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Are the Leading Indicators Signaling a Reversal?

June 19, 2020

Are the leading indicators signaling our a reversal? And if so, when can we expect it? Catch our newest TrendsTalk episode with ITR CEO and Speaker Brian Beaulieu to see what’s in store for the rest of 2020.

 

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Transcript by Rev

Hi, welcome to this edition of Trends Talk. I'm Brian Beaulieu, CEO and Chief Economist for ITR Economics. Thank you again for joining us. This is a chance to give you an update. And I think they're important updates about what the indicators are telling us. We're getting closer to that reversal in the economy that we've been talking about. There's certainly been a lot of interesting numbers flowing around out there today. Today happens to be June 16th. So I want to let you know what's going on from our perspective.

First and probably foremost, the latest data shows that the death toll in the United States in terms of daily deaths continues to come down in the US and to such an extent, now that the cumulative death parabola is angling over, actually the arc is angling over toward the horizontal discernibly. All of that is incredibly good news and barring a second wave, it means that the governors should continue to loosen their hold on the economy, and we'll be able to engage in more and more normal economic activity.

Obviously the one caveat is if there's a surge in the coronavirus, and if, because of that surge, the governors are clamping down on the economies again, then that's a game changer. We don't think it's probable that they're going to clamp down again. We think a surge is probable, but it seems to us unlikely to the extent that it's going to become a massive issue. At least, and we're not MDs, we're not medical scientists, but we're just looking at the trends in China and South Korea, where there is already a second wave going on. And we're following those very closely, and we're looking at confirmed case data here in the United States. The headlines have been a lot worse than the actual numbers have been. No major surprise there.

So now turning to the economy, for outside of the United States, let's start there. What do Australia, Brazil, Canada, the Eurozone, Mexico and the five major Asian economies all have in common? The answer: they are enjoying leading indicator rise. The only major trading partner vow is not enjoying leading indicator rise, not GDP rise, leading indicator rise is Japan. I think that's particularly noteworthy because aside from the US they probably maybe even spent more than the US in terms of stimulative package as percent of GDP. Yet, we're not seeing that leading indicator yet turn around for Japan, as opposed to the US where we now have four of the leading indicators on our traditional dashboard that are flipped back to green. If you've been following ITR long enough, you know that when we have five indicators, we get pretty excited. It means that there is a discernible statistically significant shift in the economy's momentum developing.

And we get four out of five right now. And when I say five, we need five and they can't be blinking lights. They have to be five solid green lights and that for us means a couple of months. They got to hold for a couple of months. So this being the end of, middle of June, July, August, as we roll through the end of August and on into September we'll know. Do we have five green lights or not? If we do, it puts us squarely on target for seeing economic conditions in general, improve in the fourth quarter of this year and gain additional momentum as we go through 2021, very excited, as far as I'm concerned. Again, we'll watch them. They could go the other way. They have a way of doing that, but just giving you the update of what's going on right now.

We've also been tracking some nontraditional indicators, because we don't like waiting around for the monthly data during these really interesting times. One of which is US intermodal rail traffic, and we're running a rate of change on that week, over week, rate of change. And that's been climbing since April 6th, it looks like. Are we below where we were pre-COVID? Absolutely. Are we going to be below where we were pre-COVID for quarters to come? Yeah. But does the economy have a pulse? Yes. Are we beginning to ship more stuff? Yes. All of which is incredibly good news. Within the economy, one part feeds on the other, right? So we get different parts going, and it's a beautiful thing.

We look at, as you know, the Johnson Redbook Indices for the US. First week of July, we saw a nice upturn. I know the numbers in the media today were gaga over retail sales data, but when you look at some of the details of that, clearly at least from our perspective, some of the retail sale numbers reflect a civil unrest that's been occurring in our great country. We looked at civil unrest periods in the past and seeing it negatively impact retail sales is not new. We also looked at how long we can expect it to last, how it usually worked its way through, and it's sort of like natural disasters that we've talked about.

Eventually the economic fundamentals come through. And in this case, the economic fundamental is people have money. Disposable personal income actually went up during this downturn thanks to the very generous spiff sent out by the federal government and the even more generous unemployment benefits. We have more after tax income now than we did before COVID-19. That's going to help get retail sales going. We're also seeing that there's a recovery going on in the real estate markets, incredibly important also.

So you can see all these different pieces are beginning to flow up and get us all going in the right direction. Not out of the woods yet, but we are moving in the right direction. Please plan on the third quarter of this year, expect GDP to rise, not a lot in our opinion, but expect it to rise. Then a rise more in the fourth quarter and GDP, US industrial production, retail sales, it all starts gathering more momentum as we go through 2021. We're hoping you have a business plan to contend with that. It's important. Lead with optimism, but let that optimism be grounded in the reality of what the numbers are telling us. That's how we're doing it at ITR Economics, and we think it's a good way to go.

Thanks for joining us. Brian Beaulieu from ITR Economics. Be well.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.