Breadth is perhaps my favorite analytical tool for measuring both financial market and economic health. Breadth is a great measure of underlining strength that can help identify shifts in trends before they become apparent. When the major market indexes were hitting new 52-week highs in October 2007 fewer and fewer individual stocks were hitting new highs and many were already in their own private bear markets. In the same vein, while the U.S. economy didn’t officially slip into a recession until December 2007 many individual states within the nation had already slipped into recession months previous.
This underscores the importance of not focusing solely on headline numbers like where the S&P 500 is trading or what the national GDP rate is. For a constant measurement of the stock market’s breadth I track the data each week in my Friday’s “Market’s Bill of Health” report. For gauging the country’s economic breadth I rely on the Philadelphia Fed’s state leading and coincident indexes. This week the Philly Fed just released its State Leading Index for November which showed that 49 out of the 50 states are expected to see their coincident indexes grow over the next six months.
With 98% of states expected to show growth over the next six months, the risk of a coming recession remains remote. Just look at the sea of green on the Philly Fed’s State Leading Index map below, where only Alaska is expected to show contracting economic activity over the next six months. Of note, back in December of 2007 when the U.S. economy first slipped into a recession only 32 states were expected to show economic growth in the first half of 2008, as more than one third of the country was already in a recession. Clearly the present backdrop is bullish and does not offer any impending doom to the current economic expansion.
Source: Federal Reserve Bank of Philadelphia
Before the alarm bells begin to ring for the U.S. economy we will need to see more and more states move from expansion to contraction and the nation’s overall economic growth rate needs to approach negative territory. The Philly Fed constructs a national leading index (see chart below) based on the individual state data where dips below zero provide an early warning of a coming recession. At a reading of 1.52 for November we currently stand near the upper end of the range over the last decade and will need to see far more deterioration before worrying about the economic outlook.
Source: Bloomberg
Confirming the message of the Philly Fed’s state leading data is our own recession probability model, which shows only a 2% chance the U.S. is in or near a recession as the economy continues to expand. If I see the probability jump north of our 20% threshold (see below), then I will begin to urge caution on the economy’s outlook. Until then I must respect the data and remain firmly bullish.
Source: Bloomberg
