Last Updated: June 22, 2018
The stock market took a pretty hard hit over the last week, leaving many to question, “is this a temporary shock isolated in the financial markets, or the onset of a longer-term trend that will ripple through the broader U.S. economy?” Just as they have in business cycles before, key economic leading indicators provided plenty of foresight into the recent volatility and continue to provide insight as to what the future holds.
The hot topics surrounding the decline are the economic slowdown in China and weak commodity prices. Even though recessions are often brought on by a confluence of multiple factors, a common scapegoat is often cited as “the source” of every recession. The talk of the town in 1990 was the downfall of the commercial real estate market triggering the savings and loan crisis. In the early 2000s the culprit was the bursting of the internet tech bubble, and in 2007 it was the collapse of the housing market. While given the blame, these events are often the symptoms of general economic weakness rather than the cause.
Even in a world of global commerce, weakness in one region does not necessarily mean economic softness elsewhere. For instance, the U.S. economy continued to grow in 1997 despite the Asian financial crisis and did so again in 2013 when Europe’s financial crisis worsened. The broad-based U.S. economy was healthy enough to fend off these international crises.
Monitoring a broad set of the right economic indicators can give us insight into whether the U.S. can fend off another international “shock” like China and commodities. At any point in time, some leading indicators will be heading up, and some declining, but when a significant number of them begin to move decisively in one direction, they paint a pretty clear picture of the future. Although an initial look at key indicators this year may appear mixed, viewing them versus the prior year on a 3-month moving average basis provides better insight of how the U.S. economy is truly performing. This proven method provided advanced warning of pending recessions in both 2000 and 2007.
The table of leading indicators below is comprised of consumer spending, an advanced construction index, U.S. industrial production, S&P 500 performance and a composite index that accounts for consumer opinion and business tendency in the United States. The indicators began to head definitively downward in late 2014 (three-month moving average, year-over-year basis), giving plenty of foresight to the rocky road we are now facing. Pay attention to the percentage under the date on the tables below. This designates the percent of indicators that are increasing during each month. We can see the decline from 33 percent in October 2014 to 17 percent in early 2015 and down to 0 percent in June – months ahead of the August turmoil.
- November 2014-June 2015: 90 percent of indicators are either decelerating or below zero
- Same Period Prior Year: 62 percent of indicators either decelerating or below zero
This cycle is not the only one where these indicators have proven advantageous. The following tables show the indicators leading up to the previous two U.S. economic recessions in 2001 and 2007. For 2001, the percentage of indicators on the rise started falling around September 2000, while the economy didn’t officially enter into recession until March 2001. In 2007, signals from the leaders starting developing around mid-year, with recession not developing officially until December.
2001 LEADING INSIGHT
- July 2000-January 2001: 83 percent of indicator are either decelerating or below zero
- Same Period Prior Year: 43 percent of indicators either decelerating or below zero
2007 LEADING INSIGHT
- July 2007-January 2008: 76 percent of indicators are either decelerating or below zero
- Same Period Prior Year: 63 percent of indicators either decelerating or below zero
The parallels to the previous two pre-recession periods suggests the U.S. economy is at a fragile point. What these leading indicators are telling us about the U.S. economy and the business outlook going forward is to be cautious. Many of these forward lookers are forecasting potential “recessionary” conditions during the coming months. Whether we actually see two consecutive quarters of real contraction in gross output (the technical definition of a recession) or not, your business is likely in for a bumpy ride over the next two to three quarters.