Last updated on November 4, 2017.
On this page are a number of graphs of important indicators for U.S. economic activity that show changes before the economy changes from growth to recession and vice versa. As time progresses I will gradually increase the number and scope of these indicators, while maintaining them as best I can. Most of the data will come from the Federal Reserve Economic Database, with some others originating at other sources such as the U.S. Treasury Department. This page is a work in progress.
The leading indicators I am following are listed in the table below along with their current indication of Bearish, Neutral, or Bullish. In counting up the total leading indicator score, each indicator’s current indication is scored as follows: Bearish = -1, Neutral = 0, Bullish = +1.
|St. Louis Fed. Reserve Bank Leading Index||Bearish||-1|
|M2 Monetary Stock||Bearish||-1|
|M2 Money Velocity||Bullish||+1|
|Average Weekly Hours, Manufacturing||Bullish||+1|
|Manufacturers' New Orders: Nondefense Capital Goods Excluding Aircraft||Bullish||+1|
|Durable Goods Orders||Bullish||+1|
|Inventory to Sales Ratio||Neutral||0|
|ISM Purchasing Managers Index||Bullish||+1|
|Change of the National Debt to GDP ratio||Neutral||0|
Of the twelve leading economic indicators, I have displayed and am counting, I see the following distribution
for a net score of +4 Bullish. Economic conditions indicate we should be moderately optimistic.
The graph below is of the St. Louis Federal Reserve Bank’s Leading Index for the United States over time. It is a composite index that is a weighted average of economic variables that increase before the economy grows, and decrease just before GDP declines. The components in the average are shown in the table below. Updated monthly.
Leading Index Components
|Average weekly hours of production of nonsupervisory workers, manufacturing|
|Average weekly initial claims for unemployment insurance, State Programs|
|Manufacturers' new orders in 1972 dollars, consumer goods and materials industries|
|Vendor performance, percent of companies receiving slower deliveries|
|Index of net business formation|
|Contracts and orders for plant and equipment in 1972 dollars|
|Index of new private housing units authorized by local building permits|
|Change in manufacturing and trade inventories on hand and on order, smoothed|
|Change in sensitive materials prices, smoothed|
|Index of stock prices, 500 common stocks|
|Money supply M2 in 1972 dollars|
|Change in business and consumer credit outstanding|
The heavy green line is a linear fit to the blue index curve from late 2014 until the election of Donald Trump. The leading indicator under the Obama administration was definitely trending downward. If we take this index seriously, as initially at least we must, one would conclude Trump’s policies bode very ill for the U.S. economy. However, the recent behavior of the index is very anomalous and inconsistent with other leading indices, as you will see below. Clearly, we must consider it a very bearish indicator.
M2 Money Supply: See the post Should We Expect Inflation or Deflation to see definitions of the monetary aggregates such as M2. In at least in the very short term an increase in the money supply should be considered expansionary by allowing more loans for investments and household consumption. In an inflationary environment an increase in M2 will mostly just increase inflation and be considered contractionary. The M2 monetary stock versus time is shown below. Updated monthly.
Because inflation is a positive 2.2% according to the CPI, the current increase of 5.10% in the M2 money supply should be considered bearish.
An increase in the velocity of M2 money should be considered inflationary and bearish in an inflationary environment, and bullish in a deflationary environment. A decrease in the velocity of money should be considered bearish in a noninflationary environment, and bullish in an inflationary environment. Below we plot the M2 velocity (blue curve) and its percent change (maroon curve) versus time.
Because we are in a low inflationary environment (CPI inflation of 2.2%), the increase in M2 velocity (currently at a +0.14% rate) is bullish. With the M2 velocity increasing, money changes hands more frequently and transactions are increased. This implies demand is increasing and that is a very bullish signal! This is an enormous turnaround for this particular indicator from the last time we looked at it in May.
Manufacturing Jobs: An increase in manufacturing jobs should be considered bullish, a decrease bearish. Below is plotted the number of manufacturing jobs (blue) and its percent change from a year ago in red. Updated monthly.
Manufacturing jobs started to increase with the election of Trump and are continuing to increase. This index remains bullish.
Average Weekly Hours, Manufacturing: More manufacturing hours worked occur in a bullish environment, fewer in a bearish environment, Average weekly hours are plotted below, together with their percent change from a year earlier. Updated monthly.
Because the change in manufacturing hours is now positive, this index has flipped to bullish.
Manufacturers’ New Orders: Nondefense Capital Goods Excluding Aircraft: This indicator begins to fall just before the start of a recession, and starts to rise again at the start of a recovery. Updated monthly.
This indicator has been sharply increasing since the 2016 election, and its current year-to-year increase is about +8.29 percent, making this a definitely bullish indicator.
Durable goods orders: When households and companies are confident of future economic growth, they make larger orders for durable goods. Updated monthly.
In the last few months before Trump’s election, the year-over-year change of durable goods new orders was close to zero. It is now increasing at a roughly +8.20% rate, year-over-year. I score this as an unambiguous bullish signal.
Inventory to sales ratio: When the inventory to sales ratio is greater than one, producers are making more than can be sold. When this is consistently true, inventories are piling up, which is a bearish signal. Updated monthly.
Inventories had been increasing faster than sales from the fourth quarter of 2014 through the first quarter of 2016. However, it has taken a steep decline from 1.57 in January 2016 to 1.29 currently. Although it remains above one, its year-to-year change is -3.73%; this remains a neutral signal.
PMI: The Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI) is a weighted average of five major indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment. This index has two magic numbers: 42 and 50. If the index is over 50, manufacturing is expanding, and if the index is below 42, it is definitely contracting. There is one small caveat however. The month-to-month change of the index is also important. If one sees a reading of 56 one month followed by an index of 51, manufacturing may be still generally expanding but approaching a period of contraction.
This index has been increasing fairly steadily with some fluctuations since late 2016, and is well above 50. The website for the Institute for Supply Management reports that the PMI was 58.7 in October 2017. The index is well above 50 and is therefore bullish.
Building Permits: An increasing level of building permits is a generally positive indicator of a growing economy.
This index has been decreasing on average since October 2016, and has changed from neutral to bearish.
Copper Prices: Because of its importance to electrical wiring and manufacturing. the price of copper will increase as economic activity increases. Updated monthly.
The percent change in producer copper prices has sharply increased since September 2016. It picked up speed with the November election of Donald Trump, but then plateaued between March and June of 2017. After then, it has skyrocketed. Prices of copper and copper products are now increasing at the incredible rate of +27.50%! This is a tremendously bullish signal!
Change in the National Debt to GDP Ratio: From the prospective of neoclassical economics, a positive change in the national debt to GDP ratio is bearish, and a negative change is bullish. Note that a Keynesian economist would say exactly the opposite in bad economic times. Updated quarterly.
Because of the threat the national debt poses to economic growth, it will be instructive to display it as a percent of GDP over two different time scales: the first from 2000 to the present and the second from 2014 to the present. Let us now consider the first plot.
We know from the researches of Carmen Reinhart and Kenneth Rogoff that anytime sovereign debt exceeds about roughly 80% to 90% of GDP, government borrowing to finance deficit spending begins to crowd companies out of financial markets and begins to kill private investment. From 2000 to the beginning of Obama’s administration in 2008, the national debt as a fraction of national debt remained relatively constant at around 60% of GDP. Obama then almost doubled it in a few year’s time, and increased it from a little more than 60% of GDP to around 100% of GDP. The sequester deal between Obama and the Republicans in 2013 (along with some “negative expenditures” from TARP repayments from Fannie Mae, Freddie Mac, and assorted banks and corporations, especially for 2009 through 2013) then forced the debt to GDP ratio to plateau at around 102% in 2013. Unfortunately, in 2016 the Congressional lust for government spending overcame the sequester mechanism, and the debt as a fraction of GDP again began to rise. It peaked at 105.7% of GDP in Q4 2016. This brings us to the more focused plot from Q1 2014 to the present.
From this plot you can see the Trump administration beginning in Q1 2017 has been able to arrest deficit spending enough to actually reduce the national debt to GDP ratio, which now stands at 103.1% of GDP. As of Q2 2017 the year-over-year rate of decline of debt to GDP has been -1.4%.
From this change I am sorely tempted to take this indicator as bullish. However, compared to the enormity of the national debt, the improvement has been very modest, so I will instead judge it to be neutral.
Treasury Yield Curve: The yield curve is an index that compares short term interest rates to long-term rates and comes in different flavors depending on which short and long-term securities are used to construct the curve. Plotted as yield of the bond or other security versus the maturity of the instrument, one hopes to see the curve with a positive slope, since then long term loans will yield more than short term loans due to their greater risk. However, approaching or during recessions short term risks are considered greater than long-term risks, and the curve picks up monotonically negative slopes. In that case people say that the yield curve is inverted. A suddenly inverted yield curve is taken by many as the gold standard test for imminent recession. Unfortunately, in this era when the Fed has held both short and long-term interest rates close to zero for eight years, it is not at all clear if the yield curve holds much meaning any more. For educational purposes, I am showing the U.S. Treasury Department’s version of the yield curve below, but I will not be including it in my count of bearish, neutral, and bullish leading indicators. If we should ever return to more normal times, I will start including it again.Views: 1,176