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Where are Indicators Leading Us?

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By Peter G. Hall
Vice-President and Chief Economist Export Development Canada

It’s good to know where we have been. It’s better to know where we are right now. But it’s perhaps best to know where we are going. Economic indicators tell stories about all three. They clearly tell the sad tale of our crisis- and post-crisis journey. They also speak loudly of our indeterminate present. But what are they currently saying about the future?

Over the last few years, economic hopes have risen and fallen on monthly movements in key indicators. Momentum would rise, then fall, sending analysts scurrying from one point of view to another, adding confusion to the general mayhem of the post-crisis economy. Gloom about the situation was interrupted by moments of panic, induced by the next approaching fiscal cliff, or one of the many natural disasters to plague attempts at a more fulsome recovery. Casual and serious observers alike can be forgiven for being more than a bit jaded about data releases.

This year began no differently. Momentum last fall, interrupted by the unexpected shutdown of the US government, was expected to resume in the aftermath, gaining strength early in 2014. Poor weather across North America flattened activity, not just at home but across the globe. The effects were so great that in the Fed’s Beige Book, weather was mentioned more than 25 times in the 7-page executive summary, being discussed in almost every paragraph as a brake on growth.

The frequent incidence of exogenous, or out-of-the-blue occurrences of late has prompted certain serious economic forecasters to suggest adding an adjustment to economic models that anticipates some level of persistent, systemic shock to the system. It might be broadly appealing, a sort of meteorological ‘new normal’ – but in the absence of longer-dated proof, altering the models at this point could prove counter-factual and deceptive.

Why? Check out today’s leading indicators. Prior to the North American weather debacle, indicators across the 34-country OECD group rose for 16 straight months, the first run of its kind since the outpouring of fiscal stimulus in late 2009 created the illusion of global recovery. Weather wrecked the streak, but only temporarily. Post-winter data releases the world over have largely been accompanied by an inspiring two-word phrase: ‘beating expectations’. This time, in spite of the setback, the economy is displaying a refreshing resilience.

It’s happening everywhere, but is most obvious in the US. Purchasing managers are more upbeat than expected. Housing activity is roaring back. Retail sales are strong, and consumer deleveraging is making higher spending sustainable. Industrial production is following suit – not just in the US, but around the world. Even key lagging indicators are rebounding. In April, US employment was well ahead of expectations, and jobless claims last week were at their lowest level since May, 2007.

It now looks like businesses are gearing up to meet new demands. Since the crisis, investment has been unusually low, allowing firms to absorb the excess capacity brought on by recession. Once again, capacity is tight, and orders are piling up. Firms now need to up investment in a big way. The Philly Fed capex orders index suggests much stronger investment intentions. Other indicators are more direct. Class 8 truck orders – a leading indicator popularized by Alan Greenspan – are up 35 per cent year-on-year, the fastest growth seen since 2006. Freight movement is strong, rates are rising, and companies see continued growth through the year.

On a number of fronts, the economy appears to be gathering steam. This time, the groundswell of growth is fired up not by policy or panic, but by basic need. Having exhausted the excesses of the last cycle, current economic activity is once again normalizing.

​The bottom line?

It has been a long time coming, but after over five years of waiting, the economy seems to be reawakening. The leading indicators are almost universally showing it, and for the first time in a long while, we actually believe it’s possible.

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