Markets saw the US Treasury yield curve, specifically the spread between the 10-year US Treasury rate and the 2-year US Treasury rate, briefly invert. An inverted yield curve is considered to be a good predictor of recession, and it is common for markets to sell-off on fears that a recession will occur. That being said, apart from the yield curve, there are other types of indicators one can look out for.
Firstly, the price of copper is a metric that has traditionally been considered a good indicator of global economic conditions because copper is an industrial metal utilised in construction and many other finished products.
Theoretically, in an economic expansion, copper is in higher demand and therefore the price rises On the other hand, in an economic downturn, copper is not utilised as much and the price declines. The price of copper has declined significantly in recent months, but it's important to recognize this is a global economic indicator not country-specific.
Purchasing manager surveys are also considered to be good leading indicators and useful gauges of turning points in the business cycle such as the ISM Manufacturing and Non-Manufacturing Indexes.
A headline number above 50 is consistent with a manufacturing expansion and a headline reading below 50 is consistent with a manufacturing contraction. It is also worth noting that a reading below 43 for an extended period of time is consistent with an overall economy in contraction. Similarly, a headline reading above 50 is consistent with a non-manufacturing sector expansion, and a reading below 50 is an indicator of a non-manufacturing sector contraction.
Currently, the most recent readings for these indices are 51.2 for the July ISM Manufacturing Index and 53.7 for the July ISM Non-Manufacturing Index.
One of the major parts in an economy is the consumers in the market and hence the consumer expectations gap is an indicator worth looking it. In the U.S, consumers represent approximately 70 percent of gross domestic product, so any gauge of consumer sentiment or spending is important. However, the consumer expectations gap - the spread between current sentiment and expectations - is viewed as a very accurate herald of an imminent economic slowdown.
The wider the gap, the more concerned markets should be. In recent months, while headline consumer confidence has remained strong, the spread between current sentiment and expectations has become relatively wide.
On a more general idea, a Composite Index of Leading Economic Indicators exists that consists of 10 different components that help assess and predict the economic outlook.
These include the average weekly manufacturing hours worked, average weekly initial unemployment claims, manufacturers' new orders for consumer goods and materials, ISM Manufacturing New Orders Index, manufacturers' new orders for nondefense capital goods, new residential building permits, the S&P 500 Index, the inflation-adjusted money supply, the spread between long and short interest rates and consumer sentiment.
For June, this index declined slightly to 111.5 which was the first decline since December and suggests slower growth in the back half of 2019, but not a recession.
This article was issued by Maria Fenech, Credit Analyst at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.