Economic Intelligence: Building Market Intelligence from Economic Indicators

Analysis
Joseph Abruzzo
July 16, 2018

 

Market intelligence refers to a comprehensive understanding of a marketplace.  In a sense, it comes in different flavors: digital intelligence, location intelligence, social intelligence.  And so on.  This post from well-known research and advertising executive Joseph Abruzzo explores what might be thought of as “economic intelligence” – it weaves together all the major economic indicators in the U.S. to offer a comprehensive, data-driven perspective on where the economy might be headed.

 

Stephen Kraus, Ph.D., Editor-in-Chief, Market-Intelligence.io

 

Economic Intelligence: What the Market Intelligence of Leading Indicators Suggests About the Future of the U.S. Economy

By Joseph Abruzzo

Where the economy is headed can have a major impact on important business decisions. Whether to consider a large scale capital expenditure? Whether to invest? Assumptions impacting long-range business plans? What are the risks? Where are the opportunities?  What can economic intelligence tell us about tomorrow’s economy?

To get a sense of the direction of the economy, analysts look to leading economic indicators that signal changes in the future direction of the economy. While indicators are sometimes combined into a single composite “leading indicator” measure, viewed individually, the indicators provide a more sensitive view of areas of improvement vs. deterioration.

To avoid the risk of over-simplifying this topic, it’s always a good idea to obtain the opinions of professional economists. Nevertheless, following the indicators outlined below will keep you informed and knowledgeable on where the economy is headed.

 

Leading Economic Indicators

There are many points of view on which measures to include in a list of leading economic indicators. Consensus suggests focusing on the following core topic areas:

  • Employment
  • Housing
  • Demand
  • Stock Market
  • Interest Rates

These measures are conveniently tracked by the Federal Reserve Bank of St. Louis (follow the links below).

 

Where do leading indicators stand today?

The economy has been on a very healthy track in recent years. Stock market performance and interest rate indicators are now pointing to a slowing economy. Indicators representing employment, housing and demand remain on a positive, healthy trajectory.

 

Stock Market Performance

After an accelerated run-up in stock market valuations in 2017, there are indications that the market may now be above fair-value. That means less upside opportunity and more downside risk.

The S&P 500 Index, the NASDAQ and the small-cap Russell 2000 composite indices all reached record levels in early 2018.

As of late January 2018, the S&P 500 had advanced by 24% (year-over-year). However, since then, the perceived benefits of reductions in corporate taxes combined with the lifting of regulations considered restrictive to businesses have been challenged by the threat of trade wars with China (result of tariffs) and concerns that low rates of unemployment could translate to wage inflation. The initial result was a 10% pull-back in stock prices (early-February 2018 vs. late-January 2018). The S&P 500 has since gradually recovered with recent levels about 2.5% below the late-January high-water mark (mid-July 2018).

The average price/earnings multiple for the S&P 500 stock market composite is approaching above average levels (especially considering the Shiller P/E ratio). A similar condition exists for the S&P 500  Price-to-Book Ratio. Both the Shiller P/E and the Price-to-Book measures suggest that the S&P 500 (and equity markets in general) may be over-valued with greater downside risk than upside opportunity.

 

Interest Rate Indicators

Often sited interest rate measures include the Federal Funds Rate and the Yield Curve.

The Federal Funds Rate is the overnight interest rate used by banks (and other depository institutions) when lending reserve balances to one another.

From 2009 through 2015, the Federal Funds Rate sustained at near-zero levels. Since late 2015, the Federal Reserve has raised the Federal Funds Rate by a quarter of a percentage point on seven separate occasions. Two additional increases are expected in 2018. The Federal Funds Rate is now near 2%. The expected result is moderation of economic growth and dampening of inflation rates.

The Yield Curve is the gap between long-term bond yields (e.g. 10-year Treasuries) vs. shorter term bond yields (e.g. 2-Year Treasuries). During periods leading up to recession, it is common for the gap to shrink. In some instances, the yield curve becomes negative, meaning that short-term yields exceed longer-term yields. This is known as an “inverted” yield curve. The yield curve may be approaching an inverted condition, signaling that a recessionary period could be imminent.

 

Employment Indicators

Commonly cited indicators include: employment and average weekly hours within the manufacturing sector plus initial jobless claims.

Manufacturing employment has been growing since Q2 2010 at a rate of about 11 thousand jobs per month, the healthiest trajectory since the 1990s. Despite the fact that manufacturing employment remains below pre-recession levels, job growth continues on-trend.

Average weekly hours of employment within the manufacturing sector has remained within a narrow range of 40.5 and 41.0 hours per week since early 2015. Recent trends suggest that the trend may edge up above the 41.0 hour mark in 2018/2019.

The “Initial jobless claims” trend has declined steadily since early 2009. Recent levels of initial jobless claims are at their lowest level since late 1969.

 

Housing Indicators

The most frequently cited housing indicator is New Private Housing Units Authorized by Building Permits. This measure is often supplemented with the S&P CoreLogic Case-Shiller U.S. National Home Price Index.

The number of new private housing units authorized by building permits has increased steadily since the end of the 2007-2009 recession. The new private housing unit growth rate now stands at approximately 8.5 thousand units per month, a rate similar to the pre-recession rate of growth.

The S&P CoreLogic Case-Shiller U.S. National Home Price Index has been on a solid growth trend since February 2012.

 

Demand Indicators

Demand-related indicators include: Durable Goods Orders and New Orders for Non-Defense Capital Goods. These measures are often supplemented with the PMI Composite Index.

Since mid-2016, the durable goods orders indicator has been growing at a healthy average rate of $1.5 billion per month. The level of durable goods orders recently surpassed pre-recession levels.

The New Orders for Non-Defense Capital Goods indicator has been on a solid growth trend since mid-2016. Recent levels are equivalent to levels achieved in 2012-2014.

The PMI Composite Index (Purchasing Managers’ Index) which is published by the Institute for Supply Management is an average of 5 indices including: new orders, production, employment, supplier deliveries and inventories. The PMI Composite Index has been on a solid growth trend since early 2016.

 

Economic Intelligence: A Summary of Leading Indicators

The following table summarizes where the indicators discussed above stand as of mid-July 2018. Each section includes an indication of performance, either plusses or minuses indicating the health of the indicator.

Summary of Economic Intelligence Indicators

 

In conclusion, the indicators relating to employment, housing and demand are generally positive. Indicators relating to the stock market and interest rates suggest that a recession could be imminent.

In the coming months it will be important to continue to monitor the leading indicators discussed above. The consensus is that the likelihood of the U.S. economy entering into a classic recession is low for 2018, with probabilities rising sharply in 2019 and especially in 2020. The coming recession is not expected to be as severe as the 2007-2009 recession which was precipitated by a mortgage crisis.

Events
*
By invitation only
By invitation only
By invitation only
About the Author  |  Joseph Abruzzo

Joseph Abruzzo is President of Abruzzo Consulting, and works with leading brands to leverage research and analytics to improve marketing and media decision making. His previous roles include Chief Experience Office of Havas and Managing Partner of MEC. Joe has been recognized as an Adweek Research All-Star and an Advertising Age Media Maven.