At least that’s what the latest update from The Conference Board says. Released last week, the figures for June suggest that not only is the US economy improving, but it will continue to do so.
The Conference Board’s Leading Economic Index (LEI) has a strong history of accurately predicting periods of weakness in the economy (see chart below). It accomplishes this by aggregating 10 leading indicators that generally turn first when an economic slowdown is approaching.
Last month, the LEI rose by 0.6%. Of the 10 indicators that comprise the index, 6 contributed positively, 3 were relatively unchanged, and 1 declined.
The factors contributing most to the rise were the interest rate spread, building permits, and consumer expectations for business conditions. Interestingly, stocks, as measured by the S&P 500, were the only component of the index to fall.
I’ve pointed this out many times, but make sure to notice in the chart above how the LEI reliably turns down well ahead of economic recessions. Even at the point when the LEI does capitulate and begin heading lower, the approaching recession is typically six-months to a year away, giving us ample time to exit the market.
According to Bloomberg, year-over-year changes in the LEI show a very strong correlation with US GDP growth. Over the last 10 years, this correlation has been 89 percent. With the LEI up over 5 percent from year-ago levels, it’s another indication that the economy is growing steadily.
It’s not all roses, however. As The Conference Board points out, the six-month growth rate of the LEI has slowed when compared to its previous six-month growth rate. This may simply be the result of the cyclical winter slowdown, but either way we should proceed cautiously. While we are still in a growth environment, the rate of expansion may be slowing.
Of worthy mention, and another signal that conditions are improving, not deteriorating, jobless claims this week hit the lowest level in 40 years. The chart below highlights this aspect of the still-improving labor market.
Jobless claims are one of the 10 components of the LEI, and for good reason. This data point has a strong history of predicting economic trouble all by itself. When businesses begin to see slowdowns ahead, one of the first things they do is reduce headcount. Those folks ultimately show up in the jobless claims figures and indicate something is awry.
At the moment the trend is still very positive here, and while the most recent dip may be somewhat seasonal in nature, it clearly shows that employers are retaining workers. This, combined with continued job creation, will help bolster consumer spending in the near term.
Housing has been showing signs of strength as well. Perhaps some of that money that consumers have garnered from improving labor conditions and saved from lower oil prices is filtering its way into real estate.
Home prices, according to the FHFA home price index, rose 0.4% in May, and existing home sales reached the fastest pace since the recovery started (chart below).
It’s likely that this momentum will carry forward into the end of the year, as labor conditions continue to improve and interest rates remain favorable.
The strength here is validated by rental demand, which is exceptionally strong as well. The rental vacancy rate has been falling and is nearing multi-decade lows.
This suggest that new home construction has not been keeping up with demand, even though the pace of construction has been rising steadily since early 2009.
Construction on multi-unit complexes is at the highest level in 28 years, and housing starts, as of last month, are just shy of a post-recession high, and still in a strong uptrend.
Overall, many key components of the US economy remain healthy. Unfortunately, that’s not all that investors care about. With potentially troubling developments across a number of key trading partners, corporate earnings are following a different trajectory than US economic growth.
S&P 500 earnings are still on pace for a quarterly decline, and commentary from conference calls is indicating weak demand overseas.
China in particular is front and center, as many international companies with exposure there are reporting lackluster results. Whirlpool, United Technologies, IBM, Microsoft, and VMware are just a few of the companies who have reported declining revenues in China.
Apple is the notable exception, showing strong sales growth in China, but then again, who doesn’t want an iPhone?
Adding to the downbeat mood, a preliminary reading on Chinese manufacturing today came in at 48.2, pointing towards continued contraction in factory output.
If there is any good news here, it’s that from the US’s perspective, demand from China only accounts for about 1% of GDP (estimate from Goldman Sachs). From that angle, it would seem that the promising domestic economic developments outlined above should be able to keep the US economy moving forward.
As earnings season drags on, we’ll get a better read on how companies with primarily domestic exposure are performing. That will give us more insight into the health and status of the American consumer.
The preceding content was an excerpt from Richard Russell's Dow Theory Letters. To receive their daily updates and research, click here to subscribe.
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