After several polar vortex rounds, several snowpocalypses, and a fair share of other North American weather calamities, it’s been hard to suss out the true US economic position. Recent economic news here has been weaker than expected, as shown by the recent downward move in Citigroup’s Economic Surprise Index. Debate continues as to whether the weakness is temporary in nature. Throw in Putin’s Ukraine misadventures and we see that global economic news has become scrambled as well.
Accordingly, we thought it might be useful to quickly review some of the US and global economic leading indicators we follow to see if the global economy remains on track for a steady recovery. In our work, leading economic indicator indices have been solid predictors of market trouble when flashing recession warning signs in conjunction with high multiples and waning market momentum. As we’ve mentioned in several posts, the US remains overvalued historically using various long-term valuation metrics, while overseas developed markets, for the most part, are neutral valuation-wise. Long-term market momentum is intact. Now let’s look at the economic outlook.
Starting with the US, despite some recent weakness, the economy appears to be on track for decent forward growth. Using a 12-month rate of change, 6-month smoothed indicator for the Conference Board LEI, we see the indicator firmly in positive territory. Prints below zero indicate high recession probability. As you can see, the string of sub-par data didn’t significantly affect leading indicators, or at least not yet.
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| Source: Conference Board, Bloomberg, and IronHorse Capital |
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| Source: Federal Reserve Bank of Philadelphia |
Turning to Europe, we’ll use the OECD leading indicators to provide a view. Like the Conference Board indicator in the US, we use the 12-month rate of change, 6-month smoothed indicator to indicate recession risk. Levels below zero indicate high probability of future recession. Like the US, Europe’s indicator remains firmly in positive territory.
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| Source: OECD, IronHorse Capital |
Next, we’ll look at Japan. The longer-term chart for Japan presents an interesting picture, capturing the longer-term downward trajectory from the boom years of the 60s, 70s, and 80s. Since the mid-90s, we see a steady stream of economic dips. Abenomics has pushed the leading indicators out of recession prediction territory in 2012. Right now, the economy looks to be in solid territory for the next few quarters at least.
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| Source: OECD, IronHorse Capital |
Finally, we’ll look at Australia, which is a key component of the EAFE. Like the others above, growth at this point should remain solid over the next few quarters.
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| Source:OECD, IronHorse Capital |
Put it all together, and we see a world where economic growth over the next several quarters should remain intact. Granted, very few expect growth to knock the lights out globally, but that doesn’t matter. As long as future recession probabilities remain low, we have a hard time seeing the beginnings of a major market dislocation along the lines of ’08, etc. Certainly, in the US and some other areas, elevated long-term valuations open up the possibility of corrections. The beginning of this year reminded investors that markets have the ability to back-and-fill quickly. Until we see leading indicators roll over across the board, however, we’ll remain in the camp that markets will churn sideways worst case (think this quarter for global equity markets) and grind higher best case.
