Road Warrior

State of the General Economy: Part 1

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It is the beginning of the year and it is time to take a glance at key economic indicators to gauge the direction of the U.S. economy. Let’s go through some of the metrics to determine where the economy has been and predict what is on the horizon.

More producers, lenders and agribusiness people are using key economic indicators in their strategic planning processes. They are particularly useful in the start-up, growth and transition phases of the business. Also, many of the ag lenders I work with and teach at schools are keenly interested in the direction of the following indicators.

One of the closely watched economic metrics is the Leading Economic Index (LEI). This index is composed of ten factors including stock prices, average weekly manufacturing hours, and building permits. The LEI’s diffusion index indicates the portion of the factors that are moving in a positive direction. At the start of 2013, this indicator was in decline; however, since June, the monthly reports have shown a rise in the index, indicating that the economy down the road for the first six months of 2014 should be growing. The diffusion index has been strong, ranging from 55% to 85% in the last six months, indicating that most of the factors are positive. Remember, if this index is down 0.3% for three consecutive months and shows more than 1% decline over the period, there is a likely chance of a recession three to six months ahead.

Another closely watched indicator is the purchasing manager index (PMI). This metric is reported monthly in the U.S. and also in many of the G-20 nations that make up a large part of the world economy. If the PMI is above 50, a growing economy is on the horizon. Below 41, the economy is headed for recession, while a level between 41 and 50 represents a sluggish economy. The good news is that all but one month in 2013 the number was reported above 50 here in the U.S., and is currently a strong 57.3. This would suggest the general economy has momentum going into the first six months of 2014. Globally, this indicator has been close to 50 in Europe and also in summary reports out of China. It would suggest that the U.S. economy is probably the strongest of the G-20 nations moving forward in 2014.

If one examines gross domestic product (GDP) growth, the picture becomes clearer. For the first half of 2013, the economy was growing at just above 1%, far below the preferable rate of 3-4%. In the second and third quarters, the growth rate accelerated to 2.5% and 4.1% GDP growth, respectively. Time will tell whether this growth rate will sustain after the first quarter of 2014. 

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Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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