Leading Indicator Checkup“You can use all the quantitative data you can get, but you still have to distrust it and use your own intelligence and judgment.” – Alvin Toffler
There are plenty of economic indicators quoted by the media, but many lag or are coincident to the business cycle. Let’s review a few leading indicators to gauge where the cycle is going.
One of Warren Buffett’s favorite old time indicators was counting the train cars to identify changes in the overall economy. The latest data shows another increase from 2011, though at a slower pace. As seen below, intermodal traffic was persistently negative in 2007, much before the previous recession began.
The next chart is of real retail and food services sales adjusted for the U.S. population. If economic contraction looms, after cutting back on big purchases like cars and other durables, people next stop going out for dinner and buying discretionary items. The uptrend remains strong through last month, and similar to the middle of prior expansions, albeit at lower overall levels.
Source: St. Louis Fed
The grey vertical lines indicate the months of official recession. Sales seem to flatten out for about a year prior to going steeply negative during recessions.
Next up is the number of temporary hires. Businesses typically increase temporary help during healthy economic times and stop hiring prior to recessions. The trend remains up for this data series.
Source: St. Louis Fed
Capital markets, of course, do not track economic conditions exactly, even during expansions. It is all about expectations. The Citigroup Economic Surprise Index measures the extent to which data meets or falls short of expectations across global data releases. After consistently seeing surprises over nearly the past six months (and an accompanying equity market rally), surprises may go negative as economists ratcheted up estimates.
The big issue on the horizon is the cuts to the budget deficit looming in 2013. A study from the Brookings Panel on Economic Activity presented this week in Washington D.C. validates the concern. It found when interest rates are held at 0%, fiscal stimulus is effective. Contracting fiscal stimulus has a significantly negative impact on real GDP over subsequent years, as the chart below shows.[i]
To sum up, leading economic data looks good right now, though expectations are on the rise. One concern of ours is the ‘fiscal cliff’ that looms in 2013 as tax hikes and spending cuts form a vicious one-two punch for the economy. Fortunately, there is still time for policy makers to change this path, though confidence in politicians remains quite low.
This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security/instrument, or to participate in any trading strategy. Any such offer would be made only after a prospective investor had completed its own independent investigation of the securities, instruments or transactions, and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the accuracy or completeness of this material. Aurum Wealth Management Group and/or Aurum Advisory Services has no obligation to provide updated information on the securities or information mentioned herein.
Estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes only to simplify the presentation and/or calculation of any projections or estimates, and Aurum Wealth Management Group and/or Aurum Advisory Services does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material should not be viewed as advice or recommendations with respect to asset allocation, any particular investment, or any tax advice. Persons should not use any information contained herein or linked presentations as a primary reason for investment or tax decisions.
Read the full article here
- Talkin' a Little R&R
- Baseball's Long Season
- What's going on in Cyprus?
- The Complex - Gold, Commodity Update
- Golfing & Failure Points