However, the Conference Board’s Leading Economic Index continues to suggest weakness ahead.
Stocks, with earnings growth strongly correlated with economic growth, remain in a consolidation phase with key support levels currently holding and cyclicals still showing leadership.
Gauges of Current Economic Activity Remain Consistent with Growth
The breadth of economic growth across states provides valuable information about the overall health of the U.S. economy and the Philly Fed state coincident indexes provide important insight into this health. The state coincident indexes increased in 37 states in July, decreased in six, and were stable in seven. While indicating weakening conditions across more states, the current level remains far from recession territory.
The average percentage change across all 50 states eased to 0.2% from 0.3% in the previous month, which was in line with the historical average and consistent with further economic growth for the broader U.S. economy. Supporting the argument for continued growth, the U.S. coincident index rose 0.3%, a modest acceleration from the month before, and above the historical average of 0.2%.
Weekly jobless claims are a timely and accurate economic indicator, and we follow them closely. Jobless claims have been range-bound since February roughly between 220,000 and 265,000 with the most recent reading at 230,000. This continues to reflect an overall tight labor market and strong labor demand, but not quite as strong as last year when jobless claims hit their cyclical low.
The Conference Board’s Coincident Economic Index is designed to provide an indication of the current state of the economy. Encouragingly, it shot up 0.4% in July from flat in the prior month. It was its biggest gain since January, led by a rebound in industrial production.
Leading Economic Index Continues to Signal an Economic Slowdown
The Conference Board’s Leading Economic Index (LEI) tracks where the economy is heading and has been historically accurate at signaling coming recessions, albeit with variable time lags. Consequently, we pay close attention to it. It fell in July for the 16th consecutive month, but also by the smallest amount since August 2022. This suggests the outlook for growth remains uncertain.
Most LEI components either declined or held steady last month. The biggest negative contributions came from falling manufacturing new orders, worsening consumer expectations for business conditions, and higher interest rates. The majority of LEI components have worsened over the past six months. The widespread component weakness and persistent decline in the LEI are historically consistent with shrinking economic activity. Consequently, the Conference Board projects a short and shallow recession in the fourth quarter 2023 to first quarter 2024 timespan.
While we are watching the weakness in leading indicators closely, stocks remain supported by current economic growth and upward earnings revisions after starting the year with low expectations. While consolidating this year’s strong gains, key support levels are holding, and we remain encouraged by the cyclical leadership with sectors that benefit the most from economic growth outperforming.
Investment Implications of a Potential Government ShutdownWe have the following thoughts on the potential government shutdown.
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