- by New Deal democrat
On Friday I wrote about how I have been rethinking the long leading indicators — those that are useful for forecasting the economy 12-24 months out — because while when they are positive, the economy has been as well, but when they have been negative (twice) in the past 15 years, the economy has weakened but not gone into recession. They have functioned more like a “severe weather watch;” i.e., conditions are favorable for development, but by no means more likely than not.
By contrast, the “quick and dirty” short term forecasting system has been flawless.
What is the “quick and dirty” system? Simply look at the stock market and the four week average of initial jobless claims. If the stock market is lower YoY, and the four week moving average of new jobless claims is 10% or more higher YoY, the economy is likely to fall into recession in the next several months. Otherwise, the economy will remain in expansion.
Let’s take a look. The below two graphs track stock prices (gold), the four week average of initial jobless claims (red, inverted and adding 10 so that any YoY change of higher than 10% shows below the zero line); and also adds real retail sales YoY (blue), which has also had a very good long term record; first for the four years before the pandemic:
And here are the five years after the pandemic:
As you can easily see, at no time have both stock prices and the four week average of initial jobless claims been below the zero line together. In 2018, stock prices and real retail sales were negative for only one month, but jobless claims were doing very well. And in mid-2023, the system never quite signaled — stock prices went positive YoY one month before jobless claims turned sufficiently negative. And real retail sales likewise turned positive with stock prices.
Currently all three metrics are solidly positive, signaling economic expansion will continue for at least the next few months.
And what of the pandemic? Here is the close-up of 2020:
The pandemic lockdowns began roughly on March 9. Within several days, the stock market turned negative YoY, and jobless claims also did so by more than 10% on March 21 (in fact, there were such severe layoffs that I’ve had to cut the scale by 100!). By early May the stock market had turned positive again. Real retail sales also turned negative in March, and turned back positive in June.
LIke I said: quick and dirty - and flawless.
