicator that the economy has entered a recession. Once this threshold has been passed, if it falls below 33% that is a reliable indicator that the recession is over.

Additional reference sources for this index and its construction can be seen in the Econbrowser post of February 14, 2016 titled “Recession probabilities” as well as on the “The Econbrowser Recession Indicator Index” page.

Below is a chart depicting the most recent value of 1.20000% for the third quarter of 2021, last updated on January 27, 2022 (after the January 27, 2022 Gross Domestic Product, Fourth Quarter and Year 2021 (Advance Estimate):

source:  Hamilton, James, GDP-Based Recession Indicator Index [JHGDPBRINDX], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 28, 2022: 
https://research.stlouisfed.org/fred2/series/JHGDPBRINDX

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4326.51 as this post is written

The St. Louis Fed’s Financial Stress Index (STLFSI3) is one index that is supposed to measure stress in the financial system. Its reading as of the January 27, 2022 update (reflecting data through January 21, 2022) is -.5956:

source: Federal Reserve Bank of St. Louis, St. Louis Fed Financial Stress Index [STLFSI3], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 27, 2022: https://fred.stlouisfed.org/series/STLFSI3

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Below are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on January 26, 2022 incorporating data from January 8, 1971 through January 21, 2022 on a weekly basis.  The January 21 value is -.58669:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed January 27, 2022:  
http://research.stlouisfed.org/fred2/series/NFCI

–

The ANFCI chart below was last updated on January 26, 2022 incorporating data from January 8, 1971 through January 21, 2022, on a weekly basis.  The January 21, 2022 value is -.69625:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed January 27, 2022:  
http://research.stlouisfed.org/fred2/series/ANFCI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4365.95 as this post is written

On Wednesday, January 26, 2022 FOMC Chairman Jerome Powell gave his scheduled January 2022 FOMC Press Conference. (link of video and related materials)

Below are Jerome Powell’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript.  These comments are excerpted from the “Transcript of Chairman Powell’s Press Conference“ (preliminary)(pdf) of January 26, 2022, with the accompanying “FOMC Statement.”

Excerpts from Chairman Powell’s opening comments:

CHAIR POWELL. Good afternoon.  At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us:  maximum employment and price stability.

Today, in support of these goals, the Federal Open Market Committee kept its policy interest rate near zero and stated its expectation that an increase in this rate would soon be appropriate.  The Committee also agreed to continue reducing its net asset purchases on the schedule we announced in December, bringing them to an end in early March.  As I will explain, against a backdrop of elevated inflation and a strong labor market, our policy has been adapting to the evolving economic environment, and it will continue to do so. 

Economic activity expanded at a robust pace last year, reflecting progress on vaccinations and the reopening of the economy, fiscal and monetary policy support, and the healthy financial positions of households and businesses.  Indeed, the economy has shown great strength and resilience in the face of the ongoing pandemic.  The recent sharp rise in COVID cases associated with the Omicron variant will surely weigh on economic growth this quarter.  High-frequency indicators point to reduced spending in COVID-sensitive sectors, such as travel and restaurants.  And activity more broadly may also be affected as many workers are unable to report for work because of illness, quarantines, or caregiving needs.  Fortunately, health experts are finding that the Omicron variant has not been as virulent as previous strains of the virus, and they expect that cases will drop off rapidly.  If the wave passes quickly, the economic effects should as well, and we would see a return to strong growth.  That said, the implications for the economy remain uncertain.  And we have not lost sight of the fact that for many afflicted individuals and families, and for the healthcare workers on the front lines, the virus continues to cause great hardship.

also:

Inflation remains well above our longer-run goal of 2 percent.  Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.  In particular, bottlenecks and supply constraints are limiting how quickly production can respond to higher demand in the near term.  These problems have been larger and longer lasting than anticipated, exacerbated by waves of the virus. 

While the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, price increases have now spread to a broader range of goods and services.  Wages have also risen briskly, and we are attentive to the risks that persistent real wage growth in excess of productivity could put upward pressure on inflation. Like most forecasters, we continue to expect inflation to decline over the course of the year. 

Excerpts of Jerome Powell’s responses as indicated to various questions:

VICTORIA GUIDA.  Hi, Chair Powell. I wanted to ask, you were talking about the health of the labor market. And I’m curious whether you would characterize where we’re at right now as maximum employment? And also, along those same lines, obviously, rate hikes on the table this year, do you think that the Fed can raise rates, bring inflation under control without hurting jobs and wages? 

CHAIR POWELL.  Sorry. Just getting both parts of your question written down. So, I would say — and this view is widely held on the Committee — that both sides of the mandate are calling for us to move steadily away from the very highly accommodative policies we put in place during the challenging economic conditions that the economy faced earlier in the pandemic. And I would say that most FOMC participants agree that labor market conditions are consistent with maximum employment in the sense of the highest level of employment that is consistent with price stability. And that is my personal view. And, again, very broad support on the Committee for the judgement that it will soon be appropriate to raise the target range for the federal funds rate. The other thing is maximum employment will evolve over time and through the course of a business cycle. In the particular situation we’re in now, it may well increase max – the level of maximum employment that’s consistent with stable prices may increase. And we hope that it will as more people come back into the labor market, as participation gradually rises. And the policy path that we’re broadly contemplating would be supportive of that comment — that outcome as well. So, the thing about the labor market right now is that there are — there are many millions of more job openings than there are unemployed people. So you ask whether we can — whether we can raise rates and move to a less accommodative and even tight financial conditions without hurting the labor market. I think there’s quite a bit of room to raise interest rates without threatening the labor market. This is, by so many measures, a historically tight labor market, record levels of job openings, of quits. Wages are moving up at the highest pace they have in decades. If you look at surveys of workers, they find jobs plentiful. Look at surveys of companies, they find workers scarce. And all of those readings are at levels really that we haven’t seen in a long time and, in some cases, ever. So, this is a very, very strong labor market. And my strong sense is that we can move rates up without having to, you know, severely undermine it. I also would point out that there are other forces at work this year, which should also help bring down inflation. We hope including improvement on the supply side, which will ultimately come at the timing and pace of that are uncertain. And also, fiscal policy is going to be less supportive of growth this year, not at the level of economic activity but the fiscal impulse to growth will be significantly lower. So there are multiple forces which should be working over the course of the year for inflation to come down. We do realize that the timing and pace of that are highly uncertain and that inflation has persisted longer than we thought. And, of course, we’re prepared to use our tools to assure that higher inflation does not become entrenched. 

also:

NICK TIMIRAOS.  So, if I could follow on that, raising rates and reducing the balance sheet both restrain the economy, both tighten monetary policy. How should we think about the relationship between the two? For example, how much passive runoff is equal to every quarter percentage point increase in your benchmark rate? 

CHAIR POWELL.  So, again, we think of the balance sheet as moving in a predictable manner, sort of in the background, and that the active tool meeting to meeting is not — both of them, it’s the federal funds rate. There are rules of thumbs. I’m reluctant to land on one of them that equate this. And there’s also an element of uncertainty around the balance sheet. I think we have a much better sense, frankly, of how rate increases affect financial conditions and, hence, economic conditions. Balance sheet is still a relatively new thing for the markets and for us, so we’re less certain about that. So, again, our — I think our — the pattern we’ll follow is to arrive at a, you know, a timing and a pace and composition and all those things and then announce that with advance notice, and it will start in the background. And then we will look to have that just running in the background and have the interest rates, again, be the active tool of monetary policy. That’s at least the plan. I can’t tell you much more about any of the very good issues about size, pace, composition, those sorts of things. But we’ll be turning to all of those at coming meetings.

NEIL IRWIN. Thank you, Chair Powell. It’s Neil Irwin from Axios. Glad to be back. Sir, I was wondering if the volatility we’ve seen in the financial markets in the last few weeks strikes you as anything alarming or that might affect the trajectory of policy. Conversely, to the degree that financial conditions have tightened some, might that be desirable in some ways in achieving your tightening goals? 

CHAIR POWELL.  So, as you know, the ultimate focus that we have is on the real economy, maximum employment, and price stability. And financial conditions matter to the extent that they have implications for achieving the dual mandate. And you also know that we look at broader financial conditions, not one or two things, one or two markets. And what we’re always asking ourselves is, are we seeing changes that are both persistent and material enough that — of a change in financial conditions that they are inconsistent with the achievement of our goals? So that’s how we’re looking at that. And I don’t want to comment on today’s financial conditions broadly, but we’re not looking at any one market or so. So that’s how we’re thinking. In terms of what we’ve seen, I would say this. We — you know, we said at our last meeting we published the summary of economic projections, the meaning of which the median participant expected three rate increases this year. And, you know, it’s six weeks, seven weeks later now. And you have seen that our communication channel with the markets is working. Markets are now pricing in a number of rate increases. Surveys show that market participants are expecting a balance sheet runoff to begin, you know, at the appropriate time sometime later this year perhaps. We haven’t made that decision yet. So, we feel like the communications we have with market participants and with the general public are working and that financial conditions are reflecting in advance the decisions that we make. And monetary policy works significantly through expectations. So that in and of itself is appropriate.

also:

JEANNA SMIALEK. Thanks for taking our questions, Chair Powell. And sorry for my tech issues. I wonder if you could tell us a little bit about where your thinking on inflation stands today. You know, the last time we saw an SEP back in September, we saw that you and your colleagues were projecting that inflation would sort of sink back down quite close to target by the end of the year. And I wonder if you still think that projection from December is a reasonable one. And if your thinking has changed at all, I wonder how you’re thinking about that. And I also wonder if you could talk a little bit about the pathway to getting to that deceleration? Like, how do we get from here, 7 percent CPI to where you expect to be at the end of the year. 

CHAIR POWELL. So I’d say, you know, since the December meeting, I would say that the inflation situation is about the same but probably slightly worse. I’d be inclined to raise my own estimate of 2022 core PCE inflation, let’s just go with that, by a few tenths today. But we’re not writing down an SEP at this meeting, but I think it’s — it hasn’t gotten better. It’s probably gotten just a bit worse, and that’s been the pattern. That’s been the pattern. So I think if you look at the FOMC participants are — there’s a range there. And that range has been moving to the right for a year now. And, by the way, if you look at other forecasters, essentially all other macro forecasters who do this for a living you’ve seen the same pattern. So what do we think about that? Well, I think we — you know, we wrote down rate increases in the December meetings, each of us individually. And I think to the extent the situation deteriorates further, our policy will have to address that, if it deteriorates meaningfully further, either in the time dimension or in the size of the inflation dimension. So that’s how we’re thinking about it. I — as I mentioned, though, I think it’s part of this will be that us, the Fed moving away from a very highly accommodative policy to a substantially less accommodative policy and then, over time, to a policy that’s not accommodative in time. I don’t know when that will be. That’s — those are the things that we’re thinking about. That’s part of it. Another part of it is that fiscal policy provided an impulse to growth over the last two years. That impulse will be less, in fact, will be negative this year. And so that’s another thing. The other one is we will eventually get relief on the supply side. And, you know, the ports will be cleared up. And there will be semiconductors and things like that. Now, what we’re learning is it’s just taking much longer. So I think — longer than expected. And that I think does raise the risk, that high inflation will be more persistent. I do think we’ll come off of the highs that we saw in the early part of this episode in the spring last year. But really, what’s — the question is going to be what is inflation running at? And so we’ll be watching that. And I — you know, we, our objective is to get inflation back down to 2 percent. It’s also to provide enough support to keep the labor market healthy. The labor market is very, very strong right now, and I think that strength will continue. There’s a — there’s really a shortage of workers. We see it, particularly among production and nonsupervisory workers and people in the lowest quartile. You see very large wage increases. I mentioned some of the other indicators. So I think that’s what we’re looking at. And we’re also — you know, we realize, I think, as everyone does that this outlook is quite uncertain and that we’re going to have to adapt. And we’re going to communicate as clearly as we can. But we’re going to have to be adaptable, and you know, move as appropriate.

also:

MICHAEL DERBY. Thank you for taking my question. I want to ask you, with the benefit of hindsight, and I realize, I mean, that is what it is. But do you feel that, you know, monetary policy and fiscal policy maybe did too much to react to the crisis and that part of the inflation problem that we’re having right now is because the government response, you know, collectively was more than what the economy ended up needing? 

CHAIR POWELL. So I think it’s too soon to write that history, really. But what I would say is this. The — if you remember what it felt like at the beginning of the pandemic, literally the global economy shutting down in large part, including our own economy and people going to their homes for weeks on end and masks, and there are no vaccines and it could be a really long time to get them, you know — and then, you know, you have economic activity drops by a shocking amount in one — so there was a real risk of lasting damage. And I think Congress responded remarkably with the CARES Act, incredibly timely, very powerful. People will — there’ll always be flaws in these things but, in real time, it was a remarkable achievement. And we responded. And what we were able to do was, you know, stave off a collapse of the financial system at the beginning and make time for what really needed to happen, which was the income replacement and then the recovery that Congress enabled with the CARES Act. So, now, that was a lot of — that was a lot, and what we did was a lot. And, you know, now — so what we have now is we have the strongest recovery of any country. And we have a recovery that looks completely unlike other recoveries that we’ve had because we put so much support behind the recovery. And we’re managing the relatively high-class problems that come with that, which are high inflation and a labor shortage. So — and these are serious problems, very serious problems that we — you know, we’re working as hard as we can on. Was it too much? Again, I’m going to leave that to the historians and, but it — look. In 25 years, we’ll look back at this incident, which will be a, you know, 2-, 3-, 4-, 5-year period. And we’ll say, you know, we’ll have a much better basis to make a judgement about the actions that people took. But it was all founded, though, in a very strong reaction to a — you know, to a unique historical event. And I guess I’ll have to leave it at that. I look for — I hope I’ll be around to see how that looks in 25 years.

also:

BRIAN CHEUNG. Yeah. Within the context of other hiking cycles, it seems like worries about asset bubbles emerging as a result of easing rates has been part of that. I didn’t know if that was part of the discussion today.

CHAIR POWELL. I would just say this. We, of course, have a financial stability framework. And what it shows is a number of positive aspects of financial stability. But you mentioned really asset prices is one of the four. So asset prices are somewhat elevated, and they reflect a high-risk appetite and that sort of thing. I don’t really think asset prices themselves represent a significant threat to financial stability, and that’s because households are in good shape financially than they have been. Businesses are in good shape financially. Defaults on business loans are low and that kind of thing. The banks are highly capitalized with high liquidity and quite resilient and strong. There are some concerns in the non-bank financial sector around — still around money market funds, although the SEC is making — has made some very positive proposals there. And we also saw some things in the Treasury market during the acute phase of the crisis which we’re looking at ways to address. But, overall, the financial stability vulnerabilities are manageable, are manageable, I would say. 

_____

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4409.59 as this post is written 

Here are two charts from the St. Louis Fed depicting the velocity of money in terms of the M1 and M2 money supply measures.

All charts reflect quarterly data through the 4th quarter of 2021, and were last updated as of January 27, 2022.

Velocity of M1 Money Stock, current value = 1.18:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed January 27, 2022: 
http://research.stlouisfed.org/fred2/series/M1V

–

Velocity of M2 Money Stock, current value = 1.12:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed January 27, 2022: 
http://research.stlouisfed.org/fred2/series/M2V

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4423.89 as this post is written

For reference purposes, below is a chart from the Advisor Perspectives’ post of January 27, 2022 titled “Q4 GDP Advance Estimate: Real GDP At 6.89%…,” reflecting Real GDP, with a trendline, as depicted.  This chart incorporates the Gross Domestic Product, Fourth Quarter and Year 2021 (Advance Estimate) of January 27, 2022:

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4411.74 as this post is written

Many people place emphasis on Durable Goods New Orders as a prominent economic indicator and/or leading economic indicator.

For reference, below are two charts depicting this measure.

First, from the St. Louis Fed site (FRED), a chart through December 2021, updated on January 27, 2022. This value is $267,629 ($ Millions):

(click on charts to enlarge images)

–

Second, here is the chart depicting this measure on a “Percent Change from a Year Ago” basis, with a last value of 12.7%:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis: Manufacturers’ New Orders:  Durable Goods [DGORDER]; U.S. Department of Commerce: Census Bureau; accessed January 27, 2022; 
http://research.stlouisfed.org/fred2/series/DGORDER

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4349.93 as this post is written

For reference purposes, below are two sets of charts depicting growth in the money supply.

The first shows the M1, defined in FRED as the following:

Before May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other checkable deposits (OCDs), consisting of negotiable order of withdrawal, or NOW, and automatic transfer service, or ATS, accounts at depository institutions, share draft accounts at credit unions, and demand deposits at thrift institutions.

Beginning May 2020, M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts). Seasonally adjusted M1 is constructed by summing currency, demand deposits, and OCDs (before May 2020) or other liquid deposits (beginning May 2020), each seasonally adjusted separately.

Here is the “M1 Money Stock” (seasonally adjusted) chart, updated on January 25, 2022 depicting data through December 2021, with a value of $20,553.1 Billion:

Here is the “M1 Money Stock” chart on a “Percent Change From Year Ago” basis, with a current value of 15.4%:

Data Source: Board of Governors of the Federal Reserve System (US), M1 Money Stock [M1SL], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 25, 2022: https://fred.stlouisfed.org/series/M1SL

The second set shows M2, defined in FRED as the following:

Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs.

Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.

Here is the “M2 Money Stock” (seasonally adjusted) chart, updated on January 25, 2022, depicting data through December 2021, with a value of $21,638.1 Billion:

Here is the “M2 Money Stock” chart on a “Percent Change From Year Ago” basis, with a current value of 13.1%:

Data Source: Board of Governors of the Federal Reserve System (US), M2 Money Stock [M2SL], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 25, 2022: https://fred.stlouisfed.org/series/M2SL

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4371.17 as this post is written

The following is an update of various indicators that are supposed to predict and/or depict economic activity. These indicators have been discussed in previous blog posts:

The January 2022 Chicago Fed National Activity Index (CFNAI) updated as of January 24, 2022:

The CFNAI, with a current reading of -.15:

source:  Federal Reserve Bank of Chicago, Chicago Fed National Activity Index [CFNAI], retrieved from FRED, Federal Reserve Bank of St. Louis, January 24, 2022; 
https://fred.stlouisfed.org/series/CFNAI

The CFNAI-MA3, with a current reading of .33:

source:  Federal Reserve Bank of Chicago, Chicago Fed National Activity Index: Three Month Moving Average [CFNAIMA3], retrieved from FRED, Federal Reserve Bank of St. Louis, January 24, 2022; 
https://fred.stlouisfed.org/series/CFNAIMA3

–

The Aruoba-Diebold-Scotti Business Conditions (ADS) Index

The ADS Index as of January 20, 2022, reflecting data from March 1, 1960 through January 15, 2022, with last value -.442273:

–

The Conference Board Leading Economic Index (LEI), Coincident Economic Index (CEI), and Lagging Economic Index (LAG):

As per the January 21, 2022 Conference Board press release, titled “The Conference Board Leading Economic Index (LEI) for the U.S. Increased in December” the LEI was at 120.8 in December, the CEI was at 107.4 in December, and the LAG was at 109.4 in December.

An excerpt from the release:

“The U.S. LEI ended 2021 on a rising trajectory, suggesting the economy will continue to expand well into the spring,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first quarter, headwinds from the Omicron variant, labor shortages, and inflationary pressures—as well as the Federal Reserve’s expected interest rate hikes—may moderate economic growth. The Conference Board forecasts GDP growth for Q1 2022 to slow to a relatively healthy 2.2 percent (annualized). Still, for all of 2022, we forecast the US economy will expand by a robust 3.5 percent—well above the pre-pandemic trend growth.”

Here is a chart of the LEI from the Advisor Perspectives’ Conference Board Leading Economic Index update of January 21, 2022:

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4315.53 as this post is written

Perhaps the main reason that I write of our economic situation is that I continue to believe, based upon various analyses, that our economic situation is in many ways misunderstood.  While no one likes to contemplate a future rife with economic adversity, current and future economic problems must be properly recognized and rectified if high-quality, sustainable long-term economic vitality is to be realized.

For long-term reference purposes, here is a chart of the Dow Jones Industrial Average since 1900, depicted on a monthly basis using a LOG scale (updated through January 21, 2022, with a last value of 34,265.37):

(click on chart to enlarge image)(chart courtesy of StockCharts.com)

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The Special Note summarizes my overall thoughts about our economic situation

SPX at 4397.94 as this post is written

S&P500 earnings trends and estimates are a notably important topic, for a variety of reasons, at this point in time.

FactSet publishes a report titled “Earnings Insight” that contains a variety of information including the trends and expectations of S&P500 earnings.

For reference purposes, here are two charts as seen in the “Earnings Insight” report of January 13, 2022:

from page 24:

(click on charts to enlarge images)

from page 25:

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I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4576.01 as this post is written

As many are aware, Refinitiv publishes earnings estimates for the S&P500.  (My other posts concerning S&P earnings estimates can be found under the S&P500 Earnings label)

The following estimates are from Exhibit 24 of the “S&P500 Earnings Scorecard” (pdf) of January 14, 2022, and represent an aggregation of individual S&P500 component “bottom up” analyst forecasts.  For reference, the Year 2014 value is $118.78/share; the Year 2015 value is $117.46/share; the Year 2016 value is $118.10/share; the Year 2017 value is $132.00/share; the Year 2018 value is $161.93/share; the Year 2019 value is $162.93/share; and the Year 2020 value is $139.72/share:

Year 2021 estimate:

$205.98/share

Year 2022 estimate:

$223.63/share

Year 2023 estimate:

$245.87/share

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4572.65 as this post is written

As many are aware, Standard & Poor’s publishes earnings estimates for the S&P500.  (My posts concerning their estimates can be found under the S&P500 Earnings label)

For reference purposes, the most current estimates are reflected below, and are as of January 13, 2022:

Year 2021 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $202.14/share

-From a “bottom up” perspective, “as reported” earnings of $191.83/share

Year 2022 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $220.31/share

-From a “bottom up” perspective, “as reported” earnings of $209.00/share

Year 2023 estimates add to the following:

-From a “bottom up” perspective, operating earnings of $234.23/share

-From a “bottom up” perspective, “as reported” earnings of N/A

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4662.85 as this post is written

The January 2022 Wall Street Journal Economic Forecast Survey was published on January 16, 2022. The headline is “Omicron, Inflation Drive Down U.S. Growth Outlook.”

I found numerous items to be notable – although I don’t necessarily agree with them – both within the article and in the forecasts section.

Two excerpts:

The combination of higher inflation, supply-chain constraints and the fast-spreading Omicron variant caused economists to trim their forecast for growth to 3.3% for the current year as a whole, based on the change in inflation-adjusted gross domestic product in the fourth quarter of 2022 from a year earlier, from 3.6% in October. Last year, output rose 5.2%, economists estimate.

also:

On average, survey respondents expect annual inflation to moderate to 5% in June, up substantially from the 3.4% they forecast in October, as measured by the consumer-price index. They expect it to cool further to 3.1% at the end of this year, up from last quarter’s forecast of 2.6%.

As seen in the “Recession Probability” section, the average response as to whether the economy will be in a recession within the next 12 months was 17.74%. The individual estimates, of those who responded, ranged from 0% to 75%.  For reference, the average response in October’s survey [the last survey published] was 15.94%.

As stated in the article, the survey’s 69 respondents were academic, financial and business economists.  The survey was conducted January 7 – January 11. Not every economist answered every question.

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Economic Forecasts

The current average forecasts among economists polled include the following:

GDP:

full-year 2021:  5.20%

full-year 2022:  3.30%

full-year 2023:  2.42%

full-year 2024:  2.22%

Unemployment Rate:

December 2022: 3.52%

December 2023: 3.45%

December 2024: 3.53%

10-Year Treasury Yield:

December 2022: 2.20%

December 2023: 2.54%

December 2024: 2.84%

CPI:

December 2022:  3.11%

December 2023:  2.49%

December 2024:  2.33%

Core PCE:

full-year 2021:  4.35%

full-year 2022:  3.00%

full-year 2023:  2.40%

full-year 2024:  2.23%

(note: I have highlighted this WSJ Economic Forecast survey each time it is published; it was published monthly until April 2021, after which the survey is conducted every three months; commentary on past surveys can be found under the “Economic Forecasts” label)

_____

I post various economic forecasts because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4662.85 as this post is written

As I stated in my July 12, 2010 post (“ECRI WLI Growth History“):

For a variety of reasons, I am not as enamored with ECRI’s WLI and WLI Growth measures as many are.

However, I do think the measures are important and deserve close monitoring and scrutiny.

Below are three long-term charts, from Advisor Perspectives’ ECRI update post of January 14, 2022 titled “ECRI Weekly Leading Index Update.”  These charts are on a weekly basis as of the January 14, 2022 release, reflecting data through January 7, 2022.

Here is the ECRI WLI (defined at ECRI’s glossary):

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This next chart depicts, on a long-term basis, the Year-over-Year change in the 4-week moving average of the WLI:

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This last chart depicts, on a long-term basis, the WLI, Gr.:

_________

I post various economic indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4642.05 as this post is written 

The following is the latest update of 10 charts that depict various aspects of the U.S. economic and financial situation.

I find these charts portray disturbing long-term trends. These trends have been in effect for years.

These charts raise a lot of questions.  As well, they highlight the “atypical” nature of our economic situation from a long-term historical perspective.

All of these charts are from the Federal Reserve, and represent the most recently updated data.

(click on charts to enlarge images)

Housing starts (last updated December 16, 2021):

U.S. Bureau of the Census, Housing Starts: Total: New Privately Owned Housing Units Started [HOUST], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/HOUST/, January 13, 2022.

–

The Federal Deficit (last updated October 25, 2021):

U.S. Office of Management and Budget, Federal Surplus or Deficit [-] [FYFSD], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/FYFSD/, January 13, 2022.

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Federal Net Outlays (last updated October 25, 2021):

U.S. Office of Management and Budget, Federal Net Outlays [FYONET], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/FYONET/, January 13, 2022.

–

State & Local Personal Income Tax Receipts (% Change from Year Ago)(last updated July 29, 2021):

U.S. Bureau of Economic Analysis, State and local government current tax receipts: Personal current taxes: Income taxes [ASLPITAX], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/ASLPITAX/, January 13, 2022.

–

Total Loans and Leases of Commercial Banks (% Change from Year Ago)(last updated January 7, 2022):

Board of Governors of the Federal Reserve System (US), Loans and Leases in Bank Credit, All Commercial Banks [TOTLL], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/TOTLL/, January 13, 2022.

–

Bank Credit – All Commercial Banks (% Change from Year Ago)(last updated January 7, 2022):

Board of Governors of the Federal Reserve System (US), Bank Credit of All Commercial Banks [TOTBKCR], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/TOTBKCR/, January 13, 2022.

–

M1 Money Multiplier Proxy:

Federal Reserve Bank of St. Louis, M1 Money Multiplier [MULT], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/MULT/, January 13, 2022.

–

Median Duration of Unemployment (last updated January 7, 2022):

U.S. Bureau of Labor Statistics, Median Duration of Unemployment [UEMPMED], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/UEMPMED/, January 13, 2022.

–

Labor Force Participation Rate (last updated January 7, 2022):

U.S. Bureau of Labor Statistics, Civilian Labor Force Participation Rate [CIVPART], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/CIVPART/, January 13, 2022.

–

The Chicago Fed National Activity Index (CFNAI) Three Month Moving Average (CFNAI-MA3)(last updated December 22, 2021):

Federal Reserve Bank of Chicago, Chicago Fed National Activity Index: Three Month Moving Average [CFNAIMA3], retrieved from FRED, Federal Reserve Bank of St. Louis https://research.stlouisfed.org/fred2/series/CFNAIMA3/, January 13, 2022.

–

I will continue to update these charts on an intermittent basis as they deserve close monitoring…

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4634.70 as this post is written

The St. Louis Fed’s Financial Stress Index (STLFSI3) is one index that is supposed to measure stress in the financial system. Its reading as of the January 13, 2022 update (reflecting data through January 7, 2022) is -.8245:

source: Federal Reserve Bank of St. Louis, St. Louis Fed Financial Stress Index [STLFSI3], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 13, 2022: https://fred.stlouisfed.org/series/STLFSI3

Of course, there are a variety of other measures and indices that are supposed to measure financial stress and other related issues, both from the Federal Reserve as well as from private sources.

Two other indices that I regularly monitor include the Chicago Fed National Financial Conditions Index (NFCI) as well as the Chicago Fed Adjusted National Financial Conditions Index (ANFCI).

Here are summary descriptions of each, as seen in FRED:

The National Financial Conditions Index (NFCI) measures risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. Positive values of the NFCI indicate financial conditions that are tighter than average, while negative values indicate financial conditions that are looser than average.

The adjusted NFCI (ANFCI). This index isolates a component of financial conditions uncorrelated with economic conditions to provide an update on how financial conditions compare with current economic conditions.

For further information, please visit the Federal Reserve Bank of Chicago’s web site:

http://www.chicagofed.org/webpages/publications/nfci/index.cfm

Below are the most recently updated charts of the NFCI and ANFCI, respectively.

The NFCI chart below was last updated on January 12, 2022 incorporating data from January 8, 1971 through January 7, 2022 on a weekly basis.  The January 7 value is -.61298:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed January 13, 2022:  
http://research.stlouisfed.org/fred2/series/NFCI

–

The ANFCI chart below was last updated on January 12, 2022 incorporating data from January 8, 1971 through January 7, 2022, on a weekly basis.  The January 7, 2022 value is -.70651:

Data Source: FRED, Federal Reserve Economic Data, Federal Reserve Bank of St. Louis; accessed January 13, 2022:  
http://research.stlouisfed.org/fred2/series/ANFCI

_________

I post various indicators and indices because I believe they should be carefully monitored.  However, as those familiar with this site are aware, I do not necessarily agree with what they depict or imply.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4723.54 as this post is written

On January 11, 2022, the Zillow Q4 2021 Home Price Expectations Survey results were released.  This survey is done on a quarterly basis.

An excerpt from the press release:

Although every respondent in this latest survey expects nationwide home price appreciation to slow in 2022 from last year’s record-breaking pace, the average of their long-term projections remains among the most bullish outlooks for home values in ZHPES history. On average, panelists expect home values to grow another 6.6% this year, and by 23.5% over the coming five years.

“Although a handful of experts foresee a modest price correction on the horizon, none expect a crash, even as the confluence of unusual forces impacting U.S. housing markets continues to generate significant uncertainty,” said Pulsenomics founder Terry Loebs.

Loebs said the range of home price predictions from panel participants is the widest he’s ever seen. The most optimistic group of experts expects more than 37% cumulative home value appreciation through 2026, while the most pessimistic group expects a gain of less than 8% over the same period.

–

Various Q4 2021 Zillow Home Price Expectations Survey charts are available, including that seen below:

As one can see from the above chart, the average expectation is that the residential real estate market, as depicted by the U.S. Zillow Home Value Index, will continually climb.

The detail of the Q4 2021 Home Price Expectations Survey is interesting.  Of the 106 survey respondents, none (of the displayed responses) forecasts a cumulative price decrease through 2026.

The Median Cumulative Home Price Appreciation for years 2021-2026 is seen as 17.0%, 25.08%, 30.05%, 34.15%, 39.89%, and 45.08%, respectively.

For a variety of reasons, I continue to believe that these forecasts will prove far too optimistic in hindsight.

I have written extensively about the residential real estate situation.  For a variety of reasons, it is exceedingly complex.  While many people continue to have an optimistic view regarding future residential real estate prices, in my opinion such a view is unsupported on an “all things considered” basis.  Residential real estate is an exceedingly large asset bubble. As such, from these price levels there exists outsized potential for a price decline of severe magnitude. 

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4681.58 as this post is written

U.S. Economic Indicators

Throughout this site there are many discussions of economic indicators.  This post is the latest in a series of posts indicating facets of U.S. economic weakness or a notably low growth rate.

The level and trend of economic growth is especially notable at this time. As seen in various measures and near-term projections, the U.S. economy had undergone an outsized level of economic contraction in 2020. However, most people believe (and virtually all prominent economic forecasts indicate) that this historic level of contraction will have proven ephemeral in nature; i.e. an economic expansion will continue. 

As seen in the October 2021 Wall Street Journal Economic Forecast Survey the consensus (average estimate) among various economists is for 5.22% GDP growth in 2021, 3.59% GDP growth in 2022, 2.53% GDP growth in 2023, and 2.23% GDP growth in 2024.

Charts Indicating U.S. Economic Weakness

Below are a small sampling of charts that depict weak growth or contraction, and a brief comment for each:

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Commercial And Industrial Loans, All Commercial Banks (BUSLOANS)

“Commercial And Industrial Loans, All Commercial Banks” (BUSLOANS) has recently been declining. Shown below is this measure with last value of $2,441.1506 Billion through November 2021, last updated January 7, 2022:

Below is this measure displayed on a “Percent Change From Year Ago” basis with value -7.6%:

source: Board of Governors of the Federal Reserve System (US), Commercial and Industrial Loans, All Commercial Banks [BUSLOANS], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 10, 2022: https://fred.stlouisfed.org/series/BUSLOANS

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The Yield Curve

Many people believe that the Yield Curve is a leading economic indicator for the United States economy.

On March 1, 2010, I wrote a post on the issue, titled “The Yield Curve As A Leading Economic Indicator.”

While I continue to have the stated reservations regarding the “Yield Curve” as an indicator, I do believe that it should be monitored.

The U.S. Yield Curve (one proxy seen below) while positive, is (all things considered) relatively low when viewed from a long-term perspective. Below is the spread between the 10-Year Treasury Constant Maturity and the 3-Month Treasury Constant Maturity from 1982 through the January 10, 2022 value, showing a value of 1.65% [10-Year Treasury Yield (FRED DGS10) of 1.76% as of January 7, 3-Month Treasury Yield (FRED DGS3MO) of .10% as of January 7]:

source: Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity [T10Y3M], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 11, 2022: https://fred.stlouisfed.org/series/T10Y3M

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Industrial Production: Consumer Goods (IPCONGD)

The “Industrial Production: Consumer Goods” measure has been relatively subdued since the Financial Crisis. Shown below is a long-term chart of this measure (displayed from 1939), with last value of 101.5776 through November 2021, last updated December 16, 2021:

Displayed below is this same IPCONGD measure on a “Percent Change From Year Ago” basis. The current value is 3.3%:

source:  Board of Governors of the Federal Reserve System (US), Industrial Production: Consumer Goods [IPCONGD], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 11, 2022: https://fred.stlouisfed.org/series/IPCONGD

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Population Growth (POPTHM)

Shown below is a long-term chart of U.S. population growth on a “Percent Change From A Year Ago” basis with value .3% through November 2021, as of the December 23, 2021 update.  The declining nature of the growth rate is notable and may in itself deserve consideration as an economic indicator:

source:  U.S. Bureau of the Census, Total Population: All Ages including Armed Forces Overseas [POP], retrieved from FRED, Federal Reserve Bank of St. Louis; accessed January 11, 2022: https://fred.stlouisfed.org/series/POPTHM

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Other Indicators

As mentioned previously, many other indicators discussed on this site indicate slow economic growth or economic contraction, if not outright (gravely) problematical economic conditions.

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4660.41 as this post is written

My overall analysis indicates a continuing elevated and growing level of financial danger which contains many worldwide and U.S.-specific “stresses” of a very complex nature. I have written numerous posts on this site concerning both ongoing and recent “negative developments.”  These developments, as well as other exceedingly problematical conditions, have presented a highly perilous economic environment that endangers the overall financial system.

Predicting the specific timing and extent of a stock market crash is always difficult, and the immense complexity of today’s economic situation makes such a prediction even more challenging. With that being said, my analyses continue to indicate that a near-term exceedingly large (from an ultra long-term perspective) stock market crash – that would also involve (as seen in 2008) various other markets – will occur. [note: the “next crash” and its aftermath has paramount significance and implications, as discussed in the post of January 6, 2012 titled “The Next Crash And Its Significance“ and various subsequent posts in the “Economic Depression” label]

As reference, below is a daily chart since 2008 of the S&P500 (through January 7, 2022 with a last price of 4677.03), depicted on a LOG scale, indicating both the 50dma and 200dma as well as price labels:

(click on chart to enlarge image)(chart courtesy of StockCharts.com; chart creation and annotation by the author)

_____

The Special Note summarizes my overall thoughts about our economic situation

SPX at 4677.03 as this post is written