Economic Indicators Up For Second Month In A Row

The economy has been sending mixed signals for most of 2013. May-Investments developed its own Leading Economic Indicator to help our firm understand the current economic environment. Today’s LEI readings are again forecasting continued economic growth during the months ahead. After weakening earlier in the year, the month of May proved to be the second straight up month.

May-Investments developed its in-house indicator rather than rely on the Conference Board’s traditional LEI. With the Federal Reserve adopting Enron-style off balance sheet financing vehicles in order to move the government’s new bond issuance out the doors into buyers’ hands, the old economic indicators became obsolete and the Conference Board’s new indicator is untested. In the meantime, investors are having difficulty understanding whether today’s economic growth is a mirage, an encouragement, or a house of cards about ready to fall and take investors down with it.

Our economic indicator peaked a year ago when activity in the drilling patch declined, small business owners retrenched, and purchasing manager new orders dropped off. Whereas eight of ten component indicators were rising in March of 2012, by the end of May only half of the indicators were on the rise. In October, 2012, only three were moving higher. As 2013 began, in spite of our positive economic forecast for the year, the May-Investments Leading Economic Indicator began trending down again.

In April, however, small business optimism improved slightly and the decline in drilling activity was less significant than it had been a few months back. Overall, the upturn represents less of an “improvement” than it does a less forceful downtrend than at the beginning of the year.

Retail sales are still an area of strength, but they are not as strong as they were a year ago, or in January, and are what we are watching mostly closely for signs that the recovery will continue. Global shipping rates remain weak and bank lending is not growing as fast as it did in 2012. A slowdown in the growth rate of the money supply is also surprising, and worrisome, given the moves that the Federal Reserve continues to make to try to flood the economy with money. We are thrilled that the LEI moved up, but it is too early to conclude that there is much strength there.

As things are now, we stand by our forecast for continued economic growth during 2013. We had projected Gross Domestic Product (GDP) growth of +2.5% this year. We projected an economy that would be making progress in its move back toward normal. As of the most recent GDP report at the end of May, the U.S. economy is growing at a +2.4% rate, pretty much as we expected. Hopefully this recent upturn in our Leading Economic Indicator suggests that slow steady growth rate can continue throughout the rest of this year.

Douglas B. May is President of May-Investments, LLC and author of Investment Heresies.