It would be wonderful, if we could take a sneak peek and get a clear picture of the future, wouldn’t it?!?
While no one has a crystal ball, we can actually use certain data points to gain a glimpse into possible future trends by studying the leading economic indicators (LEIs).
While knowing the micro factors – your specific investment/deal and market is important, understanding the global and macro trends is equally essential, as such exogenous trends and events could (and often do) impact investment performance and asset valuation.
Economic indicators like unemployment, inflation, or GDP that you often read about in the press are considered lagging in nature, i.e. show the end result of an event or report events that have already occurred.
In contrast, LEIs describe data points that are indicative of forthcoming trends and events. While the list of the ones I like to follow is rather long, in today’s quick snippet I will share a few.
I like to describe those LEIs as falling into three main categories – consumers/individual, business, and other.
Consumer/Individual
Consumer credit and consumer debt delinquency rate: signifies higher reliance on debt to fund daily expenses and therefore an indicator of potential strain. It can impact future ability of tenants to pay rent on a timely basis (or afford renting or owning housing altogether). Per Trading Economics, the latest reading data as of 7-2024 of 2.73% represents a 10 year all-time high.
Personal savings rate: indicator of saving ability and additional cushion consumers can fall back on during a period of stress. A lower savings rate would indicate consumer strain and higher propensity to rely on credit/go into debt, which is an early indicator of consumer stress. Per Trading Economics and US Bureau of Economic Analysis, as of 11-2024 the savings rate was 4.4% (which is a 10-yr low).
Consumer sentiment: measured by the University of Michigan (U of M) and indicates consumers’ propensity to spend (e.g. holiday sales). A higher number is indicative of optimism and therefore higher spending, which boost the economy. A lower reading indicates concerns about the macro conditions and that consumer are tightening the purse. Historically US consumer confidence has averaged 85 points. Per Trading Economics and U of M as of 12-2024 it stood at 74.
Business
Business Bankruptcy Filings: early indicator of business distress that can later translate into lay-offs and less capital and consumer spending. Per the US Courts and Trading Economics, business bankruptcy Filings in the United States increased by 33.5% to 22,762 during the 12-month period ending 9-30-2024.
Purchasing Managers’ Index (PMI): reflects the current health and direction of the manufacturing and services sectors by surveying purchasing managers from various companies about their business conditions, including production, employment, and new orders. A reading above 50 indicates expansion, while below 50 signifies contraction in the economy. Per S&P Global and Trading Economics, the latest PMI was 56.8 in 12-2024.
Initial jobless claims: refers to the number of people who filed for unemployment benefits for the first time in a given week, essentially representing a measure of newly unemployed individuals. A reading above 250K on a consistent basis is a reason for concern. Increase in such claims would suggest high likelihood of increase in unemployment. Per the US Department of Labor and Trading Economics, initial jobless claims in the US declined by 9,000 from the previous week to 211,000 in the last week of 2024 (vs. expected increase to 222,000), to mark the lowest amount of initial claims in eight months.
Other
Sahm rule: The Sahm rule states that a recession is beginning when the three-month moving average of the national unemployment rate increases by 0.5 percentage points or more from its lowest point in the previous 12 months. As a reference point, most recently this rule was triggered in 7-2024.
Yield curve inversion: refers to a situation when the short term rates (3-mo treasury) are higher than the long term rates (10-yr treasury). The inversion would not state when exactly a recession would occur but it has missed (been wrong) only once in the last 60 years. Essentially the lower long term rates reflect expectations of an economic slowdown, during which the Fed would usually lower rates in order to stimulate the economy. As a reference, the yield curve inverted at the end of 2022 and most recently un-inverted in 12-2024.
LEI index: a composite economic indicator published by The Conference Board that aims to predict future economic activity by combining ten key economic variables. When the LEI rises, it suggests an economic activity expansion is forthcoming. Conversely, a decrease in the LEI predicts a contraction or slowing of the economy. The US LEI rose in 11-2024 for the first time since 2-2022.
The Beige Book: qualitative review of economic conditions by Fed District published eight times per year by the Federal Reserve.
If you’d like to do a deeper dive on the leading and lagging indicators, sites like The St Louis Fed and Trading Economics are great ones to reference.
Of course not all data is perfect and as usual, it is best to avoid evaluating each factor in isolation and instead take into context current micro, macro, and global events and liquidity.
I hope you can add some of these tools to your crystal ball tool chest, so you can spot trends earlier on, better plan ahead and position accordingly.
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Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.