The WSJ (free) has an interesting article on five telling indicators that will give early signals on the economy’s direction:
1) Orders for capital goods
Look to orders for nondefense capital goods excluding aircraft, or "core capital goods," to gauge how much equipment companies will buy in the near future. (Note: Watch for distortions to the headline number by the volatile aircraft sector).
2) Initial jobless claims
Each week, the Labor Department counts the number of people filing new claims for unemployment benefits. Falling claims are an early indicator of a surge in hiring, which in turn means more people with paychecks to spend. Because it is impossible to spot a trend in one week, economists track the "four-week moving average" of claims.
The moving average fell below 300,000 earlier this year, a threshold that indicates the economy may be running above the point where wages should rise as companies have to compete for qualified workers. If claims moves higher, it is a sign that growth may slow. If it goes even lower, watch for inflation — and more Fed interest-rate increases.
3) Home-builder sentiment
NAHB readings above 50 mean the outlook is positive, and below 50 suggest times are tough. The index topped at 72 in June 2005, accurately predicting the peak in new-home sales the following month, and has declined steadily to 50. That is the lowest level in a decade, except for a brief period after the 9/11 attacks.
Housing construction now appears to be following the downward arc of declining sales. Along with rising oil prices and interest rates, a severe housing slowdown remains one of the major risks to U.S. economic growth this year.
4) Retail sales
The Commerce Department’s monthly retail-sales report is an important signpost of consumer spending, which accounts for the biggest chunk of spending in the economy. Car sales are volatile, so economists look at a measure excluding them to gauge underlying trends.
If consumers keep getting squeezed by rising gas prices, weakness in retail sales and consumer spending on other things could follow.
5) The bond market
The bond market has pushed the yield on the benchmark 10-year Treasury note above 5%, the highest in nearly four years, raising borrowing costs for businesses and pushes up mortgage rates. That, in turn, could damp growth prospects. There is risk the 10-year’s yield could go even higher.
Five Indicators Give Early Clues To the Direction of the Economy
WSJ, April 24, 2006; Page A2