The stock market is back in positive territory for the year after a short dip into negative numbers in late September and early October. As of October 21, the S&P 500 has increased by 4.9%. Does this indicate ongoing economic growth? Historical data suggests a cautious affirmation.
Concerns about a potential recession have been rising over the past month; however, some analysts are re-evaluating their outlooks. According to Bloomberg, “The U.S. economy likely grew at its fastest rate of the year during the third quarter, alleviating fears that the recovery was stalling.” The median forecast of 68 economists surveyed indicates a projected GDP growth of 2.5%, following a 1.3% increase in the previous quarter. Additional data may show that business equipment orders rose in September and new-home sales have stabilized.
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September Leading Economic Index
Conference Board | Oct 20
The Conference Board’s Leading Economic Index (LEI) for the U.S. saw a 0.2 percent rise in September, reaching 116.4 (2004 = 100). This followed increases of 0.3 percent in August and 0.6 percent in July. Ataman Ozyildirim, an economist at The Conference Board, stated that “September’s data indicates a moderating growth in both the LEI and the CEI. The weaknesses among the leading indicator components are becoming more widespread. The CEI reflects a slow current economic condition, suggesting that sluggishness is likely to persist.”
Today’s update reveals a positive trend in new jobless claims. The number of new filings for unemployment benefits did not increase last week, maintaining optimism that a new recession can be avoided in the foreseeable future. While claims decreased by 6,000 last week to a seasonally adjusted 403,000, this modest decline is not entirely convincing. Approximately 400,000 new unemployment claims continue to emerge weekly, highlighting the ongoing struggles in the labor market. This indicates that the economy remains at risk, even if it hasn’t reached the breaking point.
Ron Paul, a Republican congressman and presidential candidate, criticizes the Federal Reserve in today’s Wall Street Journal. While there are undoubtedly numerous valid critiques of the central bank, some improvements are evident. The Fed’s response to the recent financial crisis has been better compared to their actions in the early 1930s; although that is a low bar, it does prevent recurrence of the 25% unemployment we once witnessed. However, Paul proposes completely eliminating the central bank, asserting that the market should take control of the delicate task of managing the nation’s money supply. Yet, historical evidence supporting this idea is rather limited.
This morning’s updates on consumer inflation and housing construction for September provide further evidence that September is unlikely to mark the onset of a new recession. In short, housing starts increased by 15% last month—marking the fastest pace since January—while consumer inflation has only slightly slowed down, indicating that deflationary pressures related to economic contraction are minimal.
While it may be too early to entirely rule out the possibility of a new recession, macroeconomic indicators for August do not clearly signal trouble. Macroeconomic Advisers recently published a monthly GDP estimate, revealing that the economy grew by 0.4% in August—down from July’s 0.9%. The question remains whether September’s figures will point towards further slowdowns. This query is still up in the air, given that not all September data has yet been released. The official quarterly GDP report, including the first estimate for Q3, is set for release on October 27.
There are rumors suggesting that inflation is a primary concern among investors. Tim Bond of Odey Asset Management reflects this sentiment in his recent article in the Financial Times, stating that “the rise in inflation has significantly contributed to the sharp slowdown in global growth since the onset of the year.” Typically, concerns about inflation accurately describe how capital markets react to rising inflation expectations, and rightly so, as inflation can diminish wealth. However, these are not ordinary times.
Is the small-cap risk premium losing its relevance? This question persists for a practical reason: the excess return of small stocks compared to larger firms can sometimes disappear. It’s uncertain if it will return, illustrating the unpredictable nature of return “anomalies.”
In summary, recent updates on economic indicators suggest a complex landscape for the U.S. economy. While some factors raise hopes for continued growth, caution remains necessary. By closely monitoring these developments, stakeholders can better navigate the evolving economic landscape.
