While the interpretations of economic indicators and central bank policies remain challenging, investors must constantly monitor for unexpected changes. Why? The unexpected changes can often lead to significant volatility in the financial market. Also, the changes can signal pivotal turns in business cycles. Economic indicators tend to be leading, coincident, and lagging indicators.
The three (3) sets of economic indicators that can convey peaks and troughs in the business cycle consist of leading, coincident, and lagging indicators.
Lagging Economic Indicators (LAG)
(1) Non-farm payrolls (NFP) – US Bureau of Labor Statistics publishes monthly labor market reports. (2) Average hourly earnings – US Bureau of Labor Statistics releases the price businesses pay for labor on the first Friday of each month. (3) Unemployment rate – One of the most significant lagging indicators. It shows the percentage of the workforce that is unemployed but seeking employment. (4) Corporate earnings – It is a popular lagging indicator widely tracked by investors. Because it reports the past performances of a company, it is often late to pivotal turns in business cycles.
Coincident Indicators (CEI)
(1) Gross Domestic Product (GDP) – It is one of the broadest measures of economic activity. The important coincident indicator measures the change in the total value of all goods and services produced. (2) Gross National Product (GNP) – Another popular coincident indicator measuring economic activities. Unlike GDP, GNP includes the net income from foreign investments. (3) Personal spending or consumer spending – Because 70% of the US GDP comes from consumer spending, it is one of the most followed measures of economic health. (4) Retail sales – US Census Bureau releases the total value of consumer-level sales approximately 13 days after the month ends. It is a gauge of consumer spending and economic activity. (5) Industrial production – This indicator measures the value of the output produced by industrial manufacturers. It is another relevant coincident indicator since production is sensitive to changes in the business cycle. (6) Consumer Price Index (CPI) – Investors and traders monitor CPI for changes in the price of goods and services to determine inflationary pressures and shifts in monetary policies. (7) Producer Price Index (PPI) – Another widely followed inflation indicator that records finished goods and services from producers. Changes in PPI can lead to cost-push inflation.
Leading Indicators (LEI)
(1) Central bank monetary policies – One of the most important leading indicators in the financial market. Actions by central bankers via adjustments in monetary policies can influence the economy by stimulating or slowing the business cycles, creating price stability, and allowing for employment. (2) Money supply is a complex leading indicator. The degree of money in circulation signals the willingness of consumers and businesses to spend and invest. (3) Consumer confidence – There are many sentiment indicators available. However, the Conference Board’s Consumer Index is one of the most influential of all consumer confidence surveys. (4) Capacity utilization – The indicator reports on the extent a company uses its machinery and productive capacity. Higher capacity utilization can lead to higher economic output and growth. (5) New housing starts – The number of new residential buildings is highly correlated with building permits and is a powerful indicator of construction. (6) Commodity prices – Commodities such as Oil is a leading indicator of economic conditions and inflationary forces. (7) Bond yields – Another critical leading indicator that serves dual purposes - convey investor confidence (risk appetites) and economic conditions. (8) Stock market – Some believe it may be one of the best leading indicators of the economy and investor sentiments. When stocks perform well, it signals an economy that is expanding or recovering and vice versa.
Rising interest rates, stubborn inflationary pressures, tight monetary policies from central bankers, and recent bank failures (i.e., Silicon Valley Bank) continue to roil Wall Street and Main Street.
While US regulators attempt to contain the fallout from the recent bank failures, the leading economic indicators continue to trend lower, suggesting the US economy is vulnerable to another recession.
The Conference Board, the member-driven not-for-profit think tank organization, has played an integral role in reporting economic conditions for the US economy since its formation in 1916.
Based on the uncertainties in the US economy and the challenges facing the Fed, we will turn to the Conference Boarding Leading Economic Index (LEI) for guidance to help uncover the state of the US economy.
The Conference Board survey in 2022 showed the pandemic, rising inflation, labor shortages, and supply chain disruptions were on the minds of CEOs and other C-suite executives. Interestingly, corporate CEOs ranked recession/economic contraction as their number one concern for 2023.
Enclosed are charts of the Conference Board US Leading Economic Indicators.
Although the annual growth rate of the US LEI increased slightly during January 2023 (see Chart 1 – YOY % change of LEI and Real GDP), most of the LEI components continue to decline (Chart 2 – LEI Index and component contributions (%)).
Another chart shows the trajectory of the US LEI. A brief analysis suggests an increased chance of a US recession in the next 12 months (Chart 3 – US LEI 6-month growth rate).