An alternative look at the growth problem - The Lewis-Mertens-Stock WEI index

 

We have all heard that the two quarters of negative real growth is a recession. I like that estimate as a base for discussion, but the issue of when a recession begins and ends is more nuanced. That is why a NBER dating committee provides more precision on the peaks and troughs in the business cycle. There is also the problem that GDP is estimated and announced on a quarterly basis and most investors would like a more frequent estimate. 

One solution for providing more timely information is the Lewis-Mertens-Stock Weekly Economic Index (WEI) which is a high frequency estimate of the current quarter year over year real growth. The WEI is available from the St Louis Fed FRED database. The index consists of ten data sets.

The WEI is a composite of 10 weekly economic indicators: Redbook same-store sales, Rasmussen Consumer Index, new claims for unemployment insurance, continued claims for unemployment insurance, adjusted income/employment tax withholdings (from Booth Financial Consulting), railroad traffic originated (from the Association of American Railroads), the American Staffing Association Staffing Index, steel production, wholesale sales of gasoline, diesel, and jet fuel, and weekly average US electricity load (with remaining data supplied by Haver Analytics). All series are represented as year-over-year percentage changes. These series are combined into a single index of weekly economic activity.

The current estimate is that the YoY real growth rate is 2.95%. This compares with the actual YoY change in real GDP which is 1.67%. The WEI is suggesting that growth is stronger based on the index components. I will note that it does not have an inventory or export components which are the two areas which forced real GDP lower. The index clearly shows a slowdown from last year, but the current reading is currently higher than most estimates for the post-GFC period to the pandemic. These numbers are more consistent with the labor reading we have been seeing over the last year. 

I take an ensemble approach to the growth question. For the WEI index, the trend is lower, but the index numbers are more suggestive of a soft landing further in the future, stronger inflation numbers given higher GDP, and a healthy labor market. This is a good narrative but not consistent with general market sentiment.