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Moderate Economic Growth, But ‘Somewhat Fragile’

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The American Institute for Economic Research forecasts a relatively low risk of recession in the months ahead, with consumers driving growth, according to the new January edition of Business Conditions Monthly, out this week.

But the report, AIER’s bird’s-eye view of the economy, notes there are mitigating factors in play that are worth keeping an eye on.

“The U.S. is on a sustainable, moderate growth path. However, the outlook is somewhat fragile as strong crosscurrents affect various parts of the economy,” according to the report.

Certain aspects of the economy are showing strong favorable trends, including new orders for consumer goods, housing permits, heavy truck unit sales, and retail sales. “These trends support our analysis that the U.S. consumer is leading the economy forward,” according to the report.

But the report also noted weak trends in manufacturers’ sales-to-inventory ratios, equity share prices, and consumer sentiment. Stock market volatility may reflect unsettling geopolitical events and rising economic uncertainty, according to the report.

At AIER, we use our own scientific, data-driven model to gauge the health of the economy.

December marked the 76th consecutive month in which our Business-Cycle Conditions model’s leading indicators were at or above 50 percent. Consistent readings above the midpoint suggest a low probability of recession over the next six to 12 months. Conversely, a drop below 50 percent can indicate a greater chance of contraction in the economy.

Leading indicators are those that peak and trough ahead of a turning point in the broader economy, such as new orders for consumer goods. In December, 54 percent of our leading indicators were on an upward trend, down from 56 percent in November.

In addition to leading indicators, we also keep an eye on indicators that reflect conditions in the economy right now, like industrial production. In December, 75 percent of our these coincident indicators were expanding, slipping from 80 percent in November.

We also follow lagging indicators — factors that have a delayed reaction to the business cycle, such as inventories. All these indicators were at a strong 100 percent in December.

This is the first month that AIER has used an updated version of this Business-Cycle Conditions model. Starting with this report, we have improved a number of methodologies and replaced eight indicators, or one-third of the 24 indicators in the model.

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