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By New_Deal_democrat July 8, 2015 3:48 pm
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Long leading indicators: midyear update

With half of 2015 gone, let's update the long leading indicators.  To refresh your memory, these are the 4 economic series identified by Prof. Geoffrey Moore, who developed the index of leading indicators and later founded ECRI, as leading the economy as a whole by 12 months or more.  They are:
- corporate bond yields
- housing permits
- corporate profits deflated by unit labor costs
- real M2

Let's look at each in turn.

First, here are corporate bond yields (iinverted). Typically an economic expansion does not end until at least 12 months after these establish a new low:

BAA rated corporate bonds did establish a new low in January of this year.  AAA rated corporate bonds did not confirm, although they came close.

Second, here are housing permits through May, their last monthly report:

These tied a previous high in April and then surged to a  new post-recession high in May. Since constructing and then furnishing a new house and lot take several years, this is a strong indication of continued economic growth through the first half of next year.

A similar measure is new private residential investment, measured quarterly, a measure idientifed by Prof. Edward Leamer as typically peaking 5 quarters before a recession.  This made a new high in the 1st quarter:

Third, here are corporate profits, last reported for the 1st quarter, deflated by unit labor costs:

Although these did rebound in the first quarter, they have not made a new high since 3Q 2014.  If corporate profits stall, it is fair to expect corporate spending to stall as well, particularly on new hiring.

Finally, here is real M1 and real M2 measured YoY:

Both of these are strongly positive through the end of June.

I would be remiss if I did not mention at least two other economic series that have typically led turns in the economy by at least 12 months.

First, here is the yield curve, measured as the difference in yields between 10 year treasuries and 6 month treasuries:

This has been an excellent harbinger of economic turns since the late 1950s.  It is also very positive through the end of June:

The only reason I do not use this series more often is that it does not function as a positive indicator in times of deflation (e.g., the 1920s through 1940s).  Since we are currently in a deflationary or near-deflationary episode, I am much more cautious about relying on this measure.

And here are real retail sales per capita:

These are followed on a monthly basis by Doug Short.  They have an excellent record of peaking at least 12 months before any economic downturn.  As of the last report in May, they set a new record.

While not every long leading indicator is making new highs, and in particular corporate profits have stalled, the other indicators solidly suggest that this economic expansion will last at least through the 2nd quarter of 2016.

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