Nicholas
Kulish and His
12 Vital Signs for the Economy
by Ken Coleman, editor
Ken Coleman's Investment Tracker
In
a June 26 Wall Street Journal article by Nicholas Kulish
titled "Vital Signs Offer Clue on the Economy's Stamina,"
there was nothing new or earthshaking concerning Kulish's 12
vital signs other than simplicity.
To quote, "Folks
can play along at home, even without access to the Fed's reams
of confidential data reports, since the invisible hand of the
market does leave fingerprints"
Kulish goes on to provide
12 vital signs for the economy. When any of these 12 signs begin,
the economy is starting to slow. (Later, I will explain why it's
important for you to follow these signs instead of accepting
the media's version of events at face value.) Except for direct
quotes, I have paraphrased Kulish's vital signs and comments.
I have also updated the signs and added data.
1. When your Sunday
paper's want ads start to shrink. The Conference Board keeps
track of help wanted ads in its Help Wanted Index. During the
past recession, this index bottomed at 59. According to Kulish,
it hasn't fallen below 80 since 1996. The Conference Board's
June reading on its index is 81.
Another useful bit
of data reflecting employment is the number of workers who voluntarily
leave jobs. If this number increases, it shows people are still
confident about their ability to find a better job. Just the
opposite is true of the numbers of employees quitting jobs declines.
Currently, the number
of workers seeking new jobs is down slightly. It's fallen over
the past several months from 15% of the workforce to 12%. This
is the first sign of job insecurity. Much of the job loss and
job insecurity is coming from the dot com companies, while much
of the rest of corporate America still faces labor shortages.
Follow the number of
pages of want ads in each Sunday paper. Also follow the Conference
Board's Help Wanted Index.
2. When car commercials
start advising less about the driving experience and more about
cheap financing and rebates. Car sales have declined over
the past several months. Check out your area's car ads. Do they
offer zero financing and huge cash rebates?
3. When Greenspan
is no longer every politician's hero. Once the economy is
in the grip of a slowdown, politicians who once bowed in the
presence of the Fed Chairman instead ask him pointed questions.
Greenspan will speak to Congress in early 2001 and this will
be a meeting to watch carefully. Will the politicians be cooing
or will they be worried? Listen to their questions. Few of us
get much from Greenspan's answers.
4. When the dollar
start to lose value. After the dollar has fallen 10 - 15%,
most analysts agree the hot money in our markets from abroad
will start to head home, precipitating another market crash.
To quote Kulish, "a slowdown would punish the greenback
against the yen, the Euro and Swiss franc."
Currently the dollar
is in what I view as a blow off stage. It is testing recent highs
against the currencies just mentioned and putting pressure on
corporate earnings.
6. When there are fewer and much shorter freight trains clogging up traffic in your town. Kulish states this data is religiously used by the Federal Reserve to examine the strength of the economy. According to the Association of American Railroads, freight traffic numbers (U.S. carload) fell 1.1% in May and another percent in June. The American Railway Car Institute estimates freight traffic will fall drastically this year.
7. When the yield curve inverts. According to Kulish, "bond market mavens study charts showing the yield on Treasury securities of different maturities. They worry about a slowdown or recession when long-term interest rates fall below short-term interest"
This is a vital sign I spend a lot of time watching. The degree of inversion is important because it provides an estimate of the potential slowdown in GDP. The degree of any uphill incline between short an long rates provides an educated guess for any increase in GDP.
It works because the long-term interest rate has a built-in inflation premium. The longer the maturity and the greater the expectation for rising prices, the greater the premium. When the short rates move above the longer rate, it suggests a slower economy. Once the economy slows, the next expectation is for lower short-term rates. Currently, the inversion of the yield curve is less than 100 basis points or 1%. This suggests the economy is slowing, but at a modest rate.
As the degree of the inversion increases, so will the potential for a GDP slowdown. One caveat: our government is currently buying back 30-year bonds and other select government securities. This tends to distort the meaning of an inverted yield curve. The 10-year note is now the benchmark for the yield curve.
8. When you finally get a reputable carpenter to do your home repairs or improvements. Six months ago my wife couldn't get anyone to install hardwood floors in our kitchen and dining room. After a couple of months, she gave up. She says she will try again early next year. When the economy is booming, everyone wants all those home repairs and improvements done as soon as possible. When the economy starts to slump, these projects start to lose appeal.
9. When crime reports start to increase in number. The economic boom has kept those willing to work very busy. Acts of crime have slowed. But once GDP moves lower, crime will escalate. As Kulish put it, "when murders start to take over the evening TV news at five, it is a bad sign for the economy."
10. When adult toys start piling up on store shelves. According to PC market research, "buyers gorged themselves on $40.92 billion of hardware, software and peripherals in 1999" This was a 13% increase over the previous year's sales. When the economy starts to sour, leading edge high-tech gadgets will remain on retailers' shelves.
11. When the mini baby boom starts to come to a halt. The number of births in our nation tends to move with the economy. When the economy is booming, births are up. When the economy declines, so do births. This, of course, is a lagging indicator because it usually takes about 9 months from conception to birth.
12. When the equity bubble finally bursts and average investors lose interest in stocks. The proverbial shoeshine boy has had nothing on his mind but AOL, Cisco and Dell for several years. Nearly half of all U.S. households owned equities last year. That's a big increase from 36% in 1992. According to Kulish, "when a slowdown comes, friends and relatives may stop talking price-earnings ratios and start talking box scores again."
That's it for Kulish's 12 Vital Signs for the Economy. As you know, I follow many more. I track our nation's money supply growth and select commodity prices such as crude oil and gold. Others I track are the Fed's X Factor, the business cycle, long cycle, Consumer Price Index and Producer Price Index.
One reason I listed Kulish's 12 Vital Signs for the Economy is to encourage you to develop a feel for what's happening independent of what the Fed and the mainstream media are saying.
There is a growing concern about the credibility of media data. Most of the data about the economy used by the media comes from the Conference Board, private research and the Department of Labor. The latter has received a lot of criticism over the accuracy of its data.
Among those critics are Fed governor Larry Meyer who was quoted in Barron's to be critical of a private payroll report. St. Louis Federal Reserve Bank President Poole recently downplayed the May employment report which convinced many the economy was slowing.
The media has failed to warn the public that two senior Fed officials no longer trust DOL stats. Alexis Herman, who heads the Bureau of Labor Statistics, is under investigation for influence peddling. How can we trust the accuracy of her data?
Few investors have any knowledge of these problems. They accept the media's and DOL's version of our economy's slowdown without question.
Editor's Note: Ken Coleman is editor of Kenneth Coleman's Investment Tracker, 4805 Courageous Ln., Carlsbad, CA 92008, 1 year, 12 issues, $139.
