The most visible of these indicators is the stock market, and the one that has most visibly improved in the last two weeks. Looking at the chart below we see that the stock market (as measured by the large-cap S&P 500 index) has improved noticeably over the past two weeks. Since this index is now clearly above the level from six months earlier, this indicator is no longer flashing a recession warning sign.
Another important economic indicator is the NAPM index, a measure of order delivery for industrial companies. As I indicated in my last article, a reading below 50 is a warning sign of a possible recession. This index has been below 50 since October of last year. Last month this indicator was at 48.2, clearly warning of recession possibility. The latest NAPM report showed an improvement in this index to 49.5. But with this index still below 50, it’s still worrisome and clearly shows economic weakness, even if not necessarily recession.
The next indicator I looked at was the steepness of the yield curve. When the yield difference between the 10-year U.S. Treasury bond and the 3-month Treasury bill is less than 2.5%, this is an indicator of economic weakness and potential recessionary conditions. Two weeks ago this spread was 1.45%, indicating economic weakness. As of March 4, this spread had widened to 1.59%, showing some improvement, but still potential economic weakness. This indicator has a ways to go to reach 2.5%, a level that would show economic strength.
Lastly, the index showing corporate bond spreads between riskier bonds and less risky ones was clearly flashing recession possibilities two weeks ago, with spreads significantly higher than six months prior. As of March 3, this indicator is identical to the level of two weeks ago. This credit risk indicator is still clearly showing negative economic conditions, and much apprehension in the bond market.
So of the four indicators looked at here, one of those indicators is up significantly – the stock market, two are slightly improved (though still warning of a recession possibility) and the fourth is unchanged. Are there other economic and financial indicators that stock traders and investors might be focusing on more closely that are giving more confidence that the economy is the upswing?
The indicator that is most watched by stock traders these days, isn’t really an economic indicator – it’s the price of oil. As a year-to-date chart of the price of oil shows below, since bottoming about three weeks ago, the price of oil has been up sharply, gaining more than 30%.
While the rise in price is due in part to some geopolitical cooperation, the rise in price is also suggesting to many investors that increased demand for oil is indicating underlying strength in the world economy. Another positive that investors see is that higher oil prices will make it easier for oil and energy companies to manage their debts. Of course it should also be noted that a large number of energy companies will still not be profitable with oil at $36 a barrel or even $40 or $50, and many will be going through bankruptcy proceedings before the year is through.
Regardless, any sign of rising oil prices has lately been signaling to traders a reduced concern over risky debt in the energy industry and generally less worry of financial stress cascading through the economy. As a result, the U.S. stock market and the oil market have been moving in tandem the last few months. The chart below of the stock market over the same time span as the oil chart above is more than similar. My belief is that in 2016 the stock market is trading off the price of oil, not any real changes in economic conditions. Stock traders are betting with their wallets that the price of oil is accurately assessing financial and economic reality.
The problem with that bet is that the price of oil is not completely based on demand in the economy, but also from supply, in the U.S and worldwide. In the last month, oil-exporting countries like Russia and Saudi Arabia have shown an increased willingness to cooperate in limiting their oil output, thus potentially limiting supplies and boosting oil prices. In addition, over the past year, in response to collapsing oil prices, the number of oil rigs in the U.S. has been plummeting, falling from over 1,500 drilling rigs in 2014 to just 400 today, according to energy firm Baker Hughes.
But while those changes limiting oil supply may be supportive to oil prices, they don’t necessarily portend economic strength in the U.S. economy. In fact, it’s quite the opposite. Supply is being cut because demand (at least for oil) has been so weak. The primary benefit from higher oil prices is less financial stress from energy firms. But of course, the rising price of oil will also have a cost, to consumers and companies who will then pay more for their energy. On balance, there is little evidence that higher oil prices produce an overall economic benefit to the U.S. economy Which is why it has long been stated that lower energy prices benefit the U.S. economy, not higher ones.
Another measure of global demand is the Baltic Dry Index, an index showing the price of worldwide shipping costs. It is a real-time index showing the balance (and sometimes mismatch) of supply and demand. Because of an overproduction of shipping supply and lower worldwide freight traffic, the price of this index has fallen the last couple years. In particular, since August of last year, supply has been far outweighing demand, and the Baltic index has collapsed, falling from about 1,200 to about 350 today. While this index has increased about 20% from mid-February all-time lows, at today’s levels it is not indicating anything close to robust economic growth. This is clearly a negative economic signal for worldwide economic growth.
Another economic indicator that has traditionally been used as a forward-looking predictor of economic activity is the University of Michigan’s Index of Consumer Sentiment. Last month that indicator was at 91.7, a relatively high level, usually consistent with economic growth, though down somewhat from levels in the first half of 2015.
Short-term consumer confidence is also often reflected in the auto market. Below is a (seasonally adjusted) chart of U.S. auto sales. While we see a dip in auto sales as 2015 came to a close, the current level of sales is still relatively high from historical standards (though I will have more to say about this in a coming article on the auto market.)