16 April 2009

Clues from the US Leading Indicator

The following was written by Peter G. Hall, Vice-President and Chief Economist, Export Development Canada.

'Up' has crept back into US economy-talk in recent days. A quick rally in equity markets, modest commodity-price gains and what seems like a bottoming-out of certain key US economic signals have together fuelled hopes of impending rebound. But what are the leading indicators saying?

Among the deluge of monthly, weekly and daily economic data that are available, a select few are known as leading indicators – reliable predictors of the near-term direction of the economy. For ease of analysis, many countries have compiled their leading indicators into single composite indexes. Given the US economy’s leading role in the current economic downturn, many are watching its composite leading indicator closely for early signs of a broad global recovery.

Recent movements of the composite indicator are not comforting. It has trended downward since mid-2007, half a year ahead of the onset of recession. During that time, it has flattened out briefly on three occasions, the latest period being from last November through January. The indicator fell again in February. Does the recent up-tick in certain elements bode well for March results?

The US leading indicator has 10 components: interest rate spreads, money supply, the stock market, manufacturing sales, hours and orders for consumer and non-defense capital goods, housing permits, unemployment claims and consumer expectations. Recent data are moving in different directions; some are up, others are neutral, while others maintain a downward trajectory.

Among those that are up, the stock market is perhaps the most visible. The 24% climb in the S&P 500 since March 9 has created a lot of excitement, a rally that is now into its sixth week. The jump in the index will have a strong positive effect on the leading indicator – however, in terms of overall significance to the index, stock market movements are middle-of-the-pack. Other elements are up, but much more modestly. Spreads between long- and short-term interest rates have increased, but at a much slower pace than during 2008. Money supply growth is up by an annualized 4% on average in the past two months, but compared with last year’s explosive 27% pace, things are a lot slower now. For both consumer expectations and orders for non-defense capital goods, small recent gains are still far from reversing the prior month’s contractions. For the most part, the positive indicators are only moderate reversals from exceptional lows.

Sadly, there are as many decliners as gainers among the leading indicators. Average weekly hours in manufacturing fell for the eighth successive month in March, with no sign of a slackening in the pace of decline. New orders for manufactured consumer goods resumed a protracted decline following a one-month reprieve. These two elements rank third and fourth in order of importance, so their declines carry a lot of weight. New unemployment claims, a less weighty indicator, continued to hit new highs in March, adding further drag to the overall index. Of the remaining elements, manufacturing sales fell in March while new building permits were flat.

The bottom line? Certain key US indicators have jumped, and others may be hitting bottom. In both cases, it is still too early to celebrate. The rest are still declining steadily, with no clear sign of a let-up. As such, on balance the leading indicator still foreshadows a slow six months ahead.