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Three Reliable Economic Indicators.


Any effort to forecast macroeconomic trends is complicated by too much information that is instantly available.

There are, however, three reliable macro economic indicators that suggest where the economy is headed.

Building Permits, Manufacturing and Jobless Claims are reliable signals  that anticipate changes in underlying macro trends. Their movements have consistently forecasted changes in the business cycle over the last 65 years.

Building Permits

Building permits offer a macro view during economic peaks and troughs. As of April 2011, the current level of building permits was 563,000. While May permits were over 600,000, this is still well below longer-term averages. Not far, in fact, from the lowest level since the U.S. Census Bureau started tracking home-building activity in the 1950s and near where it was 2 years ago. This indicator says that the U.S. economy is still bumping along the bottom.

 

Manufacturing Index

The Institute of Supply Management Manufacturing composite index is a collection of 18 manufacturing industries and is considered to be the most reliable economic barometer available. It has consistently been an unambiguous indicator. A reading of more than 50% means growth in the manufacturing sector, while below 50% indicates a decline.

As of April 2011, “The PMI registered 53.5 percent and indicates expansion in the manufacturing sector for the 22nd consecutive month. This month’s index, however, registered 6.9 percentage points below the April reading of 60.4 percent, and is the first reading below 60 percent for 2011, as well as the lowest PMI reported for the past 12 months. Slower growth in new orders and production are the primary contributors to this month’s lower PMI reading. Manufacturers continue to experience significant cost pressures from commodities and other inputs.”

This indicator says that U.S.manufacturing has bounced off the bottom. But rather than a sustained bounce, growth is slowing … and it is slowing at a rate that is consistent with an economic downturn (like after 9/11).

 

Jobless Claims

Jobless claims can denote the end of a downturn because claims typically peak in the last month of a recession. In the week ending June 4/11, claims were 427,000. A recovery is imminent when jobless claims retreat from their peak. (The latest unemployment rate, however, has moved up to 9.1% from 8.8%).

These three indicators suggest the ‘sideways drift’  thesis is intact.

For investors, these indicators offer reliable signals regarding when a recovery will occur.

Chart source: Alliance Bernstein, Global Economic Research.

 

Next time?
Risk Management
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan
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8 Comments Post a comment
  1. John Mauldin had made reference to the RA view. Your right, it should be read with a stiff scotch close at hand.
    I think the markets have a history of rewarding conservativism … and i think the best approach is to take the middle ground between two extreme views … that’s why a balanced fund (however defined) is always the happy middle ground. How boring! But it works.

    Like

    June 24, 2011
  2. diversifyme #

    Here’s another insightful (albeit somewhat depressing article) about the economic prospects for the developed world going forward, written by the folks at Research Affiliates (of fundamental indexing fame). Scary stuff for us all, especially those without DB pensions or the like who are relying on investment returns to secure their retirement. I’m thinking cash under my mattress might be the way to go. Hardeeharhar.

    http://advisorperspectives.com/commentaries/research_62411.php

    Like

    June 24, 2011
    • Hi, ‘diversifyme’
      You commented on my Blog posts 11 times in 2011.
      Thanks.
      Anything in particular you’d like to see addressed in 2012?

      Like

      January 1, 2012
  3. Hi, JTN.
    U.S. stats ARE Canadian stats … as far as i’m concerned. What affects the U.S. affects Canada. I’m as patriotic as anyone, but Canada still exports 80% – 90% of what we build to the U.S. … so if the U.S. ain’t building … Canada ain’t ship’n.
    Yes. Housing starts in Canada are robust. Yes our employment rate is lower. But a high Loonie hurts our small and already decimated manufacturing sector. So sorry, but Canada is the quiet spouse to the U.S.’s big, assertive partner.
    It’s difficult to quantify, but when we ‘sense’ Canadain arrogance at being independent… we can expect a good slap.

    Like

    June 21, 2011
  4. JTN #

    Ah, very insightful. I take it that as the economic picture is bleak for Americans, it won’t be too good for Canadians either.

    Like

    June 20, 2011

Trackbacks & Pingbacks

  1. U.S. Building Permits revisited. « Institutional Investing for Individual Investors

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