Is the economy turning around?
I purposely avoid TV news for business information. There’s too much there to provoke an emotional response and encourage frequent trading, which we all know is a bad idea. But one of the few general interest news programs I do watch is Meet The Press on Sunday mornings.
Has anyone else noticed that the press suffers from a bit of attention deficit disorder? For the fourth straight week, the economy wasn’t part of the newscast at all. This week, it made way for discussions about troubles in Afghanistan and Pakistan. Last week, it was the swine flu and Sen. Arlen Specter’s switch to the Democratic Party.
Those are all important topics, but it’s seeming more and more like the complete disintegration of our financial system has become yesterday’s news.
I suspect that’s because the stock market has risen more than 30% since the March low. But while the stock market is often the earliest barometer of which way the economy is headed, it’s worth pointing out that other economic indicators say we’re not out of the woods yet.
The June issue of Money Magazine (which isn’t online yet, unfortunately) explains three leading indicators that would point to an economic recovery.
1. Business sentiment goes up and stays up. The Institute for Supply Management’s non-manufacturing index (found here) measures how confident companies are about their growth prospects. The survey asks questions about business activity such as new orders, backlogs, and inventory changes to come up with an overall index.
For April, the index was at 43.7, a couple points above the March figure and much higher than the November low of 37.4. A score below 50 means that industries are contracting. A consistent rise in the index to a score above 50 would indicate that the recession is winding down.
2. Housing supply shrinks. According to the National Association of Realtors, the real estate market had nearly 10 months of supply in March (found here). A 10 month supply means that it would take about 10 months for home buyers to absorb all of the homes currently for sale. Since you generally don’t expect homes to be sold immediately, a “healthy” inventory isn’t 0 but closer to 6 months. Ten months is a bit below some of the highs last year, but not that much better.
3. The hiring of temp workers spikes. In the first stages of a recovery, companies tend to be cautious, preferring to hire temporary workers over full timers. But in the first few months of the year, temp staffing hasn’t risen or fallen (found here). You should see a consistent rise in temp hiring for a few months before being confident that the economy is growing again.
All in all, it doesn’t look like we’re quite on the precipice of an economic rebound—though that could be coming. This data doesn’t mean that you should avoid the stock market while waiting for the indicators to turn positive. On average, the stock market tends to bottom between four and five months before the end of a recession. These indicators, on the other hand, only turn positive 2 to 3 months beforehand.
By the time you see these “leading” indicators turn around. The best leading indicator out there — the stock market — might have already taken off.
– Joe Light
