5 Telling Economic Indicators

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.

Good stuff.

Wsj_20060423

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Source:
Five Indicators Give Early Clues To the Direction of the Economy
CHRISTOPHER CONKEY
WSJ, April 24, 2006; Page A2
http://online.wsj.com/public/article/SB114583538144233653-
59mRU7hloqRbUMyzhNWP1OaNUsY_20070423.html?mod=blogs

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  1. spencer commented on Apr 24

    A more interesting indicator is to divide the crb commodity index by initial unemployment claims.

    This index is a great leading indicator of interest rate turning points.

  2. Chad commented on Apr 24

    With reference to item 5, bond yields, the resistance to yield increase at the long end was something that Macro Mavens interpreted as a signal of stagflation a couple years ago (their advice to play the trading range probably paid off, at least the bond bears stayed frustrated for a long time).

    On a more mundane level there is something though that continues to puzzle me but I’m assuming it’s just my ignorance and would appreciate some enlightenment.

    Say I bought a 10-year T-note in February of 1996. Price per $100 was $99.819 for an interest rate of 5.625% and a yield of 5.649%. At maturity I get my $100 back but it is now worth about $78.53 in 1996 buying power due to inflation.

    So how much money is really being made? If some modest rate of inflation is built in to modern economies and there is no way to predict exactly how great that will be in the future then why would an individual buy a longer term bond?

    Switching to inflation protected securities seems to help some but if the measure of inflation (e.g., CPI) significantly understates real inflation I’m not sure you really do much better with TIPS. If they had a wider range of maturities so a decent ladder could be constructed that might help though.

    This may or may not be independent of the question of rising yields but I guess what I’m saying is that I can see why institutions with long-term liabilities and reserve requirements might buy long-term bonds but can’t really understand why an individual would do so.

  3. B commented on Apr 24

    How about a sixth? The Nikkei today. Geesh! Talk about an axe murder. But Tout-TV isn’t talking about that. And they chalked up global equity weakness to a G-7 meeting.

    Uh…..smile for the camera as you take a 3% haircut. That’s like the Dow having a -300 day. We’d have trading curbs if that happened and it would be the biggest drop this entire bull cycle. What will today bring? The US indices have followed the Nikkei recently……………….Global liquidity being mopped up? No more free money out of Japan? Or just a normal day at the office to be discounted as we head to higher highs?

  4. Trends I’m Watching commented on Apr 24

    Five Economic Indicators To Watch

    Trends: At this point (April 24, 2006), these indicators suggest the US economy is slowly slightly. Barry Ritholtz summarizes a Wall Street Journal article: Five Indicators Give Early Clues To the Direction of the Economy. Link: The Big Picture: 5 Tell…

  5. Trends I’m Watching commented on Apr 24

    Five Economic Indicators To Watch

    Trends: At this point (April 24, 2006), these indicators suggest the US economy is slowing slightly. Barry Ritholtz summarizes a Wall Street Journal article: Five Indicators Give Early Clues To the Direction of the Economy. Link: The Big Picture: 5 Tel…

  6. Trends I’m Watching commented on Apr 24

    Five Economic Indicators To Watch

    Trends: At this point (April 24, 2006), these indicators suggest the US economy is slowing slightly. Barry Ritholtz summarizes a Wall Street Journal article: Five Indicators Give Early Clues To the Direction of the Economy. Link: The Big Picture: 5 Tel…

  7. Storm Bear commented on Apr 24

    One thing I believe that drives the disaffection the populace has with the economy is that folks are really feeling a pinch – they are in lower paying jobs, working more jobs and paying more for produce and gas. You can coast on that kind of economy for just so long before the people start taking their frustrations out at the voting both.

    Anyway, this is the subject of my cartoon strip this morning and I linked it to your post.

  8. Mark commented on Apr 24

    B-

    If global liquidity indeed were being mopped up, you would see oil and gold come off, like today. Or perhaps this is just oil ST cycling down again, as it does, and bringing heavily correlated gold down with it. But if the spigots get turned off, that would signal a new maturity by our leadership and I just don’t think they have the cajones to do it.

  9. B commented on Apr 24

    Mark,

    And your point is………?? That you support my argument? :-) That’s been the whole premise of why I am bearish on commodities. Everyone has their favorite tell all. To the bears, it’s M3. M3 is not terribly useful as a telling stat of global liquidity.

    I look at a few things which measure facts not the size of Ben Bernanke’s cajones. I really don’t want to partake in that exercise.

  10. Mark commented on Apr 24

    B-

    Okay, you win. You have secret formulas that the rest of us don’t. You are smarter than us. You will be right in the end.

    I have tried to learn from what you are saying and what you know but everything turns into a verbal contest with you. On that I am O-U-T.

  11. B commented on Apr 24

    I likely don’t have one iota of information thousands or millions of others don’t have and I never said I was smarter than you. Now did I? All I did was briefly respond that I thought liquidity was leaving the system. I have posted a boatload of information on here. Some useless rants. Some maybe got someone to consider an alternative perspective.

    But I am also not going to share any proprietary work that I sweated over to create or hock or modify or whatever. Barry ain’t gonna share his either. Ain’t no one going to give it away on a public blog board. That’s what people pay for.

    I saw your message about books to read, research, etc. I don’t really have any advice other than lots of research. There is no holy grail I am aware of. I’m sorry. I am here to simply supply liquidity to the opposite side of the argument.

    If you hook me up with Jessica Alba, I’ll give you some more information.

  12. Mark commented on Apr 24

    “I saw your message about books to read, research, etc. I don’t really have any advice other than lots of research. There is no holy grail I am aware of. I’m sorry. ”

    I didn’t ask you for advice. I asked you what you were reading that made you certain of your position and offerred to read it also to see if it changed my mind. I am always eager to learn something new. This other stuff about my wanting the Holy Grail from you is pure projection on your part. It’s a nice subtle attempt at a putdown and it just reinforces my point about discussing things with you.

  13. algernon commented on Apr 24

    spencer, please elaborate on your index.

  14. powayseller commented on Apr 25

    The WSU missed the boat. Capital spending and jobless claims are lagging indicators.

    Check out Ahead of the Curve, by Goldman Sach retail analyst Mr. Ellis, who was awarded the #1 retail analyst award for 18 consecutive years.

    http://www.aheadofthecurve-thebook.com

    Leading indicators are year-over-year changes in the rate of consumer spending (2nd derivate). From this flows production, capital spending, and employment. Each of these lags the preceeding factor by 0-9 months. The main effect on consumer spending is real hourly wages, and to a lesser extent, interest rates and borrowing. However, the latter are coincident with spending and thus don’t give us a predictive effect.

    With wages stagnant, and consumer borrowing slowing, you will see this flow through the economy. Capital spending is still strong, as the slowdown takes 3-9 months to go from consumer to manufaturer to capital spending to employment. I expect strong employment numbers for another month or so.

    This is the time to exit the stock market, while it is high. Buy low, sell high. Who has the smarts to do it? If you do, sell now. This is high.

    And when unemployment is high and wages are just starting to pick up, when the economy is in a recession, then you get back into the stock market. That is buying low, and getting in just as the uptrend is starting. By the time unemployment is at its peak, consumer spending will have already turned, i.e. the rate of change is the other direction.

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