Thoughts from our recent Big Picture podcast, "Approaching the Peak," with Jim Puplava, which can be listened to in full on the Newshour podcast page here or on iTunes here.
Weakening LEI Trend
The Philly Fed Leading Economic Index for all 50 US states has weakened considerably from its 2014 highs (see above) and is getting closer and closer to reaching our first warning threshold of a possible peak in the US economy.
“We’re getting more and more of these indicators that are telling us we’re in danger of going into stall speed, and the labor markets are also edging lower with fewer job formations,” Puplava noted.
Also, a lot of the stimulus we’ve seen in place over the last couple of years has started to fade, adding that long-term interest rates are starting to tighten again, which is particularly concerning.
“That is a very serious one to watch because we saw this happen in the fourth quarter of last year,” Puplava said. “As the Fed talked about raising interest rates, we saw credit spreads blow out, the Fed raised interest rates in December, and then all hell broke loose in the first part of this year.”
What to Do Now
Employment appears to have peaked and we’ve seen the worst new business formation in any recovery since World War II, Puplava stated.
“The one strength of this economic recovery has not been Capex spending by business, it’s not been investment — it’s been consumer spending,” Puplava said.
This may be changing, however. The restaurant performance indicator has dropped and contracted into negative territory for the first time in 8 months. It’s an early warning indicator of recession, Puplava stated.
“I think it’s time to start thinking defensively,” Puplava said. “It’s time to start taking profits if you have them, and lowering your risk profile.”
The market hasn’t been going up based on fundamentals. It’s being kept elevated ahead of an election, but what happens after the election is more important. If the Fed tightens and the dollar continues to strengthen, this could rattle the markets.
“We’ve seen this cycle repeat,” Puplava said. “We could be doing a repeat of last year’s cycle. The only difference is, the economy has weakened much further than where we were last year at this time, and there’s a lot more risk out in the marketplace today than what existed a year ago.”
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