Tuesday, July 18, 2017

A quick and dirty approach to short leading indicators

- by New Deal democrat

Although I have downgraded my longer term forecast to neutral, my shorter term forecast remains positive.

The easiest quick and dirty way to look at short leading indicators is to simply consider initial jobless claims and stock prices. They are updated weekly and daily, respectively, and except for one revision the following week to jobless claims, neither are revised. If both are positive, you're fine. If both are negative, you're in trouble. Here's what they look like for the last 10 years (with jobless claims inverted):

Jobless claims made a new low in May. Stocks made a new high last week. The short term economic forecast is positive.

How long can these series go without new highs/lows before we might be concerned?  While stock prices can be very noisy and volatile, that's not the case with initial jobless claims. Even less volatile is the unemployment rate, which initial jobless claims tend to lead by several months.  So I've compared the YoY changes in each in the below graph going back 50 years:

Generally speaking, the economy isn't in trouble unless YoY jobless claims are negative (meaning the 4 week average is higher now than one year ago). Trouble is confirmed when the unemployment rate follows.

The system isn't perfect (hey, it's quick and dirty, right!). It gives us some false positives, and in 2 cases (1974 and 1981) doesn't signal until the recession is already starting.

But, as a general rule, if YoY jobless claims are lower,  absent a big extraneous shock (like the oil embargo in 1974 or the Fed embarking on steep raising of rates in 1981), there is no recession on the near term horizon.

Here's a close-up of where we are now:

*IF* initial jobless claims stop declining, the earliest the "yellow flag" on our quick and dirty system will trigger is probably this autumn, if not the beginning of next year.  Unless, of course, there is an exogenous shock like Congress triggering a  partial default on our debts by failing to raise the debt ceiling in the next 60 days.