Leading Indicator Evidence for Growth in 2021
January 22, 2021
Why is ITR Economics preparing for growth in 2021? Leading indicator evidence points to it - catch our newest TrendsTalk episode with ITR Analyst and Speaker Taylor St. Germain to learn more.
Transcript by Rev
Thanks so much for joining me on this episode of TrendsTalk. My name's Taylor St. Germain. I'm an analyst and public speaker at ITR Economics. Today, I wanted to talk to you all about confidence, specifically confidence in 2021. For those of you that follow ITR Economics closely, you already know that we have positive growth rates forecasted for the US economy at large, especially from major series, like GDP, industrial production, CapEx. In order to establish confidence in, in these forecasts, I wanted to talk with you about some of our leading indicators. Now, we have a vast majority of economic information available at our disposal. We have thousands and thousands of data sets in our database, but we like to narrow in on those indicators that have the highest historical correlation and that forward looking predictive value. Now, many of our speakers have recently talked about a leading indicator dashboard that we're tracking closely.
It's our favorite subset of leading indicators for the US economy at large and all of these leading indicators are displaying rise at this point. That gives us at ITR Economics a lot of confidence in 2021. These leading indicators typically have a two to four quarter lead time to the US economy given that they're all displaying rise that gives us a lot of confidence in our forecast for 2021, in 2021 being a positive year for the US economy. There's one specific indicator that I wanted to talk about in more detail. That indicator is the US business confidence index. This index comes from the Organization of Economic Cooperation and Development or the OECD. I thought it was valuable to talk about business confidence in the wake of some of the uncertainty that we're still facing today. There's still COVID-19 concerns out there. There's concerns with how the election results ended up and turned out.
Even with those concerns, the data from this business confidence index suggest that us businesses are growing more and more confident. Let's talk about that in greater detail here for a minute. The OECD submits the raw monthly data to us. When we look at the historical monthly performance, we see that the business confidence index reached a low point in April of 2020. In every month since April of 2020, we've seen businesses grow more and more confident. Now, that's great news, especially like I mentioned, even in the wake of rising cases, rising COVID-19 deaths, the election uncertainty, businesses generally grew more confident, especially throughout the second half of 2020. That confidence is continuing into 2021. Now, there's one major economic benchmark that we'd like to use the US business confidence index to help understand the trajectory as we look out into the future.
That major economic benchmark is CapEx activity here in the US. The series I'm referring to is one of our trends report series. It's US non-defense capital goods new orders, excluding aircraft. It's our B2B and CapEx proxy for the United States. If you take the business confidence index and develop a month over month rate of change, or as we refer to it at ITR a 1-12 rate of change, and you overlay that business confidence rate of change on top of the CapEx year over year growth rate, we get a 12 month leading indicator, meaning that business confidence index historically predicts within the next 12 months, the trajectory of CapEx activity in the United States. Now, it's not perfect. That's why we have numerous other leading indicators, but it is one of the higher correlated indicators. When you look at that CapEx to business confidence relationship is for.
What this business confidence index is telling us is that we should see an increase in B2B activity as we move throughout 2021. If you look at the trends report, our US non-defense capital goods new orders forecast, is one that displays a positive growth rate in 2021. The readings from this business confidence index are giving us that confidence that we'll see positive CapEx spending here in the United States, as we work throughout the remainder of this year. There's, again, a lot of uncertainty that we still face as businesses, but when we take a step back and remove some of that emotion and really focus on what the data is telling us, there's a lot to be excited about in 2021.
Start considering the moves that you need to make to take on this increasing CapEx, this increased demand from the general economy, so that you can be prosperous in 2021. Don't wait. We're already seeing it in the data. If you wait until you actually start feeling that manifest itself in your business, then it's probably too late in some other companies out there have likely got a jump on you at that point. Move forward with a high degree of confidence, the data, even the data labeled confidence index is improving. I hope you found this episode of TrendsTalk helpful. I'm Taylor St. Germain. I look forward to talking with you all next time, and I wish you all the best rest of the first quarter of 2021. Thank you very much.