The Seven Signs of a Changing Economy™ Summer Update
The data flow tends to be slow in the summer, so like all prior Augusts, I pull the research inputs for the Seven Signs, but I don’t publish and email an August edition.
That said, there is just enough weirdness in the data flow this month that I thought I would use this opportunity to share a quick summary of what is going on in the Seven Signs inputs.
1) | Indicator: | Personal Consumption Expenditure (PCE) |
| Where to find it: | www.bea.gov |
| What to look for: | Consumer spending increases or decreases for three consecutive months |
Sign #1 remains negative, which is not great. The last six-month trend looks like this:
December 2021 -1.40%
January 2022 +1.30%
February 0%
March +.30%
April +.30%
May -.30%
June +.10%
Prior six months +.30% for a simple annualized growth rate of +.60%. This is not terrible, but behind the curtain the Federal Reserve reported on 8/2/22 that household debt hit $16 trillion for the first time ever during 2Q22. Key: Credit card debt, the most expensive interest rate out there, jumped +13% to over $100 billion. Conclusion: That tiny +.10% average increase for 2Q22 is likely being financed on a credit card! This could be a sign that soaring energy costs, food costs, housing costs, etc. are now taking away the key driver of our economic growth, consumer spending.
2) | Indicator: | Institutional Money Flow |
| Where to find it: | www.lipperusfundflows.com |
| What to look for: | Increasing or decreasing prices on high volume of large block trades |
For the period of 6/29/22 through 7/27/22 Lipper Fund Flows reported the second largest outflows of mutual fund assets for 2022 (selling).
I don’t mention this much, but one thing to watch, as it will cause more volatility to the stock and bond markets, is Russia’s slow reduction in the gas supply to Western Europe. It gets really cold there about three months from now and with no natural gas there could be a shock to the world economy.
3) | Indicator: | Leading Economic Index (LEI) |
| Where to find it: | www.businesscycle.com or https://www.conference-board.org/data/bci.cfm |
| What to look for: | Trends up or down for three to four months |
LEI has now been reduced to negative from neutral last month and it was positive just two months ago. I know I should have just skipped the reduction to neutral and just dropped it to negative, as I said last month. Here is the trend.
2022
January -.3
February +.3
March +.3
April -.3
May -.4
June -.8
6 months: -1.20% and a simple -2.40% annualized contraction.
4) | Indicator: | Employment rate and after-tax personal income |
| Where to find it: | www.bls.gov |
| What to look for: | A flattening, then downward trend in non-farm employment with a flattening to decreasing after-tax income would be a negative indicator. The appropriate trend would, of course, be a positive trend indication |
Good news is bad news! Our economy created 528,000 new jobs in July (huge!). Yet, at the same time initial claims for unemployment increased to the highest level since November 2021. If we can prevent massive layoffs, like all prior recessions, the Fed should be able to manage a soft and sector rolling recession.
5) | Indicator: | Durable goods spending |
| Where to find it: | www.census.gov (Monthly Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders) |
| What to look for: | An increasing or decreasing trend, especially a trend of four to five months out of six would be a positive or negative sign |
Surprisingly, pretty good, as these long shelf-life items like non-perishable, non-fashion items are usually the first to show signs of a slowing economy. Remember, these are items we can do without, if need be. New orders +1.90%, shipments +.30% and unfilled orders up +.70%.
It is a bit of a conundrum to have Sign #1, Personal Consumption Expenditures (PCE) negative and stuff we can do without, not. The data will eventually tell the truth, but for now, my take is these durables, like my dishwasher, were on backorder and now just getting delivered and paid for.
6) | Indicator: | S&P 500 Earnings per Share growth |
| Where to find it: | www.standardandpoors.com |
| What to look for: | Two quarters of S&P 500 earnings per-share growth, up being a positive trend and down being a negative trend |
The profits of Corporate America have held strong. Per Yardini Research, Corporate America is on track to earn $238.16 per share for full-year 2022. A quick valuation would be to take that $238.16 and multiply it by the 25-year price to earnings (P/E Ratio) of 16x (Source: J.P. Morgan Guide to the Markets, 6/30/22). The value based on this would be an S&P 500 of 3,810.56 versus the August 10, 2022 value of 4,122.47. Thus, the S&P 500 is trading about 8.20% above the 25-year average. Not terribly overvalued based on this measurement.
7) | Indicator: | Inflation/deflation numbers |
| Where to find it: | www.bls.gov/ppi/ or www.bls.gov/cpi/ |
| What to look for: | An interruption to the consistent but modest increase in the cost we all pay for goods and services |
The real growth rate of all the goods and services we produce as a country (GDP) for 1Q2022 was -1.60% followed by the Bureau of Economic Analysis (BEA) 2Q2022 estimate reported on 7/28/2022 of -.90%. This completes two contracting quarters of growth. Politicians can tall me all day long that is not a recession, and I will simply look back and smile and suggest there be no more moving of the goal posts, i.e., B.S.!
We are in a recession and now we will simply need to decide how deep, how long and how much of this has been priced into the valuations above in Sign #6.
I’m interested in your thoughts, comments and observations. Feel welcome to call, email or stop by the office and say Hi.
Respectfully,
James O. Lunney, CFP®
CERTIFIED FINANCIAL PLANNER™ Professional
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.