How Strong is the Economy?

There are many ways to gauge the economy's momentum. GDP reports are important, but dated -- we won't have the data for Q3 for another month, and that will be a "first pass." There are other indicators used: the Index of Leading Economic Indicators; Consumer Confidence; Retail Sales; and many others.

A very good real time read on this is given by the Cyclicals Index ($CYC). We have discussed ways to look at short-term and intermediate-term trends. How can we determine the long-term trend? The way I will suggest here is to look at daily data using a very long moving average. How long? Long enough to capture the current trend without having many "bounces" below or above in the short-term. In the diagram of Cyclicals, the MA that works for this is the 400-day (=80 weeks).

The potentially startling result using the 400-day MA, is that the long-term trend has just recently turned negative (early October). Note this on the graph. Also, short-term support has also been violated in the past few days. So, no matter what you hear on CNBC, or Bloomberg, the rosy picture painted by my fellow economists is not shared by asset markets. The message of the Cyclicals is that we are already experiencing a "soft patch." And, as asset markets are leading indicators, this paints a not-so-rosy picture for the upcoming months. Note that this is consistent with what the bond market has been saying for some time now (the bond markets are saying the Fed is tightening too much).

The interesting thing now is to see if the markets are right or whether the optimistic TV "talking heads" are correct.

Q: What do you think is the likelihood of being invited to Larry Kudlow's 5:00 show if you believe what the Cyclicals chart is saying?
A: DUH!