Cardan Capital Partners examines in a monthly series different indicators we believe are relevant to the current environment. Indicators can inform our understanding of the economy and investment strategy. For example, economic indicators can help explain the stage of a particular economic cycle, market indicators can help explain how the market is behaving, and sentiment indicators can shed light on how investors are feeling.
In the United States, consumers are the primary drivers of the economy with consumer spending making up about two-thirds of overall U.S. GDP. Manufacturing in turn makes up only 10%-15% of U.S. GDP. It has now been in contraction for four consecutive months as seen by the ISM Manufacturing Index in the chart below.
Data sourced from Bloomberg LP.
A reading of more than 50 indicates expansion of the manufacturing segment of the economy in comparison with the previous month. A reading of 50 indicates no change. A reading below 50 suggests a contraction of the manufacturing sector. With manufacturing suffering, the growth of the economy has been squarely on the shoulders of the U.S. consumer. Two large drivers of consumer behavior are employment and housing.
Employment Trends Index
The Conference Board’s Employment Trends Index is an aggregate of eight labor-market indicators that shows underlying trends in employment conditions. The chart below shows the index against its 12-month moving average. When the index moves below its moving average, this can signal a weakening in employment momentum. In the latest reading, October 2019, the index fell slightly below its moving average. This is something worth keeping an eye on. If employment begins to weaken, this can manifest itself via lower consumer spending, which in turn slows the economy.
Data sourced from Bloomberg LP.
Housing Starts
Data released by the U.S. Census Bureau, housing (or building) starts track the number of new housing units (or buildings) that have been started during the reference period. As explained by Investopedia, ”Housing is a key part of the U.S. economy, which has an effect on related industries, such as banking, the mortgage sector, raw materials, employment, construction, manufacturing, and real estate. In a strong economy, people are more likely to purchase new homes; conversely, in a weak economy, people are less likely to buy new homes.”
In the chart below, we track two monthly moving averages for housing starts; one looking back 12-months, the other, a longer look-back of 30 months. When the shorter, 12-month moving average falls below the longer moving average (30 months), this historically has signaled a change in the direction of the trend – from an increasing to declining trend. Often, as can be observed, recessions eventually have followed. Most recently (October 2019), the two moving averages have converged toward each other, perhaps signaling an eventual slowdown in housing. Again, this would translate into broader implications of the overall economy and potentially bring on recessionary pressures.
Data sourced from Bloomberg LP.
Conclusions
The indicators above are a small sample of a multitude of indicators tracking the U.S. economy that can help inform if economic growth is trending up or down. Based on these two indicators, employment and housing, it would suggest a slowing of the economy, but not a definitive contraction of economic activity at this point. As of today, Dec. 6, 2019, the jobs report came in very strong, with unemployment at a low of 3.5%, back to the low for 2019. The current economic environment may only be a mid-cycle slowdown, not dissimilar to the one experienced during the late 2015 / early 2016 period.
