The last few weeks have been very scary. For people like me who watch the economy and the markets on a daily basis, the drops have been deeply concerning and unsettling.
At times like this, it’s important to take a deep breath, slow down, and look at the data. I categorize economic numbers into long-leading, leading, and coincidental indicators — a system based on the work of Arthur Burns and Geoffrey Moore. The good news is that most indicators — save financial market numbers — are still positive. The bad news is that most of these numbers are pre-virus, which means we could see big changes to the data as new reports come in.
Let’s start with the bad news. Less-than-investment-grade bond yields are rising.
Junk bond yields are rising sharply. However, they are still far below the peaks hit during the oil market collapse of 2015-2-16.
BBB yields are also rising. But they are still low relatively speaking.
And then there’s the stock market — which is a leading indicator:
Sorry about that. But, yes, that’s an ugly picture.
However, the data so far is solid.
Building permits are high
Here’s the best news: the housing market is in great shape. Permits for 1-unit structures (left) hit an expansion high in the latest report; the Y/Y percentage change (right) is at a 5-year high.
Unemployment claims are low
The 4-week moving average of initial unemployment claims is still very low.
Durable orders are trending sideways
Orders for consumer durables (left) and business equipment (right) are trending sideways and have been for almost two years. The US-China trade war is the main reason.
There is no sign of weakness in the coincidental numbers. In fact, last week’s employment report was very strong, especially for an economy that is in its 11th year or expansion.
Does that mean things are OK? No. There’s been an unprecedented amount of shut-down activity over the last few weeks: shool systems are closing; broadway is shut-down; conferences are being canceled; big events (sports, concerts and the like) are being postponed. Think of this like slamming on the brakes of a car going 50 MPH. The question is this: “does the slamming on the brakes cause a complete stop or a mere slowdown?” We don’t know. What we do know is that the slowdown hasn’t shown up in the hard data yet.
So — what should we look for?
Here’s my list of must-watch indicators:
1.) Retail sales: here look for hard data (issued by the census) and soft data (reports from companies). This will give us a good window into consumer activity. This is really the key data to watch since consumer spending accounts for 70% of US economic activity.
2.) Consumer sentiment: sentiment leads activity. If people start feeling more cautious, they’ll act accordingly.
3.) ISM manufacturing and service data: we just got the latest batch, so we’ll have to wait until early April. However, Markit Economics releases its series a little earlier. I prefer the ISM reports, but right now any data is good.
4.) The financial markets are a good barometer of investor sentiment.
Consider the following two points.
1.) Some very smart and capable economists are saying we’re already in a recession. It’s possible due to the breadth of actions meant to slow activity.
2.) China is already working to restart its economy. That means it shut down the economy for about 1.5-2 months. Assuming a similar timetable for the US, that means the 1H20 will be terrible but a modest rebound in 2H20 is a decent possibility.
So, please do what you can to keep a cool head during this stressful time. Here is my favorite de-stress activity.
Spending time with my pups.
Lita, the world’s greatest pitbull
Mumph, who is also the world’s greatest pitbull
