A data-oriented look at current economic conditions, and an explanation of what those data mean, as well as actions to take in that will benefit you financially in the future.
Amidst the firestorm of predictions of financial doom, terrified investors listen to a myriad of pundits who postulate all manner of gloomy prospects without a modicum of supporting data. It's no wonder that people are terrified.
In an effort to add a note of reason to this conversation, we will look at current economic data, with an explanation of what it may mean for the future. In a series of five articles, we will look at data in four categories
1. Economic Cycle Momentum
2. Monetary Indicators
3. Sentiment
4. Valuation
Finally, we will draw conclusions from these data, and based on those conclusions, plan for the best actions to take for the future.
Part 1: Economic Cycle Momentum
The first part of this discussion will cover economic cycle momentum. You probably know what an economic cycle is. Basically, the economy grows, employment is high, people generally feel good about their economic prospects and investments in the capital markets (stocks and bonds) as well as real estate do well. Then, as the growth "heats up," inflation occurs, the Federal Reserve Bank raises interest rates to slow the economy, unemployment grows, people feel concerned about their economic prospects and investments do less well. As inflation eases, rates are lowered to an "accommodative" level, and the economy picks up growth again. Economic cycle momentum looks at where the economy is in the "boom/bust" cycle.
We will look at ten indicators to help us see where the economy is, and the momentum it has in its current direction.
1. Industrial Output
Industrial output is exactly what it sounds like - the growth in the output of industrial companies based in the United States.
In 2003, industrial output grew .85% from the output in 2002. In 2004, it grew 4.23%; in 2005, 2.65%; 2006, 4.07%; 2007 .95%, and thus far in 2008, (with data to September) industrial production fell 1.9%. The last time industrial production fell was during the recession in 2001, when it fell 3.5% in 2001 and 1.3% in 2002.
2. Capacity Utilization
This is the percentage of productive capacity that is currently being used. Generally, 84% is considered to be the benchmark for US capacity utilization.
In 2003, capacity utilization was 75.133; in 2004, it was 77.35%; in 2005 it was 79.67%; in 2006, 81.76%; in 2007, 81.65%; and thus far in 2008 (with data to September), capacity utilization was at 79.6%, a drop of 2.57% from 2007.
3. Gross Domestic Product
This is the measurement of growth in total domestic US output from the prior year. The benchmark is generally set at 2.8% for sustainable growth.
In 2003, GDP was at 4.2%; in 2004, 4%; in 2005, 3.3%; in 2006 2.9%; in 2007, 2.4%, and thus far in 2008 (with data through the third quarter), 1.1%, with the third quarter down by .5%. This is 55% less than last year.
4. Unemployment
This is the percentage of those who are actively looking for a job who cannot find one. Generally, "full employment" in the US is determined to be 4%.
In 2003, unemployment was at 5.99%; 2004, 5.52%; 2005, 5.08%; 2006, 4.63%; 2007, 4.62%; and 2008 (with data through October), 5.4%, up 17% from the prior year.
5. Consumer Confidence
This is a measurement, based on survey data, of the level of confidence consumers currently feel, with 1995 being a starting measurement point of 100.
In 2003, consumer confidence was at 79.56; 2004, 96.36; 2005, 100.27; 2006, 106.18; 2007, 103.49, and 2008 (with data through November), 59.6.
6. Inflation
Inflation is the measurement of the increase amount consumers must pay for a basket of goods and services. Inflation is measured in two ways; on the consumer level, and on the producer (or wholesale) level. Long term inflation has averaged 2.5%.
Consumer inflation was up 2.31% in 2003; 2.7% in 2004; 3.37% in 2005; 3.21% in 2006; 2.87% in 2007, and with data through September, 2008, up 4.2%.
Wholesale inflation was up 3% in 2003; 4% in 2004; 4.81% in 2005; 2.9% in 2006; 4% in 2007, and with data through September, 2008, down 5%.
7. Business Inventories
A build up of business inventories is indicative of anticipation of higher sales in an economic upturn, and the inability to sell in an economic downturn.
In 2003, business inventories grew 4.19%; in 2004, by 3.85%; in 2005, by 3.84%; in 2006, by 5.55%; in 2007, by 5.72%, and in 2008, with data through September, by 4.93%
8. Durable Goods Orders
These are orders for "big ticket" items.
In 2003, orders were up by 2.2%; in 2004, by 10.35%; in 2005, by 8.32%; in 2006, by 2.57%; in 2007 by .33% and with data through October 2008, down by .67%.
9. Durable Goods Consumption
This is delivery of "big ticket" items.
In 2003, such deliveries were up 1.94%; in 2004, up 10.95%; in 2005, up 6.32%; in 2006, up 1.23%; in 2007, up .33%, and in 2008 with data through October, down by .67%.
10. Leading Economic Indicators
This is a group of indicators considered predictive for future economic growth.
In 2003, these indicators were up 5.05%; in 2004, up 7.09%; in 2005, up 2.7%, in 2006, up 1.27%, in 2007, down .4%, and in 2008 with data through October, down 2.2%.
What do we see here? Note that nearly all indicators in the economic cycle were lower in 2007, predicting an economic slowdown in 2008. Indicators in 2008 verify those trends and show us with a contracting economy. Economic contractions, or recessions, happen about every 8 - 10 years. As can be seen by the consumer confidence indicator, there seems to be an extremely low level of consumer confidence. Since 2/3 of GDP is consumer spending, that, coupled with a growing unemployment rate, would indicate that we are nearing the trough in this economic cycle.
