Leading Indicators Show Slowdown

Businesses will still be busy through the coming five to six quarters…the rate of growth will be slower than what we have seen in the previous two years.

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Different leading indicators will look at the United States economy from different angles. The factors that make up the leading indicators and the weighting of these factors vary considerably. It is thus an event of note when the timing and directions of the leading indicator trends point to the same conclusion, namely that the U.S. economy will be accelerating for the next six to nine months, followed by a shift onto the backside of the business cycle. Please understand that for the latter half of 2007 the phrase “backside of the business cycle” means a slower rate of growth, not the onset of recession (that comes later). Let’s take a look at favorite leading indicator of ours.

The EcoTrends Leading Indicator is our favorite leading indicator for two very important reasons. One is that this leading indicator is exceptionally accurate; the second is that it also is usually the first leading indicator to signal an upcoming cyclical shift. The EcoTrends Leading Indicator edged higher in September, but the one-month upward tick is not statistically significant. The overall trend clearly signals that we are on track with our U.S. forecast. The October 2005 high in the EcoTrends Leading Indicator places the corresponding U.S. Industrial Production 12/12 peak around March-May 2007. We are calling for a second-quarter 2007 12/12 high for the macroeconomic benchmark, which means Phase C for the economy as a whole in the second half of 2007. Mature and coincident industries can plan on the same timing estimate—plan for Phase C now and be ready to implement by mid-2007.

Economists, including ourselves, have a tendency to talk about “the economy,” and in doing so, we lump disparate segments of a complicated system into one neat file folder. The sum contents of the file folder are then forecasted and labeled Gross Domestic Product (GDP) or U.S. Industrial Production.  This forecast proposes a likely course of action for the collective “we”; however, “we” are not managing your business—you are.

Know the phase

Management at the corporate level can often take advantage of our U.S. Industrial Production forecast, as many of you know, by virtue of the Economic Timing Analysis we generated for your specific business. But it is also true that different markets will progress through the business cycle at different times, putting them in different phases of the cycle. Different trends, reflecting different worlds, require that you look at our Management Objectives on a market-by-market basis (see our Web site at www.ecotrends.org). The universal goal is to maximize profitability during good times and bad, and this can best be accomplished by knowing what phase of the cycle your own business is in and acting upon that knowledge.

Quarterly and annual data trends for Electrical Equipment New Orders are climbing to record highs, at 18.4 percent and 19.9 percent above year-earlier levels, respectively. The seasonal rise in the quarterly New Orders figures is steeper than normal. Despite all this good news, the rates-of-change are signaling that we have begun a gradual trek down the backside of the business cycle, also known as Phase C. Phase C means businesses will still be busy through the coming five to six quarters; it is also telling us that the rate of growth will be slower than what we have seen in the previous two years. Expect the growth rate in 2007 to be about one half the yearend 2006 clip.         

Alan Beaulieu,

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