The three-month average of the Chicago Fed National Activity Index (CFNAI) is expected to rise incrementally to +0.20 in tomorrow’s update for May, according to The Capital Spectator’s median econometric forecast. The projection is virtually unchanged from the previously released +0.19 reading for April, which reflected above-average economic growth relative to the historical trend. Only values below -0.70 indicate an “increasing likelihood” that a recession has started, according to guidelines from the Chicago Fed. Based on today’s estimate for May, CFNAI’s three-month average is expected to remain at a level that’s historically associated with growth, and at a moderately above-trend pace.
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● The Consolations of Economics: How We Will All Benefit from the New World Order
By Gerard Lyons
Review via The Telegraph
The Consolations of Economics provides the reasons that the world has become so much smaller over the past 40 years, ranging from President Nixon’s decision to end the last remnants of the gold standard in 1971, by ceasing the convertibility between the dollar and gold, to the Big Bang of the London markets in 1986, and the rise of China as an economic superpower. Lyons also addresses the many crises that the new economy might face in the future, from market instability to growing inequality, to the end of Western economic dominance. However, none of these problems will prove terminal, he tells us, just so long as we follow the golden rule: “In economics, allowing the market mechanism to work is the right way to proceed, as it allows the price to clear, sends the right signals and allows outcomes freed of prejudice.” But how exactly do we ensure a world free of cloudy prejudice?
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Earlier this month I wrote about an econometric tool—Hidden Markov model (HMM)—for identifying the start of bear markets, as early as possible and with a relatively high degree of confidence. The record looks encouraging for the past 50 years with the US stock market (S&P 500), although some readers wondered if this upbeat in-sample analysis would hold up in an out-of-sample context. That’s always a relevant question when forecasting (or nowcasting or even backcasting). Many models look wonderful with historical numbers only to stumble when applied in real time going forward. Is that fate for the HMM process I outlined a few weeks ago? Not necessarily, as a bit of testing suggests.
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It’s a melt-up scenario. Everything’s running higher for the major asset classes. Red ink has been banished from our standard list of ETF proxies via 250-trading-day windows (the rough equivalent of 1-year returns). With volatility generally moving in the opposite direction, it’s the best of times as summer’s set to officially begin on Saturday.
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It seems that macro threats are popping up everywhere these days, but the broad trend for the US economy has yet to show substantial signs of stress overall. The May update of a diversified set of 14 economic and financial data sets continues to track positive with regards to measuring business cycle risk. There are some cracks that deserve monitoring—rising oil prices, weak housing data, and a wobble in consumer sentiment. But the majority of indicators in the aggregate still look encouraging. Near-term projections imply that the upbeat trend will soften a bit in the months to come but otherwise roll on.
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Where’s that spring rebound? No sign of it in today’s update on residential construction activity. Housing starts in the US fell more than expected in May, dropping to an annual rate of 1.001 million units, according the Census Bureau. That’s down from the revised 1.071 million in April. The crowd was looking for something better, with the consensus forecast calling for a kinder, gentler retreat to 1.036 million. There was also disappointing news for newly issued building permits, a leading indicator for residential construction. On a monthly basis the numbers don’t look so bad, but there’s a worrisome trend brewing when we review the data in year-over-year terms.
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Housing starts are expected to total 1.029 million in tomorrow’s update for May, based on The Capital Spectator’s median econometric forecast (seasonally adjusted annual rate). The projection represents a modest drop vs. the previously reported 1.072 million for April.
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Industrial production in May rebounded sharply from April’s decline, the Federal Reserve reports. Output advanced 0.6% last month, a strong reversal to the upside after a 0.3% drop in the previous month. The manufacturing component also revived, growing 0.6% in May vs. a 0.1% slump in April. More importantly, the year-over-year trend in industrial production (and manufacturing) continues to show improvement. Although the latest crisis in Iraq and the resulting rise in oil prices introduce a new phase of uncertainty for analyzing macro risk, today’s upbeat news at least tells us that the industrial slice of the US economy has been humming along at a healthy clip.
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Iraq, oil markets, and the U.S. economy
Econobrowser (James_Hamilton) | June 15
To summarize, my view is that the U.S. economy is less vulnerable to an oil price shock than we were in 2007. Moreover what has happened on the ground so far in Iraq should not have major immediate implications for the price of oil.
But longer term, we may have just witnessed the creation of an important new power in the Middle East. Among other spoils, ISIS apparently seized $425 million from the Iraq central bank in Mosul. From ABC News:

Analysts say the financial and strategic spoils of ISIS’s capture of Mosul and Tikrit could provide a significant, nearly unstoppable boon to its Syrian arm, helping turn the tide in the months-long battle for Deir Ezzor.

So the immediate implications for the U.S. economy may turn out to be minor. After that? The world seems to be changing.
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US industrial production in May is projected to increase 0.3% vs. the previous month in tomorrow’s release from the Federal Reserve, according to The Capital Spectator’s median econometric forecast. The expected gain represents a rebound after April’s 0.6% decline.
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