Looking for the vital signs

Measure what matters

Human beings have vital signs like pulse rate, respiration rate, body temperature, weight, etc. to make sure everything is functioning correctly. If something is wrong, a combination of those signs or indicators will start deviating from average raising red flags.

Similarly, economies also have few indicators that serve as vital signs, and monitoring them could give you a sense of the health of an economy.

The following are some of the indicators I like to follow. I'm planning to write a post every month, updating these values. For now, I plan to focus only on the US economy because when the US coughs, the world catches a cold.

Let's begin from the top-

GDP:

Gross Domestic Product (GDP) measures the annualized change in the inflation-adjusted value of all goods and services produced by the economy. It is the broadest measure of economic activity and the primary indicator of the economy's health.

The average growth rate of US GDP over the past five years has been ~2.3%.

The US economy shrank by an annualized 5 percent in the first quarter of 2020.

Unemployment Rate:

The Unemployment Rate measures the percentage of the total workforce that is unemployed and actively seeking employment during the previous month.

The average unemployment rate in the US in the past three years has been ~4%. It currently stands at 13.3%!

Inflation:

Inflation generally measures the increase in the price of goods.

Average inflation in the past three years has been around 2.6%.

The annual inflation rate in the US eased to 0.1% in May of 2020, way below the average.

World PMI:

Purchasing Managers' Index (PMI) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies.

Composite Pmi in World averaged 52.29 points from 2013 until 2020, reaching an all-time high of 55.50 points in July of 2014 and a record low of 26.50 points in April of 2020.

It currently stands at 36.30 points.

US PMI:

Composite Pmi in the United States averaged 53.76 points from 2013 until 2020, reaching an all-time high of 61 points in June of 2014 and a record low of 27 points in April of 2020.

It currently stands at 37 points.

CAPE Ratio:

Price-earnings ratio is based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio), Shiller PE Ratio, or PE 10.

Average: 16.72
Max: 44.1 (Dec 1999)
Current: 28.15

Market/GDP:

The total market valuation is measured by the ratio of total market cap (TMC) to GDP -- the equation representing Warren Buffett's "best single measure."

The lowest point was about 35% in the previous deep recession of 1982, while the highest point was 148% during the tech bubble in 2000. The market went from extremely undervalued in 1982 to extremely overvalued in 2000.

It is currently at 141%, which signals that the market is significantly overvalued.

US Equity Risk Premium:

This is an indicator calculated by NYU Stern Prof Ashwath Damodaran. A high number means that stocks are attractive.

It was lowest in 2000 at ~2% and highest in 2009 at ~6%.

Its currently at 5.35%, which is higher than average.

10Y-3M (Yield Curve):

The 10-year yield for the US treasury is currently at 0.687.

The 3-month yield for the US treasury is currently at 0.176.

The yield curve is calculated as 10Y-3M. Since 10Y > 3M, the yield curve is positive, and that is good for the economy. The negative yield curve is generally a strong leading indicator of a recession.

To Summarise (June 2020):

GDP Growth: Negative ๐Ÿ˜“๐Ÿ‘Ž๐Ÿป
Unemployment Rate: High ๐Ÿ˜“๐Ÿ‘Ž๐Ÿป
World PMI: Low ๐Ÿ˜“๐Ÿ‘Ž๐Ÿป
US PMI: Low ๐Ÿ˜“๐Ÿ‘Ž๐Ÿป
CAPE Ratio: High ๐Ÿ˜“๐Ÿ‘Ž๐Ÿป
Market/GDP: Very High๐Ÿ˜“๐Ÿ‘Ž๐Ÿป
Inflation Rate: Low ๐Ÿ˜
US Equity Risk Premium: High ๐Ÿ˜๐Ÿ‘๐Ÿป
Yield Curve: Positive ๐Ÿ˜๐Ÿ‘๐Ÿป

There is more pain in the system than good news. The Dr. Fed is trying their best to keep it from failing completely.