Fisher Investments Research Staff
Reality Check

Six Indicators of Underappreciated Economic Strength

By, 12/13/2011

Two well-known stories in 2011 have been heightened market volatility and ongoing uncertainty regarding the European debt situation. But a less talked about story has been, what we see as the underappreciated strength of the US economy. In our view, this exemplifies the disconnect between sentiment and reality—a positive for stocks moving forward. The following exhibits detail just a few underappreciated indicators.


Leading Economic Indicator Index

The Conference Board’s Leading Economic Indicator (LEI) index (see Exhibit 1) has risen to all-time highs. The index derives its value from 10 key variables, including employment data, spending results, manufacturing and consumer sentiment. In the last 50 years, a recession has never closely followed a rising LEI trend.

Exhibit 1: Leading Economic Indicators Index

Source: Thomson Reuters



Credit and liquidity conditions have materially improved—see Exhibits 2 and 3. After months of negative lending growth, bank loans and leases are expanding, likewise commercial and industrial loans. These are positive signs of banks’ increased willingness to lend, which should prove fodder for ongoing economic growth.

Exhibit 2: US Commercial Bank Loans and Leases

Source: Thomson Reuters

Exhibit 3: US Commercial & Industrial Loans

Source: Thomson Reuters


Private Fixed Investment and Core Capital Goods

Private fixed investment—outlays on things like machinery, land, buildings or vehicles—has experienced a growth spurt the last five quarters. (See Exhibit 4.) Likewise, shown in Exhibit 5, shipments of core capital goods—items like machinery, power transmission equipment and computers—continue to rise. These indicators show businesses are stronger than folks believe—many are preparing to ramp up production to meet anticipated future demand.

Exhibit 4: Private Fixed Investment

Source: Thomson Reuters

Exhibit 5: US Shipments of Core Capital Goods

Source: Thomson Reuters


Retail Sales

Sharply rising retail sales figures contradict dour consumer confidence surveys, which are backward-looking in our opinion. To get a better sense of consumers’ health, look no further than retail sales in Exhibit 6, which are well above the historical average. Some argue this trend isn’t sustainable with elevated unemployment, but we’ve found disposable income drives sales more than unemployment does. And nominal disposable income has grown eight straight quarters now, despite persistently high unemployment. 

Exhibit 6: Year-Over-Year Change in Retail Sales

Source: Thomson Reuters

The aforementioned indicators are by no means an exhaustive examination of the entire economy. However, amid rampant negativity in media headlines, they serve to highlight some of the underappreciated factors unfolding in the economy. And that they continue to be underappreciated bodes well for stocks moving forward.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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