Every day we are inundated with noise about the health of the economy. Take for instance the following headline, “Consumer Sentiment ticks down 2 points to 93.1”. Without more information, there is no way to know if this is slightly negative, very negative, or simply neutral.
The goal of this exercise was to:
- Visualize how various economic leading indicators are correlated to future moves in the employment rate, stock market, and housing market.
- Show the current status of the economy for each leading indicator.
- Develop a solution that can be automatically refreshed with the latest data from the Federal Reserve.
- Provide simple summary of future expectations based on current conditions.
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Used analysis methods:
Historical N-Tile analysis – The sample data in this dashboard is divided into 8 subsets (quantiles) of equal sizes. In Quantile analysis when there are stronger patterns in the quantile values the indicator has had more consistent past results. For example when the highest (or lowest) values are on the left side, in the middle or on the right side, then it’s a good base for any conclusions.
Current Leading Indicator analysis – Average future (10-12 months) value increase/decrease based on the indicators current quantile value.
“… prior 3-month change” calculation was implemented as an Average of values between 3 and 4 months prior which ensure smooth average of monthly data. This was done due to the data granularity issues.
10-City Home Price Index (SPCS10RSA) – S&P/Case-Shiller 10-City Composite Home Price Index. Case–Shiller index composite 10 index is a composite index of the home price index for 10 major Metropolitan Statistical Areas in the United States.
Employment Rate (LREM64TTUSM156S)- Aged 15-64: All Persons for the United States.
Wilshire 5000 Full Cap Index (WILL5000PRFC) – Wilshire 5000 is market-capitalization-weighted index of the market value of all US-stocks actively traded in the United States. The difference between the full capitalization, float-adjusted, and equal weight versions is in how the index components are weighted. The full cap index uses the total shares outstanding for each company.
10-Year Minus 2-Year Treasury (T10Y2Y) – 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity. It shows if the U.S. Treasury long-term rate is higher or lower than the U.S. Treasury short-term rate. A 10-2 treasury spread that approaches 0 signifies a “flattening” yield curve. A negative 10-2 yield spread has historically been viewed as a precursor to a recessionary period. A negative 10-2 spread has predicted every recession from 1955 to 2018, but has occurred 6-24 months before the recession occurring, and is thus seen as a far-leading indicator.
2yr Treasury (DGS2) – 2-Year Treasury Constant Maturity Rate. Constant maturity is the theoretical value of a U.S. Treasury that is based on recent values of auctioned U.S. Treasuries. Constant maturity yields are often used by lenders to determine mortgage rates. For example, if the one-year constant maturity rate is 4%, the lender may charge 5% for a one-year loan to a borrower. The 1% spread is the lender’s compensation for risk and is the gross profit margin on the loan.
Consumer Sentiment (UMCSENT) – University of Michigan: Consumer Sentiment. Consumer confidence measures the degree of optimism that consumers feel about the overall state of the economy and their personal financial situation. If the consumer has confidence in the immediate and near future economy and his/her personal finance, then the consumer will spend more than save.
Crude WTI (DCOILWTICO) – Crude Oil Prices: West Texas Intermediate (WTI) – Cushing, Oklahoma
Industrial Production Index (INDPRO) – measures real output for all facilities located in the United States manufacturing, mining, and electric, and gas utilities (excluding those in U.S. territories).
Single Family Housing Permits (PERMIT1) – New Private Housing Units Authorized by Building Permits – in Structures with 1 Unit.
Ted Spread (TEDRATE) – Ted Spread is difference between the interest rates on interbank loans and on short-term U.S. government debt (“T-bills”). An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. Interbank lenders, therefore, demand a higher rate of interest, or accept lower returns on safe investments such as T-bills. When the risk of bank defaults is considered to be decreasing, the TED spread decreases. Boudt, Paulus, and Rosenthal show that a TED spread above 48 basis points is indicative of economic crisis.
Total Employees – Goods (USGOOD) – Thousands of Persons in goods producing industry, seasonally adjusted.
USD Index (TWEXBGSMTH) – Trade Weighted U.S. Dollar Index: Broad, Goods and Services. A weighted average of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.