Seeking Clues on the Future Economy (Hint: It Looks Good)

Despite potential trade wars, FBI and White House wars, and Russian intrigue giving Wall Street persistent heartburn, forecasters remain confident in future economic and market growth.

They point to several key indicators as reasons why.

“Our favorite leading indicators are signaling that further economic growth and stock market gains lie ahead,” said John Lynch, chief investment strategist for LPL Financial.

These five benchmarks are at the top of the list of indicators:

The Treasury Yield Curve. Bull markets often end (and bear markets start) when the Federal Reserve pushes short-term interest rates above long-term rates, which is often referred to as "inverting the yield curve,” Lynch said.

For example, the S&P 500 Index peaked in 2000 and 2007 when the three-month to 10-year Treasury yield curve was inverted by about .5 percent (three-month Treasury yields were roughly .5 percent above the yield on the 10-year Treasury note), he said.

With three-month and 10-year Treasury notes currently yielding 1.67 percent and 2.89 percent, respectively, the Fed should raise short-term rates by more than 1.7 percent, assuming a constant 10-year yield, to invert the yield curve by 0.5 percent, Lynch explained.

“The roughly seven hikes of 0.25 percent each that would be necessary to push the Fed funds rate over 3.4 percent may still be two years away, if not more,” he said.

ISM Manufacturing Index. Earnings are the most fundamental driver of the stock market, and should be a part of any recession or bear market watch checklist, Lynch said.

“The ISM Manufacturing Index has historically been a good earnings indicator, with a six-month lead time,” he noted.

Currently, this indicator is signaling that solid manufacturing activity and robust earnings growth are ahead with no sign yet of a meaningful peak.

“Historically, on average, recessions do not start until nearly four years after manufacturing peaks,” Lynch said. “The February reading (60.8) was the highest since 2004 and significantly above 50, which is the level that indicates contraction.”

Leading Economic Indicators. The Conference Board Leading Economic Index (LEI) is arguably one of the most underrated macroeconomic metrics/indicators out there, said Mitch Zacks, principal with Zacks Investment Management, based in Chicago.

“If you try to find an instance where the LEI was going up and the economy fell into a recession, you wouldn’t find one,” Zacks said. “Any time the LEI is high and rising, the economy has grown. It makes sense then that the key elements of the LEI are designed to signal peaks and troughs in the business cycle.”

The LEI looks at factors like manufacturers’ new orders, building permits, the interest rate spread, weekly claims for unemployment insurance, amongst a few others.

“These are all indicators that may be able to offer forward-looking insights into economic activity, versus a metric like GDP that looks backward,” Zacks said. “Right now, the LEI is high and rising – and that’s another good sign.”

U.S. Employment/Wage Growth. Job growth came in above expectations to start the year and continues to grow, as the United States saw an additional 313,000 jobs added in February. The current unemployment rate is at 4.1 percent, a 17-year low.

“January's initial positive wage growth numbers were perhaps overstated and we see thus far only a 0.1-percent rise in wages for hourly workers,” said Maggie Johndrow, a financial advisor with the Johndrow Wealth Group of Farmington River Financial. “While this may prove to be difficult for hourly workers, the market responded well to this news with stocks rallying this past Friday.”

The lower wage growth may indicate that inflation is not rearing its head as quickly as January's data suggested. Instead, the data keeps the Federal Reserve on track for the already anticipated, modest interest rate increases this year, she added.

Consumer Confidence Index. The Consumer Confidence Survey reported at the end of February that the Consumer Confidence Index is at its highest peak since 2000. The Index is now at 130.8, an increase of 6.5 from January.

“Positive consumer sentiment is, of course, good for the economy as consumers are likely to spend more during these periods, further stimulating the economy,” Johndrow said. “Based on these leading economic indicators we do anticipate continued growth into 2018. That said, we continue to monitor possible risks such as a potential trade war, possible international conflict with other countries, and/or inflation.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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