Now that we have a good set of top economic reads on the state of the economy and a list of the top 6 individual economic indicators, we can tackle using these indicators to get a gauge on where we are in the economic cycle. In this post we’ll present a simple heat map of the top 6 economic indicators, look at what the heat map looked like in previous recessionary periods, and finally compare it to what the heat map is saying today. This will become a regular monthly post, published on or just after the third Friday of every month. Let’s jump right in.
To develop a simple heat map on the state of the economy we can use the top 6 economic indicators. Based on the recessionary triggers for each indicator we can classify each indicator as either green (not near a recessionary trigger), yellow (warning, getting close to a recessionary trigger but not there yet), and red (indicator signaling a recession warning). For example, for the industrial production of durable consumer goods we use the year over year % change. A warning trigger is issued with a year over year change of less than 1%, and a recession trigger occurs with a year over year change of less than -2.3%. We do a similar exercise for each of the top 6 indicators. The triggers for the indicators can be set using fancy mathematics. We chose to do it qualitatively balancing crying wolf (a false trigger) and signaling the start of the recession. Ultimately, before any action is taken we use the SPY and it’s 200 day moving average as the confirming signal since what we are ultimately interested is the market reaction to a recessionary signal. This the same methodology I posted about in the SPY-UI series of posts.
Then we develop a composite score based on the status of each indicator. The composite score is then assigned thresholds for green, yellow, and red triggers. Again we chose a simple approach to the composite scores. We’ll show you how the pros do it in an upcoming post on the heat maps of the composite indicators. OK. Now, let’s take a look at some historical data. The table below shows the top 6 indicator heat map for the 1973 to 1981 period which contained three recessions. The official start of the recessions are the months highlighted in red.
Several of the indicators where flashing red before each recessionary period. Now lets look at the next three recessions. The period below is 1990 through 2008.
Similar story. Several of the indicators were flashing red before each recessionary period. Even though each of these recessions was a bit different in nature overall the economic indicators were a decent tell of upcoming probable weakness.
Now we can look at where we are today. Below is the heat map of the top 6 economic indicators as of Friday, February 17th (which reflects economic data through the end of January).
All 6 indicators are green, no recessionary signal, nor any warning signal. A brief update on the status of each of the indicators.
- Unemployment rate: recent data points are stable. Has stopped dropping rapidly but has shown no signs if turing up.
- Real retail and food sales: latest reading is a year over year growth rate of 2.9%. not blowing out the doors but stable.
- Industrial production: durable consumer goods: recent reading of 2.7% year over year growth. Weaker than the previous 2 months but trend is still stable.
- Permits: this is a noisy indicator so we use the 3 month moving average of the year over year change. Latest reading is still positive at 1.6%, up from the previous month which is positive considering the concern over rising interest rates.
- Leverage: this is a great financial stress indicator and is quite strong at -0.83 with an improving trend. No real signs of an economy in financial stress.
- Yield curve: end of January reading of 192 basis points. No where near yield curve inversion.
That’s it for an introduction to the heat map of the top 6 economic indicator and what they are telling us about the economy today. In my next post I’ll introduce the heat maps for the composite economic indicators that we track.
Full Disclaimer - Nothing on this site should ever be considered advice, research or the invitation to buy or sell securities. These are my personal opinions only.