I am certainly not an economist, but when a Barron’s article early in September highlighted an obscure but potentially troubling economic data point, I had to find out more. The Federal Reserve Bank of Philadelphia produces monthly coincident indexes for each of the 50 U.S. states. These monthly indexes describe recent trends and are further combined into a diffusion index value. More specifically, these indexes focus on four state-level indicators to summarize current economic conditions. The variables in this coincident index include nonfarm payroll employment, average hours worked in manufacturing by production workers, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average) – per the Philadelphia Fed’s website.
What was so shocking in the most recent month’s index release was that the one month diffusion index went below 50, to 36 (a reading below 50 signals the index is declining). As seen in this week’s chart, this is the first time that the one month coincident index has gone below 50 since June 2007, when the index went to 46 that month. Looking at this week’s chart, we can see that this index rarely breaks below 50, but when it does for the first time in a while, it generally doesn’t bode well for the returns of the S&P 500 (as seen in the more than 40% decline after June 2000, and after June 2007 with a more than 50% decline).Key Takeaway:
Coincident economic indicators are supposed to show the current economic environment, not necessarily be a leading indicator (that’s what leading economic indicators are for). As I mentioned before, I’m not an economist and do not closely follow all of the economic indicators out there. I rely on listening to management teams provide updates on what they are seeing in their industries, and I look at the quarterly financial results for U.S. corporations. From these management updates we should be expecting this bull market to continue, but I wonder if we would have heard a similar story back in June 2000 or June 2007. I’m not saying we are headed into a major market correction. It certainly does not feel that way based on what I’m hearing and seeing, but it’s worth highlighting such a rare occurrence in the economic model world and letting others draw their own conclusions.
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