The theme this week is “why I don’t think a recession is looming.” 

I seldom talk to a client these days who isn’t worried about the state of the economy and their investment portfolio. Despite double digit returns in the stock and bond markets in the first 3 quarters of 2019, investors out there are just downright scared. 

So we gotta tackle this head on and talk about what is going on in the world right now - what’s driving the economy and the stock market, and take an honest look at where we might go from here. 

Today, I’m covering 2 important leading economic indicators to watch. Keeping a pulse on the leading indicators can be helpful for understanding when we’re getting close to the edge, and when the economy might fall over the edge into the next recession. 

Focusing on leading indicators is important because these types of indicators are more reliable for signalling an approaching recession, compared to a lagging indicator which might point to a recession, but because it’s lagging it may not signal a recession until we’re several months into one, making it a poor forecaster. So we want to focus on leading indicators. 

 

There are plenty of leading economic indicators to follow, but today I’m sharing with you 2 indicators that I follow closely. They are also relatively easy to understand - you don’t have to be a professional investor or an economist to track these.

Leading indicator #1 - Housing starts. I like this one because it’s well-followed, and housing starts data is released monthly, along with building permits. Builders don’t start building homes unless they’re confident that the house will sell quickly. Based on the data from August 2019, housing starts reached their highest level in over 12 years - 1.36 million. On the other hand, an extended drop in housing starts has been a reliable predictor of a recession since the 1960s, so this is an important one to pay attention to.

Leading indicator #2 - Consumer Sentiment Index. The University of Michigan publishes a consumer sentiment index each month. It gauges how the average person is feeling about the future. Consumer activity represents the vast majority of our GDP, and when the consumer feels good about the future, they tend to spend, borrow, and generally continue to drive the economy higher. Readings above 90 are considered very positive for the economy, while readings below 70 signal the consumer is nervous and is bad news for the economy. The September 2019 reading came in at 92. 

The takeaway here is that if you’re concerned about the direction of the economy and where we currently are in the economic cycle, pay closer attention to leading economic indicators, like these 2, and focus less on the crisis de jour. 

Thanks for listening. My name is Ashley Micciche and this is the One Minute Retirement Tip. 

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