Leading indicators are the economist's best friend, but we are dealing with equity markets that really aren't concerned with economics. It's all sentiment, all the time, but I feel the need to avoid the herd and analyze things. So, today's release of the Conference Board's monthly index of leading economic indicators is a good place to start.
As a nod to reality, though, I have to point out that the Conference Board's LEI hit its apex for the prior economic cycle in February 2020 at 111.8. Oops! That is more evidence that Covid-19 and its economic effects are like nothing ever seen before. The LEI perfectly called the 2001 and 2008 recessions, though, and, more importantly, called the move out of those recessions back into economic expansion.
So, analyzing each of the 10 components of the LEI should give us an idea of when things will get back to normal in the U.S. economy. One of the indicators is the S&P 500. I will omit that one since we all look at that all day every day. The other nine range from slightly obscure to almost unknown, though, and they paint a picture of an economy that, as of May, was still deeply in a recession that was NOT indicated by the Fed-addled action of the S&P 500 since it bottomed on March 23rd.
The most important takeaways are not that things improved slightly from April to May (again, the stock market already told us that), but that the key indicators are light years away from their recent peaks. That indicates that it will be a long slog toward normalcy, and that certainly informs my bond-heavy portfolio construction of late.
Here are the indicators:
Average workweek, production workers, mfg
39.4 vs. 38.5 in April and 41.6 in February.
This is the single-most important indicator of the health of the blue-collar worker. Various government programs have put $1,200 in stimulus and, in many cases, $600 per week in unemployment assistance in those workers' pockets, but that figure indicates those payments will have to continue, as manufacturers are still running well below capacity.
Average weekly initial claims, state unemployment insurance
2,288 vs. 4,180 in April and 214,000 in February.
Of course this index is improving from its all-time lows, but as seen in this morning's unemployment report from the Bureau of Labor Statistics, it is a very slow pace, and one that does not indicate a v-shaped recovery.
Manufacturers' new orders, consumer goods and materials
111,347 versus 110,554 in April and 135,981 in February.
A critical but often overlooked indicator. Order trends remain weak. This is such an important indicator that the next LEI factor is a very similar one.
ISM New Orders Index
31.8 vs. 27.1 in April and 49.8 in February
Similar to the prior indicator, the ISM figure shows absolutely no evidence of a return to economic normalcy in the U.S.
Manufacturers' new orders, non-defense capital goods excl. aircraft (mil. 1982 dol.)
35,669 vs. 34,475 in April and 37,249 in February
This indicator is slightly less negative than the two new orders factors, but still shows the size of the hole in industrial America. It is not small.
Building permits (thous.)
1,220 vs. 1,066 in April and 1,438 in February
The issue here is the strong seasonality in this factor owing to weather in the Northern states. Missing the spring building season was huge. That doesn't mean that 2020 will be a total write-off for builders, but that challenges will reappear as we enter the fall and winter.
Leading Credit Index™ (std. dev.1 )*
0.94 vs. 1.33 in April and -0.97 in February
This is the only LEI indicator that actually forecast the recession, as it was negative from November to February. It's positive now, thanks to the Fed. Powell and Co. move stocks, but bank lending officers move the economy, so this is an indicator that I will be closely monitoring through the summer.
Interest rate spread, 10-year Treasury bonds less federal funds
0.62 vs. 0.61 in April and -0.08 in February
It is true mathematically that the spread has widened since the Fed took its Fed Funds rate to an effective 0.0%. That said, I don't see any evidence in the bond futures markets that appetite for risk has returned. So, this one is slightly misleading. I forecast a renewed tightening, not widening, of spreads as we move throughout the summer.
Avg. Consumer Expectations for Business Conditions (std. dev.1 )
-0.60 vs. -0.83 in April and 0.94 in February
This is an ugly number; no way to spin it positively.
So, the final summation is an index that sits at 99.8 (2016 = 100) versus 97.1 in April and 111.8 in February. The bottom line is that LEI is painting a bearish picture on the Covid-19 recovery. Do not ignore it.