Depending on the week, the U.S. is lurching toward recession or humming along just fine. As the bull market in stocks nears its 10-year anniversary next month, the search for a spoiler will likely intensify.
With so many data points and market indicators to choose from, what is the best gauge to spot economic trouble?
We asked three equity strategists and two top bond managers to give us their favorite indicators—though cracks are forming, none scream imminent recession. Here are five signals they are monitoring to help them decide when it is time to get more defensive:
Who: Rick Rieder, chief investment officer of global fixed income at BlackRock (BLK), overseeing $1.9 trillion in assets.
Indicator: Corporate profit margins—more specifically, the impact of wages on margins.
Rieder's favored indicator is a mouthful: Labor costs as a percent of gross value added for nonfinancial companies. About two to three years before a recession, that ratio tends to increase alongside a decline in corporate profits as a percent of gross value added.
Rieder says labor costs have been increasing off postcrisis lows, but have stabilized more recently—a reason he doesn't see an imminent recession in the U.S.
Supply chain data
Who: Dan Fuss, manager of the $11 billion Loomis Sayles Bond Fund (LSBDX)
Indicator: Anecdotal data from supply chain checks across industries.
Fuss says one of his favorite indicators for spotting a change in economic conditions is the data his analysts glean from supply chains in different industries. That includes, for example, the orders received by those in the final step of assembly of a Ford pickup, as well as orders and pricing several layers deeper into the supply chain where the change is often magnified.
At the moment, there has been a slight deterioration in orders, but not enough to spark concerns of a recession, Fuss says. "What I'm doing here is relying on the basics I've learned since starting in 1958, and finding everything I can to figure out what data the Fed is getting as input," Fuss says, with detailed supply chain indicators among them.
Conference board data
Who: Saira Malik, head of equities at Nuveen, overseeing $300 billion.
Indicator: Conference Board Leading Economic Index.
The index mixes hard data, soft data, and market indicators and usually turns negative on a year-over-year basis six to 18 months before a recession. Its latest reading was up about 4% from a year ago, though that is still down from a recent 7% rate of improvement at its peak. But Malik expects it to bounce back from what was a gloomy December.
Who: Yin Luo, head of quantitative research, economics and portfolio strategy at Wolfe Research
Indicator: Google Trends.
Luo tracks nine different indicators to monitor for recession, including the yield curve and regional bank recession indicators. But he also tracks Google Trends, creating a proprietary uncertainty index that monitors keywords related to "economy," "recession," and "economic uncertainty," adjusted for location and seasonality. That index currently sits below 60; a reading above 90 is when it gets more worrying, Luo says.
Who: Nicholas Colas, co-founder of DataTrek Research
Indicator: Participation and unemployment rate among African-Americans.
Colas admits this is controversial: "Hiring works across all racial backgrounds, but African-Americans are often the first fired," Colas says, citing research by Kenneth Couch and Robert Fairlie on employment trends going back to 1970. "It is a leading indicator—and looking back through the last couple cycles it works."
Colas says the unemployment rate and participation rate among African-Americans are among the first data points he checks in the jobs data. African-American unemployment hit a low of 7.6% in the last economic cycle, in August 2007, and had risen to 9% by December of that year. Those looking at overall employment, though, may not have seen the weakness in the labor market because it sat at 4.6% in August and rose just modestly to 5% by that December.
In this cycle, African-American unemployment hit a low of 5.9% last May. The rate now sits at 6.8%. That coincides with African-American participation rates picking up from 62.1% to 62.8% in January—classic behavior for the end of a rate cycle. The rising participation rate also suggests that net job losses aren't the only thing behind the unemployment rate ticking higher. To make sure labor market trends remain intact, Colas says he wants to see stable or even lower unemployment for African-Americans in future job reports. But for now, no red flags.
|For more news you can use to help guide your financial life, visit our Insights page.|