Thursday, August 4, 2016

Forecasting the 2016 election economy: the vital 3rd Quarter

- by New Deal democrat

As I have pointed out before, simply knowing whether the economy will be in recession during the 3rd Quarter of the election year will tell you whether or not the incumbent party's candidate will win the popular vote 80% of the time.  Since we are now in the 3rd Quarter, let's zoom in make a forecast of the near future.

Prof. Geoffrey Moore, who literally wrote the book on leading indicators over 20 years ago,  proposed a series of 11 short leading indicators. These are more variable but typically turn a few months before the economy as a whole. Moore identified them as:

  • S&P 500 stock price index
  • Average workweek in manufacturing
  • Layoff rate under 5 weeks
  • Initial claims for unemployment insurance
  • ISM manufacturing vendor performance
  • ISM manufacturing inventory change 
  • Journal of Commerce change in commodity prices
  • Change in deflated nonfinancial debt  
  • New orders for consumer goods and materials 
  • Dun and Bradstreet change in business populaton
  • Contracts and orders for plant and equipment 

If this list looks familiar, it is because most of its components made it into the 1990's remake of the LEI, which was subsequentLy taken over by the Conference Board.

Let's start by getting the few negative bits  out of the way.  Both of these have to do with the shallow industrial recession that appears to have bottomed in March.

Here is the average manufacturing workweek:

Note the downturn in the end of 2014.

Here are new durable goods orders:

This series is not terribly helpful either way.

What we can say is that neither is getting any worse.

But as I pointed out yesterday, the ISM manufacturing index has improved and is solidly positive:

(h/t Doug Short)

And the new orders compoent of the ISM index has also turned solidly positive this year:

   (h/t  Haver Analytics)
Meanwhile, new claims for unemployment insurance are near historic lows:

Commodities bottomed out at the beginning of this year and have been rising since.  Here's the long term YoY% view:

The S&P 500 has risen off its February lows and making new all-time highs::

While it isn't part of Moore's list, it has been shown that the unemployment rate, which lags coming out of recessions, is a leading indicator going into recessions, having risen before 9 of the last 11 recessions:

The bottom line is, there will be no recession this quarter.  Mesaured by this K.I.S.S. signal, 160 years of history indicates that the economy favors a victory by Hillary Clinton.