Hennion & Walsh Trending

Recent economic indicators seem to be suggesting that any potential momentum that may have been mounting with respect to the U.S. economic recovery may be coming to a halt, or, at a minimum, slowing down.  According to The Associated Press in a May 19, 2011 article entitled, “Ahead of the Bell: Leading indicators seen rising”, Economists believe that The Conference Board’s index of leading economic indicators likely increased by 0.1% in April of 2011*. While this would mark the 10^th straight monthly gain in this data point, it would also represent the slowest increase rate since August of 2010.   Economic indicators included in The Conference Board’s index including the following ten components according to The Conference Board’s website @ www.conference-board.org:

1. Average weekly hours, manufacturing
2. Average weekly initial claims for unemployment insurance
3. Manufacturers’ new orders, consumer goods and materials
4. Index of supplier deliveries – vendor performance
5. Manufacturers’ new orders, nondefense capital goods
6. Building permits, new private housing units
7. Stock prices, 500 common stocks
8. Money supply, M2
9. Interest rate spread, 10-year Treasury bonds less federal funds
10. Index of consumer expectations

Leading economic indicators, in general, can be an important tool for economists and investors as they are designed to help predict economic activity three to nine months in the future.

A further look into some of the more notable economic indicators (some of which are not included in the Conference Board’s index of leading economic indicators) reveals certain areas that are helping the economic recovery and other areas that are serving as a headwind to future economic growth.  Some indicators, which we generally follow at Hennion & Walsh, to back up this assertion are as follows:

Summary of Economic Indicators – Year/Year Change (Unless Otherwise Noted)

Source: Bespoke Investment Group, Bespoke Economic Indicators, 5/19/11

Economic indicator trends that currently concern us based upon the data provided in the table above, in terms of the headwinds that they present to economic recovery efforts, are in areas such as Housing, Employment, Inflation and GDP growth.

1. Housing – this represents one of the larger potential headwinds from our analysis.  Not only have existing home sales trended downward on a year-over-year basis over the last three months but pending home sales (often viewed as a leading indicator within the real estate market) have experienced negative year-over-year readings for eleven of the past twelve months.
2. Employment – while the widely reported U-3 unemployment rate has essentially moderated, recent upticks in jobless claims pose a concern to us as the confidence and spending ability of those currently employed is critical to economic growth.   If people become concerned with their own future job prospects, their willingness to spend, in our opinion, will likely diminish.
3. Inflation – we keep hearing from the Federal Reserve that inflation is not a concern to them at this stage as they remain more concerned on economic stimulus.  However, a review of the data shows that CPI and Core CPI (which strips out often volatile food and energy prices) have been trending higher over the last six months.
4. GDP Growth – both nominal and real (i.e. including the impact of inflation) GDP have trended lower over the last six months on a year-over-year basis which suggests that either the recovery was either significantly impacted by recent events such as the earthquake in Japan and the unrest in the Northern Africa and the Middle East, is taking a pause or, perhaps, is starting to slow down as the Private Sector shows that it is not ready to take the “stimulus baton” effectively from the Public Sector just yet.

Offsetting these areas of concern, however, are positive trends in areas such as personal income, personal spending and corporate earnings – for the most part.  Please see our previous post on May 17, 2011 entitled, “Earnings Season Report Card – 1^st Quarter 2011” for more details, and our perspective, on 1^st quarter corporate earnings.

In our view, if the recent rise in commodity prices abates and the employment front begins to firm-up again, consumers should feel comfortable continuing to spend their increasing incomes and corporate earnings should continue to be favorable.   On the other hand, if these two areas do not improve, in addition to ongoing difficulties in the housing market, we could be in store for a long and drawn-out economic recovery.

*UPDATE:   As of the publishing of this post, The Conference Board reported on May 20, 2011 that its index of leading economic indicators fell 0.3% in contrast to the 0.1% increase the economists were forecasting.