Last week, the Dow stumbled after President Trump unexpectedly revealed that he was comfortable waiting until 2020 to negotiate a trade deal with Beijing, but immediately picked back up on strong payrolls figures.
While the impressive payrolls data couldn’t be refuted, it’s important to keep in mind that it serves as a lagging indicator. In other words, it tells investors where the economy has been. Predicting where it’s going is much harder.
No one can say with certainty whether the economy will keep ticking over in 2020, but that hasn’t stopped economists from trying. There are several leading indicators that serve as a gauge for future economic growth, and right now many of them look very rosy.
Here’s a look at five indicators that suggest 2020 will be a prosperous year for the U.S. economy.
Jim Paulsen, chief investment strategist at the Leuthold Group says he’s developed a leading indicator that measures corporate confidence. Paulsen’s indicator, dubbed the WS ratio, is the U.S. wage rate divided by the S&P 500. The ratio has risen in the lead up to every recession since the 1950s.
If the stock market is rising faster than the cost of labor, companies will continue to hire with confidence. If the opposite is true, investors can expect to see hiring slow. What makes the WS ratio unique is that it changes daily due to movements in the market, making it a more accurate way to predict the future than simply following jobless claims.
With the stock market trading near all-time highs, the WS ratio is near all-time lows, a good sign for the future.
Investors are quick to parse every word spoken by Federal Reserve officials, especially following rate decisions. But the bank also offers its own economic predictors that are worth watching.
Perhaps the most closely watched is the NY Fed’s Probability of U.S. Recession indicator, which uses the Treasury spread to determine the likelihood of an impending recession. In November, that figure dropped to 24.6%. The NY Fed’s indicator has jumped above 30% before every recession since the 1960s. The indicator briefly exceeded 30% this summer, but its decline is a promising sign.
The Atlanta Fed also publishes a useful indicator that predicts real quarterly GDP growth. The estimate comes from forecasts of 13 GDP components and is used by the Fed during policy meetings as a gauge of what’s ahead.
That model indicates expansion ahead, with GDP growth expected to hit 2% in the fourth quarter.
The housing market is another way investors can take the pulse of the U.S. economy, but again much of the data is often backward-looking. Some housing data, like building permits, are forward-looking and make for a useful tool to predict economic growth. Building permits are typically issued a few months after a buyer signs their new home sale contract. That gives investors a 6-9 month forecast of new home construction.
Again, this indicator looks promising for economic growth. Currently, U.S. building permits total 1.461 million, marking both a monthly and annual increase.
Another forward-looking indicator suggesting the economy is in good shape is durable goods orders. These data show whether businesses are making expensive purchases like machinery and commercial jets. If the economy is slowing, or business leaders believe it will, they will tighten their purse strings and put-off big purchases.
For now, it looks like U.S. businesses are still shelling out for new equipment. In October, durable goods orders were up 0.6% to $248.7 billion. That’s the fourth increase over the past five months, suggesting spending in corporate America is alive and well.
The bare-bones of economic growth come down to consumers. If people are willing to spend money, the economy does well. That’s why consumer sentiment serves as a good leading indicator—if people are confident that they won’t lose their jobs and the economy will stay afloat, they’ll spend money.
Preliminary results from the University of Michigan’s Consumer Sentiment index looks promising for the economy with the figure rising to 99.2 from 96.8 in November, a 2.5% increase.
Last modified: June 23, 2020 2:33 PM UTC