April 21, 2006 at 9:04 PM #6512powaysellerParticipant
Joseph H. Ellis was a partner of Goldman Sachs and was ranked for eighteen consecutive years by Institutional Investor magazine as Wall Street’s #1 retail-industry analyst.
His book, Ahead of the Curve, teaches us how to use leading indicators for gauging the economy. Many folks make the mistake of thinking employment numbers are an indication of the health of the economy. Actually, employment is the most lagging indicator. By the time employment hits bottom, we’re in a recession. The leading indicator, the one data point you really want to watch: consumer spending. Keep an eye on the factors that influence consumer spending (wages, interest rates, and in my opinion, housing values and mortgage equity withdrawal). One difference between him and other economists: his data points are for y-o-y changes, not quarter-over-quarter, or month-to-month. This, and the consumer spending as a leading indicator idea, make his analysis so accurate, and have garnered him so much attention.
His website is cool – he regularly updates the indicator charts described in the book. It’s a fairly easy read, and totally fascinating! I should have been an economist. Is it too late for me?
The conclusion: consumer spending is slowing, and a slowdown in capital spending is inevitable.
Some excerts, if you care to read on.
Consumer Spending, Industrial Production, and Capital Spending
With a slowdown in consumer spending growth in 2006 appearing more likely…a slowdown in capital-spending growth (based on historic relationship between these two series at past peaks) over the coming year appears virtually inevitable.
Fed Funds Rate
The Fed Funds Rate is a usually reliable indicator of a forthcoming slowdown in consumer spending in past cycles, and is sending a strong cautionary signal on consumer spending for the year ahead.
Any further (energy-caused) increases in inflation are likely to trigger additional increases in the Fed Funds rate as well.
Given the consistent history of rising Discount or Fed Funds rate leading bear markets, investors should approach the stock market cautiously at this time.
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