posted on 08.28.14

We are in a period where the economy is on a gently rising path with mild ups and downs as we continue to climb out of the Great Recession. When the business cycles are low amplitude, as expected over the next few years, individual growth curves can be affected more easily by other factors such as the severe winter weather in the first quarter and “mirror images” of unusually strong or weak quarters. As a result, not all yr/yr curves will follow the exact same path and there may be some variation in the timing of the turning points. One key to cyclical forecasting is to find good leading indicators. The best long-term indicators are interest rates, leading by up to two years. Unfortunately, rates are currently being heavily manipulated and are not reliable predictors.

Two indicators that lead by a year are the CEWI-M and Yield Spread. For now the CEWI is questionable because of its reliance on interest rates, but Yield Spread has been looking reasonable for the last three years. For short term, The Purchasing Managers Index is one of the best, leading by two quarters. The ratio of durable goods orders/inventory is also reliable but currently leads by only one quarter. The Chemical Activity Barometer published by the American Chemistry Council also leads by a quarter; the Cass Freight Index leads by perhaps a month. Another interesting indicator that leads by a year is found in the “Fred” economic data available from the St. Louis Fed.

The plot below shows the Leading Index for the United States percent change from a year ago. It is a composite index which includes such measures as housing permits, unemployment insurance claims, yield spread, and Institute for Supply Management delivery times. Monthly ups and downs do not appear to correspond closely with Industrial Production, but the indicator certainly gave advance notice of the recession.

To see the full 4-page report with supporting graphs, log in to the MTI Members Only Area and click on DeWolf’s Economic Report in the featured resources box.