At the outset of every year and usually after mid-year, I lay out both short- and long-term forecasts. This is my short-term forecast. The long-term forecast will follow in a separate post after GDP is reported next week.
My method of short-term forecasting is pretty simple - in fact, so simple, I call it the K.I.S.S. method. Even though the Index of Leading Indicators is the statistic most denigrated by Wall Street forecasters, it has the inconvenient habit of being right more often than the highly-paid punditocracy, especially at turning points. Since I'm not a highly-paid Wall Street pundit, I simply rely upon the LEI for the short term and several methods of looking at long leading indicators for the longer term.
I'm only discussing the first half of this year in this post. I will update my longer-term forecast separately.
The K.I.S.S. approach is in contrast to most of what you will read. Unfortunately, the direct link to Caroline Baum's article is now dead, but Professor Mark Thoma's discussion of it remains. To wit, research has shown that what most forecasters do is simply extrapolate current trends into the future. Thus, they completely miss turning points. This is why you can be months into a recession - or recovery - with most commentators still unaware of the turn.
When I last looked at the short leading indicators back in July, I concluded that:
with very few exceptions all of the indicators for the next six months of the economy, through and past the end of the year, are very positive, confirming in the short term the message of the long leading indicators in the second half of 2020.
My base case for this year has been that with Federal stimulus and accommodating monetary policy, as the economy reopened from the worst levels of the pandemic, there has been an outright Boom... And so... I am forecasting that the economy will continue to expand broadly over the next six months."
And at the end of 2021, here is what the coincident indicators looked like for the year.
First, here is real GDP growth measured quarter over quarter:
The economy did indeed continue to grow, and with the exception of Q3 of 2021 (which at +0.6% annualized was still average for the past 10 years), grew very strongly compared with the entire 10 year expansion that preceded the pandemic.
Second, here are the "big 4" coincident indicators, including industrial production, jobs, real income, and real sales through November:
With the exception of February and November, all of the months were positive, and especially so in spring and summer.
In short, my short term forecast for H2 2021, using the very same tools as I will here, was right on point.
Subsequently, in my forecast for H1 of this year, I concluded that:
All but one of these are positive through the end of this year (corporate bond interest rates are mixed), signaling a continued expansion. The situation changes by the end of Q1 of 2022. By that time... There are four positives... There are three negatives:
In conclusion, while the long leading indicators confirm a firm, even strong expansion through the remainder of 2021, by spring of 2022 they are neutral, suggesting a much softer economy, although not a recession before the midyear limit of this forecast."
What was the long term last July is now the short term. So, let's turn to the next six months.
Since I made my long-term forecast last summer, we should have been receiving confirmation in the short leading indicators. To cut to the chase, here's what the Conference Board's Index of Leading Indicators looks like through November of last year, via Advisor Perspectives (note the inset close-up for 2021):
Both the long-term view and the short-term inset demonstrate that the Index of Leading Indicators increased strongly during the last eight months of 2021. Indeed, the Index increased 8.1% YoY through that time, the strongest reading since the end of 2004.
Similarly, In his 1993 tome, Prof. Geoffrey Moore listed a series of 11 short leading indicators, namely: The S&P 500 stock price index, Average workweek in manufacturing, Layoff rate under five 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 & Bradstreet change in business population, Contracts and orders for plant and equipment.
Aside from the Dun & Bradstreet data, all of the rest of the series are publicly available. Most of them are also included in the Index of Leading Indicators. Here are seven of them, all normed to 100 as of last June:
With the sole exception of the manufacturing workweek, which has softened, and short term unemployment, which recovered after worsening for several months, every above indicator above is positive.
Here are ISM new orders, which are also part of the Leading Index:
Any reading over 50 is a positive. As of December, they were at 60.4. Their lowest reading in the second half of 2021 was 59.8.
Finally, here is consumer sentiment as to the future as measured by the University of Michigan:
The story here is quite different, and consumer expectations fell to their lowest readings in seven years.
In short, with the exception of two indicators - consumer sentiment and the manufacturing workweek, every other short leading indicator has been positive through their last reading.
Last July the long leading indicators suggested that the expansion would continue through the first half of this year, although softening seemed likely. The short leading indicators now confirm the positive trend through the first half of this year, with very little evidence of softening at this point.
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