Prepare for Coming Growth with Leading Indicators
January 10, 2019
How is your business faring as we enter 2020 in an economic slowdown? Our proprietary leading indicators are urging you to prepare today for success in the second half of the year.
Transcript by Rev
Hello everyone. Thanks for joining us for this edition of TrendsTalk with ITR Economics. My name is Alex Chausovsky and I'm the Director of Speaking Services here at ITR. Now, as we transition into 2020 I wanted to take a few minutes to talk to you about forward looking indicators. This is important because we're now starting to get a portion of our customer base that's really buying into our messaging that the economy really is on the backside of the business cycle as we head into 2020. Most industrial companies, especially if you're in heavy industry are starting to feel some of that downside pressure and are really acknowledging now what we have been calling for more than a year, which is that we are going through a period of slowing economic growth and that some components of the economy, specifically more of the heavy industrial sectors are going to be experiencing some of this negativity as we move into that mid 2020 cyclical low.
But as we look to the second half of this year, companies are now starting to ask us, "Well, what is it that's going to cause us to transition through that low point in the economy and into that next rising trend in the second half of this year?" I wanted to give you a bit of a glimpse into some of the leading indicators that we're currently tracking that are really pointing to that emergence of the rising trend in mid 2020. The first indicators I wanted to talk about were the three ITR proprietary leading indicators. These are the ITR leading indicator, the ITR financial leading indicator and the ITR consumer activity leading indicator. These are some of our favorites because not only are they produced by ITR, so we have a great deal of confidence in them, but they have some of the longest lead times that are available to us when trying to predict what the economy's going to do.
If we look at the ITR consumer activity leading indicator that is currently in a rising trend coming off of a potential April, 2019 low and that has a 14 month lead time. If you go back to April of 2019, add 14 months to that, that says that starting with roughly speaking June of 2020 we should see some rise in the U.S. economic cycle. Now as always, it's important to not just pay attention to one leading indicator, but rather a whole group of them. Kind of build up a body of evidence that conclusively and holistically represents a consistent trend. And we have lots of leading indicators that are confirming what the ITR consumer activity leading indicators saying. The ITR financial leading indicator is coming off of a potential September, 2019 low that also has a 14 monthly time and the ITR leading indicator, the one that tries to capture the overall economy is coming off of a potential November, 2019 low. It's also in a rising trend and that has an eight month lead time.
When you look at the body of evidence from the ITR leading indicators, they're all in rising trends, all pointing to that improving economic environment, as we get into the second half of 2020. There are many other leading indicators that we track that are not produced by ITR that also consistently point to that improving environment. The J.P. Morgan Global Manufacturing PMI is coming off of a January, 2019 1/12 rate of change low. The 1/12 of course, is referring to the month over month growth rate for most of our leading indicators who pay attention to that measure because it gives us the longest future looking outlook and the J.P. Morgan Global Manufacturing PMI has a 12 month lead time. If you go back to that January, 2019 low that is saying that starting this year really, we should start to see some turnaround in the momentum in the economic environment.
The OECD leading indicator and the G7 leading indicators, both of those are in rising trends as well. They both have 10 month lead times to the U.S. industrial production index, which of course we use as the benchmark for the overall economy here in the United States. The OECD leading indicators coming off of an August, 2019 low and the G7 leading indicators coming off of a tentative July, 2019 low. One are the favorite leading indicators that people like to ask us about is the purchasing managers index or the PMI and most people pay attention to PMI, but they're looking at the raw data. They're looking at the values that are above 50 and those of course indicate expansion in the economy. Values below 50 indicate contraction. Not us though, at ITR we pay attention to the rates of change as we've mentioned many times before in the past and the 1/12 or the month over month growth rate for the PMI is coming off of a tentative September, 2019 low.
This particular indicator has a nine months lead time to the U.S. industrial production index, so that to points to some favorable momentum into the second half of next year. The others that I'd like to mention are the Wilshire Total Market Cap, that is a stock market related leading indicator. It is certainly in a rising trend. It's got an eight month lead time and it's coming off of a probable February, 2019 low. Single-family housing starts, we like to think of them as the canary in the coal mine. Those are obviously in a rising trend, not only on the 3/12 basis, which is the quarter of a quarter growth, but more importantly on a 12/12 basis, which is year over year rates of change, that's coming off of an August, 2019 low. We've got pausing checking points in place and that leads the economy by eight months and so really again, confirms that expectation of the rising trend in the second half of this year.
As you can see, most of the major leading indicators that we track are now in that positive rising momentum trend. We think that that really supports our expectation that the economy will hit that mid 20 cyclical low point and that we'll have a transition to a positive business cycle momentum and the next rising trend in the second half of this year. I hope you're making plans now of what you're going to implement during that low point, what investments you're going to make, how you're going to prepare your business to take full advantage of that rising trend as we go into the second half of this year, and certainly into 2021 as well. I hope that that gives you that nudge, that push, that encouragement that you'll need to make sure that you're taking that full advantage of the rising trend. And we look forward to speaking to you again soon. Thank you guys so much. Take care.