3 Signs the Economy is Not as Healthy as Markets Believe

With U.S. equity markets hitting all-time highs it is hard to talk about how things really aren’t as rosy as markets would lead you to believe. This is precisely why we developed Allegiant’s Economic Dashboard. Without getting caught up in the daily market hoopla we can step back and look at the health of the underlying economy. While investors buy companies, not the U.S. economy, big economic changes do lead to market changes. Therefore, it is important to watch the economy.

The February Economic Dashboard shows a rather cloudy picture. Half of the indicators are solidly in the green and the other three – are not. Here’s a snapshot of the Dashboard.

AllegiantPA Economic Dashboard Portrait February 2020

  • Job Openings (Red) - After steadily increasing job openings for much of the decade, new openings spiked in 2018. This spike coincides with the passage of the Tax Cuts and Jobs Act of 2017. However, after that initial boost, job openings have declined. This can mean two things. Open jobs are being filled at a faster rate, which is good for the economy. However, the downside is after filling these jobs, corporations feel good about their current level of employment and seek fewer new positions. This could be an early sign that new hires in the future will be lower, which is an ominous sign for the economy.
  • ISM Service (Green) - The service economy remains the bright spot of our economy. Even in the midst of a manufacturing recession, service businesses are still feeling good. To be sure, recent economic weakness has negatively impacted service businesses, but the sector remains well above the level of concern.
  • Leading Economic Index (Yellow) - As a composite of leading economic data, the LEI is signaling potential weakness ahead. However, the LEI is still positive, meaning immediate economic trouble is not a given. In fact, the LEI reached this level back in 2016 before rebounding for the next few years. However, there is little room for error in this statistic.
  • Consumer Confidence Year-Over-Year Change (Green) - The absolute level of consumer confidence is near all-time highs. However, the year-over-year change is a bit more troublesome, as it signifies changes in confidence that impact the economy moving forward. After declining some in 2019, confidence is once again increasing. This is a positive sign for the U.S. economy as consumers account for nearly 70% of economic activity.
  • 10-Year/3-Month Treasury Spread (Red) - The yield curve became inverted in June 2019, but the inversion did not last long. The same may be the case with this inversion. After inverting just long enough for us to print the February Economic Dashboard, the yield curve has already normalized. Whether inverted or not, the current flat yield curve signifies weakness in the economy.
  • S&P 500 & 20-Month Moving Average (Green) - The brightest green on our dashboard is the one that is equity market-based. As the S&P 500 continues to hit new all-time highs, the gap between the current price and the 20-month moving average is also near an all-time high. The S&P 500 would need to pull back 12% before this turned red.

With two red indicators and one yellow indicator, the Economic Dashboard is currently on the verge of three reds. This is the point at which the Allegiant team becomes concerned about a potential recession on the horizon. While we are not there yet, we are currently on alert. Of the six U.S. recessions since the 1970s, on average a recession hit within seven months of three indicators turning red. In the meantime, as evidenced by our recent experience, markets can still perform well as corporations eke out additional profits.

If you would like to see more data and charts about the economy and various financial markets please click here to view our Monthly Insights book.

Benjamin W. Jones, CFP®, AIF®
President, Chief Investment Officer, Principal