As indicated in various updates (the most recent was on 25 May), we monitor a number of ‘leading indicators’ that reflect the outlook for the US economy. These include the US Conference Board Leading Economic Indicator (next month’s data is due for release on 18 August), the Chicago Federal Reserve National Activity Index, the Federal Reserve’s Yield Gap Model, the ISM manufacturing index, the ECRI Leading Indicator (weekly), as well as the Bloomberg consensus forecast of US quarterly GDP (charts on all of these indicators are attached).
It is fair to say that all of these indicators have worsened in the past couple of months, suggesting a noticeable slowdown in the rate of growth in US economic activity, but none of them are clearly indicating a return to recession conditions.
- The Chicago National Activity Index (which is our preferred measure) has weakened very noticeably, with the 3-month average index at -0.60. This is close to the perilous recession indicator level of -0.7. Fortunately, although the index was extremely weak in April, it improved in May and June, which has allowed the 3-month rate to remain above -0.7.
- The yield gap, which is normally a very reliable and accurate indicator of future economic activity, is obviously heavily distorted by the very unusual monetary policy in the US, and therefore not necessarily a good indicator of economic conditions over the next 6 to 12 months.
- Although the Conference Board’s leading indicator declined in April (-0.3%m/m), it has recorded positive growth in 11 of the last 12 months and on an annual basis is certainly not reflecting an imminent recession; but rather a slowdown in economic activity.
- The ISM manufacturing index, which has historically been a very reliable indicator of the US business cycle conditions, has given a number of false signals about the immediate direction of economic activity in recent years. This was certainly the case in early 2011, although the index has now ‘caught-up’.
- The ECRI indicator is also pointing to a slowdown in economic activity, but its weekly reading is more useful as a momentum indicator rather than a reliable leading indicator (ECRI is better known for its Future Inflation Gauge, which has an excellent track-record).
- The latest consensus (Bloomberg) quarterly GDP forecast for the US is also not suggesting a return to recession conditions, although the forecasts have been revised lower.
Given the recent disappointment in several key US economic and financial indicators, most analysts have revised down their US growth forecast for 2011 and 2012 to 1.8% and 2.6% from 2.5% and 2.9% respectively. But, on balance, most economists are not expecting a return to recession conditions in the US. In fact, on Bloomberg, only 1 out of the 79 analysts surveyed expect a negative economic performance in the US during Q3 2011, and none expect a negative performance in Q4 2011 (see chart attached).
While the latest analysis of the various leading indicator models provides a level of comfort, there is a real risk that the negative sentiment created by the recent debt ceiling debacle and credit rating downgrade could feed on itself and produce a more adverse outcome than the leading indicator models are currently suggesting (see attached chart on the latest University of Michigan Confidence Index for August 2011). Hence we will continue to closely monitor the key incoming US economic data and market developments.
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