3 Data Points That Show We Are Still Expanding

Wednesday, June 26, 2019 |

Let’s start with the bad:

  • The Fed is likely to cut rates with a weaker economy (actually this might be good as rate cuts are usually bullish for stocks)
  • Trade wars with China are still not resolved
  • A portion of the yield curve has inverted (typically this leads a recession)
  • There is tension in the Middle East
  • The market has rocketed up this year with little resistance, so we likely are due for a pullback (note: I have no opinion on this one way or the other, just reflecting some possible sentiment)
  • I am sure there are a host of other reasons not listed that could stop our expansion in its tracks


Despite all that, here are 3 usually reliable economic indicators that show we are still in our expansion.


1 – Industrial Production. In each of the last 5 recessions the year over year change in Industrial Production went below 0 before a recession happened. While growth has slowed, we still aren’t very close to that trigger point. This has typically been a coincident data point.
 

Source: Fred


2 – Initial Jobless Claims. In each of the last 5 recessions Initial Jobless Claims have climbed above 15% from the prior year before or right around the start of a recession. We aren’t anywhere near that number today.
 

Source: Fred


3 – 2 Year 10 Year Yield Curve. While the 3 Month 10 Year Yield Curve has inverted (i.e. the 3 Month yield is higher than the 10 Year yield), the same is not true for the 2 Year 10 Year. An inversion in the curve has led each of the last 5 recessions. While the spread has come down substantially, we still aren’t in the warning zone.
 

Source: Fred


None of this means stocks can’t fall; however, historically since WWII we haven’t had a substantial (more than a 25% drop) and sustained bear market (more than 2 year recovery) in the absence of a recession and the data will likely help guide us when reach that point.
 


The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. Past performance is not indicative of future results. Investors cannot invest directly in an index. Investing involves risk, including the loss of principal.

The Federal Reserve System (also known informally as the Fed) is the central banking system of the United States and controls the Federal Funds Rate (aka Fed Rate), an important benchmark in financial markets used to influence the supply of money in the U.S. economy.

A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP); although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.

U.S. Employment and Training Administration, 4-Week Moving Average of Initial Claims [IC4WSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/IC4WSA, June 24, 2019.

The Industrial Production Index (INDPRO) is an economic indicator that measures real output for all facilities located in the United States manufacturing, mining, and electric, and gas utilities (excluding those in U.S. territories).

2 Year 10 Year: Series is calculated as the spread between 10-Year Treasury Constant Maturity (BC_10YEAR) and 2-Year Treasury Constant Maturity (BC_2YEAR).

 

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