Lead and lag economic indicators can either foretell or confirm an economy's direction. Let's dive into the numbers and see what they are telling us.
One in six jobs in the economy is directly or indirectly dependent on the direction of the housing market. To put this in perspective, housing starts at the height of the housing boom were 2.3 million annually in 2004 and 2005. Latest economic releases indicate they are down to less than 800,000 annually. This is a 17-year low; however, with a larger and growing population base, the numbers are even more negative.
The inventory of houses for sale is over nine months, and even with big discounts, homes are not selling. The recent rise in long-term mortgage rates will further depress this market. Each time mortgage rates increase 100 basis points or 1%, 200,000 fewer people qualify for home loans.
The Composite Leading Index (CLI) is reported monthly and is a lead indicator of the health of the economy going forward. This index has been instrumental in providing signs of the direction of the economy since World War II. In fact, it has predicted every recession since that period, but also errs on the conservative side, predicting four recessions that did not occur.
If the CLI is increasing, it's a sign of a growing economy. On the contrary, if the CLI declines more than 3/10 of 1% for three consecutive months and by one full percentage point over that period, a recession is usually on the horizon in approximately four to six months with a 70% probability.
If you examine the last three months of data available, code red conditions exist. The index has met condition one by declining over 3/10 of 1%, and it has met condition two by declining a total of 1.3% over that period of time. It looks like a tough fall and winter for the U.S. economy.
The Purchasing Manager Index (PMI) is a gauge of how well the manufacturing industry in the economy is performing. Granted, the service sector dominates our economy with 70% driven by this segment; however, the PMI as an index of the manufacturing base is a lead indicator to reckon with.
If you hear that the PMI is above 50, this bodes well for the economy and shows it's expanding. During the go-go years between 2002 and 2005, this index was in the range between 54 and 66 with the latter number being the highest on record.
However, if this index declines below 50, but above 42.7, it's a sign of a slowing economy, but still above recessionary rates. If the number reported is below 42.7, it is a sign of a recession. For example, in the last deep recession of 1990-1991, the PMI was reported at 40.8.
Where do we stand in the current economy? In the last four months, the PMI has been below 50. It dropped below 42.7 in October. For November, it stands at 36.2. This is the lowest reading since May 1982 when the PMI registered at 35.5. This is just another sign the bad and ugly are overcoming the good in the economy right now.
Dave Kohl, PhD., Corn & Soybean Digest trends editor, is professor emeritus at Virginia Tech. He's published four books and over 500 articles on financial and business topics. You can reach him at sullylab@vt.edu.