10/27/24
There are many different economic indicators used to track the health and strength of the economy. Additionally, there are indexes that compile multiple data points to gauge overall economic conditions. Some of these are known as lagging indicators, such as GDP, which measures economic output for the previous quarter. As a result, GDP is not a good indicator of current economic conditions but rather of what has already happened. The unemployment rate is also a lagging indicator because it reflects past data; it tells us how many people were unemployed in the previous month, not how many will be unemployed in the next.
On the other hand, there are leading economic indicators, which are forward-looking rather than backward-looking. One of the most popular leading indicators is the Conference Board’s "Leading Economic Index," which measures factors such as consumer expectations, new orders, building permits, weekly unemployment insurance claims, and more. These data points are important because they tend to "lead" other lagging indicators like GDP. In other words, when leading indicators decline, lagging indicators such as GDP typically follow. Unfortunately, leading economic indicators have been declining over the past two years, suggesting that a recession may be on the horizon. However, this does not guarantee a recession, nor does it indicate the potential severity. Since recessions are always a possibility, investors should be comfortable with their current asset allocation and how it might perform during a downturn. Diversification across asset classes and investment styles remains key.
Chart of the Week
Government spending is always a hot topic, especially as elections approach. We like to examine the broad categories of government spending to better understand where the money is going. Notably, Medicare and Social Security together account for 46% of government spending. Adding defense spending at 14%, these three categories make up 60% of the total budget. A growing area of concern is net interest, which now represents 13% of the federal budget. Net interest is essentially the cost of servicing government debt. Given the significant deficit between tax revenues and spending, this suggests that net interest will continue to rise unless there is a dramatic drop in interest rates. The other potential solution to this issue is an increase in federal income tax rates, which we believe is likely. The Tax Cuts and Jobs Act, passed under President Trump, is set to expire in 2026. This presents some interesting tax planning opportunities, as we have one more year of lower tax rates.
Source: https://www.conference-board.org/topics/us-leading-indicators
Source: CBO, J.P. Morgan Asset Management; (Left) Numbersmay not sum to 100% due to rounding; (Top and bottom right) BEA, TreasuryDepartment. Estimates are from the Congressional Budget Office (CBO) June 2024An Update to the Budget Outlook: 2024 to 2034. “Other” spending includes, butis not limited to, health insurance subsidies, income security and federalcivilian and military retirement. Years shown are fiscal years. *Adjusted byJPMAM to include estimates from the CBO May 2024 report “Budgetary OutcomesUnder Alternative Assumptions About Spending and Revenues” on the extension ofTCJA provisions. Forecasts are not a reliable indicator of future performance. Forecasts,projections and other forward-looking statements are based upon current beliefsand expectations. They are for illustrative purposes only and serve as anindication of what may occur. Given the inherent uncertainties and risksassociated with forecasts, projections or other forward-looking statements,actual events, results or performance may differ materially from thosereflected or contemplated.
Guide to the Markets – U.S. Data are as of October24, 2024.
Written by:
Ben Rones, CFA®
Senior Analyst at R&R Financial
