“You can use all the quantitative data you can get, but you still have to distrust it and use your own intelligence and judgment.” – Alvin Toffler
There are plenty of economic indicators quoted by the media, but many lag or are coincident to the business cycle. Let’s review a few leading indicators to gauge where the cycle is going.
One of Warren Buffett’s favorite old time indicators was counting the train cars to gauge the change in the overall economy. The latest data shows another increase from 2011, though at a slower pace. As seen below, intermodal traffic was persistently negative in 2007, much before the previous recession began.
The next chart is of real retail and food services sales adjusted for the U.S. population. If economic contraction looms, after cutting back on big purchases like cars and other durables, people next stop going out for dinner and buying discretionary items. The uptrend remains strong through last month, and similar to the middle of prior expansions, albeit at lower overall levels.
Source: St. Louis Fed
The grey vertical lines indicate the months of official recession. Sales seem to flatten out for about a year prior to going steeply negative during recessions.
Next up is the number of temporary hires. Businesses typically increase temporary help during healthy economic times and stop hiring prior to recessions. The trend remains up for this data series.
Source: St. Louis Fed
Capital markets, of course, do not track economic conditions exactly, even during expansions. It is all about expectations. The Citigroup Economic Surprise Index measures the extent to which data meets or falls short of expectations across global data releases. After consistently seeing surprises over nearly the past six months (and an accompanying equity market rally), surprises may go negative as economists ratcheted up estimates.
The big issue on the horizon is the cuts to the budget deficit looming in 2013. A study from the Brookings Panel on Economic Activity presented this week in Washington D.C. validates the concern. It found when interest rates are held at 0%, fiscal stimulus is effective. Contracting fiscal stimulus has a significantly negative impact on real GDP over subsequent years, as the chart below shows.[i]
To sum up, leading economic data looks good right now, though expectations are on the rise. One concern of ours is the ‘fiscal cliff’ that looms in 2013 as tax hikes and spending cuts form a vicious one-two punch for the economy. Fortunately, there is still time for policy makers to change this path, though confidence in politicians remains quite low.
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