Election No. 58 is in the books and “The Donald”, whether you love him, hate him or reside somewhere in the middle, the U.S. economy will continue to churn unabated. How much power one man really has over the economy is up for debate. A 2015 Princeton study suggested that the man in charge has minimal impact when factoring out highly volatile components (energy and food). It seems that differences in performance come down to good luck with a dash of good policy. While many look to the most common economic indicators such as GDP to gauge economic performance, we thought it would be useful to know about the more obscure economic indicators and which ones to follow. Following some of these indicators may reveal hidden opportunities for those willing to take a risk. Here are some lesser known economic indicators that might not always make the front page of The Wall Street Journal but remain relevant in today’s economy.
Construction Spending is a monthly economic indicator that reflects activity in the housing market. In particular the index provides a comprehensive view of the construction industry across residential and non-residential housing as well as public projects, according to Barron’s. Observers of this indicator over the past year would know that residential spending has been trending on the weak side in 2016. Meanwhile spending for non-residential private buildings similarly took a disappointing turn lower in September.
The Purchasing Manager’s Index reflects economic activity in the manufacturing sector. The index, which is published monthly by the Institute for Supply Management, is rather simple to understand. When the index surpasses 50, this means that the manufacturing sector is expanding. Conversely anytime the index dips below the 50 threshold, manufacturing is not growing but contracting. While average Americans might not observe this index, it’s worth watching as a gauge of the economy as purchasing manager activity could be a reflection of corporate America’s performance and growth. The November 2016 reading of this index was 53.4.
The ISM also publishes a non-manufacturing index, which reflects economic growth across a number of sectors of the economy ranging from construction, to mining, to agriculture and forestry, Barron’s indicates. In October 2016 the reading was 54.8.
Housing starts reflect new construction on residential structures. Residential construction activity can fluctuate from month to month and so most market observers consider the five-month average for a fair indication of residential construction activity in the economy. Another closely watched set of indices are the S&P CoreLogic Case-Shiller Home Price Indices. These single-family datasets cover a national index, 20 and 10-city composites and 20 individual metro areas. These indices, with data points calculated for the time period of January 1987 through the present, are normalized to have a value of 100 in January 2000. The index peaked in 2006 at 184.62. Six years later (Feb 2012) it had plummeted to 134.01. The index is back to pre-bust levels (184.42 in August). Does this mean we are in another bubble? The economists behind the original index would not necessarily make that connection. In his book, Irrational Exuberance, Robert Shiller, illustrates how the pattern of changes in home prices bear no relation to changes in construction costs, interest rates or population. In fact, home owners consistently value their homes’ appreciation at 2% annually when the actual sales data is closer to 0.7% over the same time interval.