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My economic benchmarks

Recently, MMA (a banking services and insurance provider associated with the Mennonite church) asked me to speak with some of their investors about how to read the economy. If you follow my Facebook or Twitter accounts, you already know I'm an amateur economist. Apparently, someone at MMA wondered where I was getting my ideas and decided to call me in to see if I knew what I was talking about. Do I know? Here's what I told them. You can judge for yourself. I believe there are two broad forces driving our economy, manufacturing and consumer demand. Let's talk about how to measure what is happening in manufacturing, first. A key measure of manufacturing strength is "Capacity Utilization." It measures how much of our manufacturing capacity is actively being used. It normally falls in the range of 80% to 85%. It's currently at 67.5% [caption id="attachment_3523" align="aligncenter" width="300" caption="We have very little demand for manufactured goods."]We have very little demand for manufactured goods.[/caption] Manufacturing? It's as bad as it's ever been since the 1960's. Take a close look at the raw data on the Federal Reserve website. It's too early to tell, but it may be improving. As for the second force driving our economy, consumer demand, I think there are two reliable ways to measure it. For better or for worse, customers in the USA rely on credit. [caption id="attachment_3527" align="aligncenter" width="300" caption="Credit available to consumers is falling so families in America will spend less."]Credit available to consumers is falling and now stands at 2007 levels.[/caption] An historic run up in consumer credit fueled the economy until 2008. Since then, it's been continually falling as consumers voluntarily try to rebuild their savings or are involuntarily reined in by cautious banks. Total revolving payment credit now stands at $886.6 billion (according to the Federal Reserve). That sounds like a big number, but it's smaller than any time since 2005. Based on this metric, we may have to give back all the growth we've had since that year. The second indicator of how consumers are doing is what I view as one of the most reliable leading indicators. Whenever the economy turns south, folks all over the country are forced to take part time jobs. Uncle Sam has measured this number since 1955, and ever since it's reliably and clearly pointed to upcoming recessions. [caption id="attachment_3533" align="aligncenter" width="300" caption="Over 9,000,000 people are currently working part time jobs for economic reasons."]Over 9,000,000 people are currently working part time jobs for economic reasons.[/caption] Although the number of people who working part time jobs for economic reasons has leveled off, it's not improving (yet). Consumer demand? I'm encouraged by the way the data behind these two charts seems to be leveling off. But, there's not much sign of improvement yet. My take on the economy? I think we should buckle in for a long slog toward improvement. What's your take? And, do you have a statistic that you think is a good predictor of what the future holds? There's a lesson in all this, and it's not about economics. Being asked to make a presentation to investors, as if I were some kind of expert (which I'm not), made me nervous. The lesson for me is that when I express an opinion, I better have the data to back it up! The big question now is whether my data is any good. I guess time will tell! Galen Lehman Galen Lehman, President, Lehman's Galen Lehman Click here to join me on Facebook! PS - What do you use to figure out what is coming? What do you think the future holds? I'd love to hear from you!
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