Okay, so the U.S. is solidly in recessionary territory. The fundamental economic data are lousy, trends are down, consumers and businesses are retrenching, and nobody is happy. We know that, if current forecasts are accurate, the fourth quarter of 2008 will be the worst in terms of economic performance and at least the two following quarters aren’t going to be all that pretty, either.
What we now want to know is, how will we know when the worst is over? What signposts will show when the bottom has been reached and the light ahead isn’t the proverbial catastrophic train wreck heading right at us?
Watch the stock market indices such as the Dow Jones Industrial Average and the S&P 500. Market movements can influence the economy, but being forward-looking, stocks tend to move first and therefore can serve as a leading indicator (explained below) for what people call “the real economy.” An examination of market movements during previous recessions shows that stocks tend to start their rally about four to six months before a peak forms in continuing claims for unemployment benefits.
For example, in the recession of 1981–82, these claims peaked at 4.713 million in November 1982; however, the Dow Jones bottomed out in August and rose over 300 points in those interceding four months. This pattern repeated in 1990–91 and 2001, as well. So when the DJIA quits jittering between 8000 and 9000 and actually begins rising on a sustained uptrend, it will be a good indication a bottom is forming in the labor market and therefore the real economy, too.
Watch the leading indicators. Most economic announcements concern lagging indicators, which trail the data they illustrate by a matter of weeks or months. While the time is necessary to allow for tabulations and calculations, reading about last month’s industrial production figures (down 0.6% in November) is old news at best.
On the other hand, some economic indicators are designed to show, not where the economy has been, but where it seems to be going. These leading indicators are often surveys of consumers or business managers, most of whom know their budgets to a hair, and the readings published therefore reflect their financial expectations for the coming months. The best leading indicators are consumer confidence surveys, such as those published by the Conference Board and ABC News, and commercial indicators such as business confidence surveys, purchasing managers indices, and industrial new orders data.
The two very best are the U.S. Leading Economic Index (LEI) of the Conference Board, and the Purchasing Managers Index (PMI) of the Institute for Supply Management. The LEI pulls from forward-looking data such as building permits, interest rates, manufacturers’ new orders, stock prices, and initial claims for unemployment benefits, and calculates them into a single headline figure for easy comparisons. It’s currently at a level not seen since 1991 and has fallen 3.7% from this time last year.
The PMI unfortunately doesn’t make for more cheerful reading. This survey of manufacturing purchasing managers looks at inputs such as commodities prices, new orders, order backlogs, employment plans, and customer inventories, and calculates a headline figure as well. A reading of 50 indicates the U.S. economy is stable, while readings above that point to expansion and readings below point to contraction. The current November manufacturing PMI stands at 36.2, the worst it’s been since May 1982, with significant gains required to indicate an economic bottom is in place.
Finally, watch payroll data, not unemployment figures, which can be skewed by seasonal factors and the workforce participation rate. Employment figures, on the other hand, point to jobs created and people back at work, and a rise there is generally followed fairly quickly by a similar rise in retail sales.
Like all predictions, this one carries certain caveats, the biggest being that another shock to the global financial network would be much harder to absorb at this stage of the economic game. But indicators don’t lie, and sooner or later that light ahead really will be the end of the tunnel. Watch for it.
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