In the past two years I have published my favored indicators for predicting a potential recession. In building a case for a potential recession, I concentrate on six key indicators. Last fall, these indicators were primarily positive, leaving me constructive on the equity markets. If my criteria list indicates a possible recession in the future, I would be less inclined to remain at a market weight for equities.
Indicators (click to enlarge images):
- Copper: I consistently measure the price of copper to gauge the health of the global economy. As I mentioned in my first article on the subject, this is a very popular indicator. It is known as Dr. Copper, for the metal's ability to predict future economic growth. China now has a very large impact on the price of copper, as it controls over 40% of the global market. With China's growth prospects falling in early 2014, the global commodity market has suffered. To track the metal, I follow the London Market Exchange. My primary focus is on the trend of the price in copper. In September 2012, I was positive, as the price had remained above trend. However, a strong break during the previous 12 months indicates that the global economic outlook is poor. Verdict: NEGATIVE
2. CFNAI Index
I prefer the obscure CFNAI, as it measures a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. The index is currently trending above 0. This indicator demonstrates the resilience of the U.S. economy, which is in much better shape than the rest of the world.
3. ATA Truck Index
My third favored top down economic indicator is the ATA Truck Tonnage Index. In the most recent survey, the American Trucking Associations' advanced seasonally adjusted (SA) For-Hire Truck Tonnage Index gained 0.9% in March after decreasing 0.7% in February. Tonnage has now increased in four of the last five months.
Specifically, since November 2012, the index is up 7.6%. Compared with March 2012, the SA index was up a solid 3.8%, beating February's 3.1% year-over-year gain. Year-to-date, compared with the same period in 2012, the tonnage index is up 3.9%. A strong trucking market indicates solid economic growth.
4. NAHB Wells Fargo Housing Index
Another of my favored economic indicators measures builder confidence. NAHB-Wells Fargo Housing Market Index [HMI] is based on a monthly survey of National Association of Home Builders designed to measure the health of the single-family housing market.
The survey asks questions on the sales of new homes and more importantly the view of the members on the next 6 months. The survey also measures the traffic of prospective buyers of new homes. While the HMI component gauging current sales conditions declined from above 50, the trend is still up and far below the 2007 reading.
The HMI reading also is well above the SF reading (blue over red), which is typical in periods of continued economic growth.
5. Single A Corporate vs. Treasury Credit Spreads
A 5th economic indicator is credit spreads of the 10-yr U.S. corporate A rated bonds vs. Treasury bonds of the same maturity. The spread between corporate A rated bonds and Treasuries is still very tight, quite unlike late 2007, before the recession. The obvious "reach for yield" is having an impact here. But credit spreads have actually become tighter since October 2013. I measure long-term and shorter-term spreads. Both are positive.
6. Still a favorite, the Dow Jones Transportation Index is my last key indicator. It is critical in my view that the transports remain in an upward sloping trend. The index has a very long term track record of predicting ultimately where the economy and markets are heading. However, the timing is not always perfect. In 1999, the transports set the high in May of that year. The market did not finally top out until nearly a year later, and a recession did not begin until 2001. At this juncture, the transports look in great shape as the index has hit a new all-time high.
Overall my assessment of the U.S. economy is positive, despite the cascading price of copper. I continue to overweight those sectors of the economy that profit from continued economic growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.