At first blush, the latest reading of the Economic Indicator Dashboard appears to be displaying a disturbing trend: seven of the eight indicator arrows are heading south
(left). But, is this actually a bad thing? Does this truly suggest the U.S. economy is coming to a crashing halt?
Accessed on 4/15/2015.
How do I read this chart?
This dashboard is intended as a tool to set context and perspective when evaluating the current state of the economy.
For each indicator, the horizontal bar shows four things.
- A blue color band represents the typical range for this indicator. +/- 1 standard deviation of historical values for the indicator fall in this range.
- An orange marker shows the most recent value – the closer the marker is to the blue bar, the closer it is to historically typical conditions.
- A grey area outside of the blue band which shows the range actual conditions.
- An arrow shows the most recent three-month trend indicating if it is moving toward or away from the typical range
After the events of the last decade, those are all reasonable questions to ask. But, in our view at Russell, the short answer is: “No.” There are a few factors at play here.
- First, moving left on the dashboard is, in some cases, actually a good thing.
- Second, there is a fair amount of volatility in these measures from period to period. Taking an additional minute or two to digest the data in its entirety can be helpful.
So let’s do just that.
The Dashboard is divided into two sections: Market Indicators and Economic Indicators. Some readers might also short-hand these sections as “leading” (market) and “lagging” (economic)
. Let’s review each individually:
Market (leading) Indicators
- Market Volatility as measured by the VIX1 – Lower volatility is generally a good thing, and an indicator that the investors may not be anticipating any significant economic or capital market disruptions. So, to see this indicator slide to the left (lower) is generally a good thing.
- 10-Year U.S. Treasury Yield – The low yield can be frustrating for investors attempting to generate income from investment portfolios, but the low rates have generally been additive to the economy and the U.S. capital markets. Rates remaining low is generally seen as a positive.
- Yield Spread – An upward sloping yield curve is generally a sign that the bond market expects continued economic expansion. Continued flattening may be a watch point, but the current steepness is still above historical average.
- Home Prices – The one indicator moving in the “right” (upwards) direction. A positive housing market tends to be a boost to the overall economy, generating additional activity related to new construction, remodeling, and furnishing.
Of the “leading” indicators, despite 3 of 4 moving left on the chart, they all appear to be positioned to indicate continued economic growth
Economic (lagging) Indicators
- Inflation – Currently posting a negative number, which could raise concerns about deflation. However, that negative number could be driven by the drop in energy prices. Generally lower energy prices is a net positive for the economy, so concern about the inflation number should be restrained. This is a good reminder of why economists often pull out energy and food numbers from their inflationary data as it tends to be volatile from period to period.
- Unemployment – Pretty straightforward, the number is coming down.
- Economic Expansion – The current number is coming off an unusually strong prior quarter. Overall, the U.S. economy appears to be settling in around 2.5% GDP growth, which is solid and sustainable, but not likely to get anyone excited.
- Consumer Sentiment – Coming off a high number in the prior period accounts for the direction of the arrow. The indicator remains noticeably above historical average and bodes well for the U.S.’s consumer driven economy.
Of the “lagging” indicators of economic measurement, three of the four are well within historical ranges and support the view that the U.S. economy is on solid ground
. The fourth indicator, inflation, is outside the typical range, which may be explained by lower energy prices. But that’s generally good for the overall economy.
The bottom line
Despite the initial appearance of the majority of the economic indicators tracked in the Dashboard heading in the “wrong” direction at the same time, a second look at the measures verifies that the U.S. economy currently appears to be on solid ground. There does not seem to be a compelling reason for investors to move away from their long-term strategy of investing in globally diversified portfolios adjusted to their individual risk tolerance.
1 The VIX index is the commonly used name for the CBOE SPX VOLATILITY INDEX.