Whether it is in an airport, at farm meetings or in line at the grocery store, everyone is talking about the stock market and the economy. Thus, I consider carefully before revealing that I am an economist, because it might just invite a two-hour conversation. As we head into another year, let’s examine a few key indicators that can provide dynamic and continuing insight into the direction of the economy.
As it is named, the Leading Economic Index (LEI) is a leading foreteller of future economic growth. Right now, the LEI is positive which bodes well for the economy over the next six months. Actually, this index was up nearly 5 points in 2017, which is quite unusual.
The next indicator to monitor is the Purchasing Manager Index, or the PMI. This number is currently above 50, which again is good news for economic growth in the coming year. In addition, the PMI indicator is strong throughout the large economies of the world, foretelling a synchronized global upswing.
Another major indicator for economic fortunes is housing starts. This metric represents one in seven jobs in America. While this number has somewhat lacked the strength of the LEI and PMI, it is increasing and recently hit 1.3 million starts annually.
Next, it is important to consider consumer sentiment, as the consumer drives 70 percent of the U.S. economy. Currently, consumer sentiment continues to be boosted by stock market earnings, which perpetuate the wealth effect. Specifically, every time a stock value rises by $1, the consumer spends four to five cents more. The red-hot consumer sentiment is above 90, and has been for the last 18 months. In fact, it crested 100 in recent months, a metric not achieved since the booming times of the late 1990s.
Another factor in future economic growth is factory capacity utilization. This number also shows strength with manufacturing and working class jobs on the rise. Increased demand overseas combined with the lower value of the dollar are clearly benefiting this segment of the economy.
Of course, unemployment numbers creep into almost any conversation regarding economic growth. Presently, the low 4 percent range indicates a tight job market in the U.S. On the other hand, the agricultural sector faces suppressed margins which is a challenge for wages, particularly in comparison to the rising wages in non-farm sectors. Some experts predict that unemployment could drop below 4 percent this year, which is unheard of in modern day economics.
In summary, the state of the U.S. economy is strong in the urban and suburban regions as well as in the technology and working class sectors. Yet, caution is warranted. Today’s growth levels and stock market increases may largely be due to artificial stimulus such as low interest rates and easy money policies from the U.S. Federal Reserve. As the Federal Reserve transitions to new leaders and policies, and issues including trade negotiations and geopolitical events unfold, the economic indicators will be helpful in predicting what may be ahead. Of course, the one thing that we should always expect is the unexpected.
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