Economic Indicators Suggest Investing Caution

Includes: DIA, QQQ, SPY
by: Steven Hansen

Fed Chairman Ben Bernanke celebrated December 7th by giving a “where the economy is going” type speech at the Economic Club in Washington, DC. He said in part:

Recently we have seen some pickup in economic activity, reflecting, in part, the waning of some forces that had been restraining the economy during the preceding several quarters. The collapse of final demand that accelerated in the latter part of 2008 left many firms with excessive inventories of unsold goods, which in turn led them to cut production and employment aggressively. This phenomenon was especially evident in the motor vehicle industry, where automakers, a number of whom were facing severe financial pressures, temporarily suspended production at many plants. By the middle of this year, however, inventories had been sufficiently reduced to encourage firms in a wide range of industries to begin increasing output again, contributing to the recent upturn in the nation’s gross domestic product (GDP).

His position is the economy is improving.

Interestingly enough, Bloomberg is reporting that the head of the recession dating committee for the NBER is suggesting the recession is over. Most analysts believe that the recession ended mid-year and I agree based on the definitiions.

The equities market is a forward indicator of expected economic performance. The Dow has been in a strong bull run since March, and many predict this run will continue.

I spend my day looking at economic indicators. Economic indicators are not good predictors of Dow movement – even though the market uses them as excuses for rallies and declines.

Several of the indicators are beginning to suggest a Dow turning point. You can decide if you believe that the recent movement of the indicator warrants concern.

In no case do the indicator movements suggest a trend. It could be a simple fluctuation as happens in all cycles. My rationale for presenting this is that it is occurring on several indicators at the same time.

The Chicago Fed National Activity Index (CFNAI):

This is how the CFNAI did in the 2001 recession:

This is the University of Michigan Consumer Sentiment Index:

Here is how this consumer sentiment index did in the 2001 recession:

Here is Economic Cycle Research Institute (ECRI) WLI index:

And here is how the WLI looked in the 2001 recession:

Here is the Purchasing Managers Index Report on Business (manufacturing) from the Institute of Supply Management (ISM). I personally believe this index is not reliable – many believe it works as a good predictor.

Here is how this Purchasing Managers Index performed in the 2001 recession:

Hat tip to Steve at MEMETICS & MARKETING™ for editing support.

Disclosure: long MMFs, GLD, ABFS, GGG, GRS, MXI, SWC, SLW, KSWS, LMT, NLS, NOK, PFE, TBT, XHB, WMT, FTR, IAG, HL, LIHR, HYG, PBT, IOO, PIN, UUP, Physical Gold - as well as numerous puts and calls which comprise less than 3% of my portfolio