The State Of The Short Leading Indicators
- With the long leading indicators having turned decisively negative almost a year ago, whether the short leading indicators are also turning negative becomes crucial.
- This article examines 10 short leading indicators with extensive histories.
- Their overall status as of now remains slightly positive, although it would not take much to flip several more negative.
Last week when I wrote that substantial backward revisions to adjusted corporate profits had intensified concern about the short-term forecast, I mentioned that I wanted to update two things: (1) how the producer side of the economy would have to play out, and (2) the short leading indicators.
The first part I posted earlier this week. Today I am examining the second part.
The eleven short leading indicators
In his 1993 tome, Prof. Geoffrey Moore listed a series of 11 short leading indicators. These are more variable but typically turn a few months before the economy as a whole. Moore identified them as: S&P 500 stock price index, Average workweek in manufacturing, Layoff rate under 5 weeks, Initial claims for unemployment insurance, ISM manufacturing vendor performance, ISM manufacturing inventory change, Journal of Commerce change in commodity prices, Change in deflated nonfinancial debt, New orders for consumer goods and materials, Dun and Bradstreet change in business population, Contracts and orders for plant and equipment. Aside from the Dun and Bradstreet data, all of the rest of the series are publicly available. I would expect most of these to turn negative at least a few months before the outset of any recession. Let’s examine each in turn:
S&P 500 stock price index
While stock prices are off of their recent highs, they remain in a slightly upwardly sloping trendline dating back almost 24 months:
I would expect stocks to at least make a new three-month low before the onset of a recession. They haven’t.
Average workweek in manufacturing
I have written about this series a number of times in recent months. Hours are down -0.9 from their peak last year:
In the past this has almost always preceded a recession. This is a negative.
Layoff rate under 5 weeks, Initial claims for unemployment insurance
The former comes from the monthly job report, and the latter, of course, is weekly. They measure very similar things:
Both are at or very close to their expansion lows, and remain positives, although initial claims with very few exceptions have been relatively flat for the past 18 months, averaging 220,000 +/-12,000.
ISM manufacturing vendor performance, ISM manufacturing inventory change ISM new orders
About a decade ago, the Conference Board switched over to the new orders metric from the ISM manufacturing report for inclusion in the Index of Leading Indicators. Here they are, along with vendor performance, vis Briefing.com:
Neither has gone below 50, the dividing line between expansion and contraction. Inventories are at 49.5, and slightly below 50 for the second month in a row. Since typically before recessions at minimum they have fallen below 48 for several months, altogether these remain very weak positives.
Journal of Commerce change in commodity prices
Commodity prices have generally been in a downtrend for the past 18 months, are close to their lows:
This is a negative.
Change in deflated nonfinancial debt
Here are two similar measures, deflated by the implicit deflator in GDP:
One measure is quite negative; the second is neutral. Together they are best viewed as weakly negative.
New orders for consumer goods and materials
In Contracts and orders for plant and equipment, there are two measures of new orders: one for businesses and one for consumers. I am using the “core” capital goods measure for the former:
Manufacturers’ new orders have turned sharply lower, due in part to Boeing’s troubles. This is a negative. Excluding aircraft and defense, they are neutral. Consumer goods orders have decelerated, but remain weakly positive.
Of the ten measures, 4 are positive, 2 are weakly positive, and 4 are negative. The series closest to their tipping points are the ISM manufacturing measures, and non defense non-aircraft manufacturers’ new orders, and consumer durables.
Should Q2 corporate profits continue the negative reading on that long leading indicator, then if several more of the short leading indicators turn negative, that would be a signal for a recession starting around this winter.
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