Economic Indicators (#289)
/In this podcast episode, we discuss several key economic indicators that can show when there will be a tipping point in the economy. Key points made are noted below.
There are economic indicators that predict when you’re going into a recession, and when you’re coming out of one. Since we’re already in a huge one, I assume no one wants to hear about recession indicators. Instead, I’ll just focus on the ones that historically have predicted a rebound in the economic cycle.
We’re going to need this information, because the recovery from the coronavirus is not going to be V-shaped. It’ll be more like a gradual upward trend that’ll dribble on for several years, and that’s for a couple of reasons. I won’t try to predict when a vaccine will come out, but think for a minute about some capacity-related issues.
Despite the best efforts of Bill Gates, it’s going to take a while to produce 7 billion vaccine doses, especially since most of the existing capacity is already targeted at the production of other vaccines, such as measles and the annual flu. That production is seasonal, which leaves some production capacity, but the best current estimate is that existing capacity will only handle 600 million doses of the new vaccine per year.
Another consideration is that some vaccines require two doses, not one. For example, the shingles vaccine requires two doses. If that turns out to be the case for covid-19, then we’re looking at having to produce 14 billion doses. So in short, yes – there is a capacity constraint that will delay things.
The second issue that’ll delay the recovery is the manner in which the vaccine will be prioritized. The first batch will go to medical workers, of which there are about 17 million just in the United States. The problem is that most of them are already employed, so giving them the vaccine does not cause an upward spike in the economy.
The next batch of the vaccine will go to the at-risk population, which is everyone over 80 years old. Guess what, they’re all retired, so giving them the vaccine will also not help the economy recover. They won’t suddenly start making more money, because they’re all receiving retirement benefits. There are 16 million people in this group just in the United States.
The third batch of vaccine will go to the next most at-risk group, which is everyone from 60 to 80 years old. Unfortunately for the economy, a majority of them are retired, too. And there are 52 million people in that group just in the United States.
So in short, vaccinating these three groups – which we have to do – will chew up at least 85 million doses of vaccine just in the United States. You have to do all that before finally getting around to the main working age group, which is the one that most influences what happens to the economy. So, yes, this is going to take a while even after a workable vaccine is announced.
Weekly Rail Traffic Data
So, after all that, which economic indicators do I recommend? The trick is to find indicators that are way out in front of the purchasing process, so when there’s a spike in these indicators, it’s a clear sign that businesses are planning to ramp back up in a big way. With that in mind, my first recommendation is the weekly rail traffic data from the Association of American Railroads. This is great data, because trains are mostly transporting raw materials. They publish a chart every Wednesday that shows the total carloads transported in the preceding week, and shows the result in comparison to the last two years. Currently, the data looks bad – the numbers are far below last year. When this starts to go back up, it’s a really good sign of recovery.
Purchasing Managers Index
The next indicator is the purchasing managers index, which is released by the Institute of Supply Management once a month. Again, purchasing managers are on the front end of an economic recovery, so they’re in a good position to render an opinion. Unfortunately, it’s only an opinion. The Institute asks them if they think market conditions are expanding, contracting or staying about the same. The way the index is constructed, a score of 50 represents flat conditions. Right now, I’d be happy with that, since the current index is down at 41.5. The key here is to just look for an upward trend. It might be a while before it gets back to 50. So those too indicators are associated with purchasing.
Advanced Retail Trade Survey
For this specific crisis, a potentially really great indicator is food service and bar sales. It comes from the advanced retail trade survey that’s issued each month by the Census Bureau. The report contains all kinds of other information, but the reason the food service and bar sales piece is so important is that this is the exact area that we can’t indulge in right now, due to the virus – or at least, not without taking a lot of precautions. So when this number starts taking off, it probably means that people have been vaccinated and are feeling good enough about their prospects to go out and spend a little money.
Job Openings and Labor Turnover Report
And finally, there’s the Job Openings and Labor Turnover Report, which is issued by the Bureau of Labor Statistics once a month. It contains pretty much what the title says – job hires, separations, and openings, and it’s broken down into all kinds of subsets, like construction, government, and hospitality employment. To see what’s going on, all you have to do is watch the trend line on the report.
Out of these four indicators, I’ve bookmarked the weekly rail traffic data, and I check it every Wednesday. Unfortunately, everything else only comes out once a month, so the results aren’t exactly immediate. Still, these are good indicators for whether we’re clawing our way out of this mess.