Review of Important Economic Indicators: Credit Spreads, Commodity Prices, Leading Indicators

While some equity market investors rely on hope of government intervention in the financial markets and the economy for their investment decisions, the more prudent decisions are always based on an analysis of facts.  It is generally true that the equity markets turn around before the economy (markets are leading indicators themselves), so waiting for a series of good economic news will leave an investor behind the rally.  Thus, it is important to follow a few data sets that generally indicate an economic recovery.

Given that the current recession has been caused in large part by a financial crisis, we should look not only to economic activity but also lending activity to spot a change in direction.  So, the four data sets are: credit spreads, copper price movements, oil price movements, and the index of leading economic indicators.

Credit Spreads

 TED Spread

LIBOR-OIS Spread

Copper

[SOURCE: http://www.basemetals.com/Copper/]

Oil

[SOURCE: Dukascopy.com

Leading Indicators

In December 2008, the Conference Board Leading Economic Index for the U.S. increased .3 percent.  While this may seem bullish on the economy, a closer analysis of the index shows that it was manufacturers that made up most of the gains.  As we know from the lastest gross domestic product report, inventories of goods have piled up, and so manufacturers' contributions to the economy in the near future will be far less.

 Four of the ten indicators that make up the leading economic index increased in December. The positive contributors — beginning with the largest positive contributor — were real money supply*, interest rate spread, manufacturers' new orders for consumer goods and materials* and manufacturers' new orders for nondefense capital goods*. The negative contributors — beginning with the largest negative contributor — were building permits, average weekly manufacturing hours, index of supplier deliveries (vendor performance), average weekly initial claims for unemployment insurance (inverted), and stock prices. The index of consumer expectations held steady in December.

The leading economic index now stands at 99.5 (2004=100). Based on revised data, this index decreased 0.4 percent in November and decreased 1.0 percent in October. During the six-month span through December, the leading economic index decreased 2.5 percent, with three out of ten components advancing (diffusion index, six-month span equals 30 percent).

[SOURCE: The Conference Board]

Summary

Credit spreads have improved which shows that stress in the credit markets has been reduced from the near collapse of the financial system in September/October 2008.  However, the spreads are still much higher than those of the pre-credit crisis era, suggesting that borrowing and lending is still far from normal.

Oil and copper prices are searching for direction, with buyers and sellers seeming playing a “tug-of-war.”

Finally, the leading indicators may have been encouraging, but for the buildup of inventory.

So, there are some signs of improvement, but there is nothing to get too excited about just yet.  We need more information to draw any conclusions, and only time will provide that information.