There are so many economic indicators being published weekly that it’s very easy to get distracted and lost. Which of them really matter? Which are actual leading indicators – and which are trailing ones, reporting old news from six months ago?
Here’s a great column by Forbes columnist Bert Dohmen, who makes the case that you only need to consider two things when forecasting the economy:
- Credit growth
- Job growth
- Consumer spending
Forget the dozens of economic statistics, especially the ones published by the U.S. government. Many are “seasonally adjusted,” which simply means they are good for nothing. Then, several months later, they get substantially revised. How can you know what is important and what is not? Here is a guide you should copy and put on your trading computer.
Credit growth: The most important indicator is “credit growth” or lack thereof. Everything else follows. Actually, you could stop right there. However, there are two other factors to assist you, although they depend on credit growth.
Job growth: This is the most important economic factor dependent on credit growth. If there is no credit growth, then there will not be any sustainable job growth.
Consumer spending: For stock investors, the most important indicator is “consumer spending.” Consumer spending is a coincident indicator. When it declines, so does the stock market. It helped us identify the 2007 stock market top. If there is no job growth, then spending will depend on consumers who have jobs spending more. This can happen, but it can’t be sustainable. We have seen this over the past 16 months.
Makes sense to me, and all of these indicators are things we’ve been following closely. Credit growth is negative, along with consumer spending, and job growth is non-existent. Zero for three!
Like many of us, Bert is bearish on the economy and expects a double-dip. It’s becoming more and more rare these days to find others who expect another downturn – as the S&P continues its bewildering climb to the sky – so this was a very refereshing piece to read!
Hat tip Carson for the link.
And recent updates on Bert’s metrics:
- Former hedge fund manager Andy Kessler believes we’re only in the 3rd year of a 7+ year deleveraging cycle