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Common Recessionary Warnings - An Educational Series #3 - Trey Reik

Common Recessionary Warnings - An Educational Series #3 - Trey Reik
By Sprott Global Resource Investments Ltd. 3 years ago 1766 Views

Trey Reik is a Senior Portfolio Manager and Precious Metals Strategist at Sprott Asset Management USA, a division of Sprott Inc., a Toronto-based alternative asset manager. He is also the author of The Sprott Precious Metals Watch, a monthly newsletter produced by Sprott Asset Management LP.

February 18, 2016

Sprott Senior Portfolio Manager Trey Reik discusses “a growing number of economic indicators that are beginning to flash red, “in his Strategy Report on gold. The ISM Index, Fed Current Activity Index, and Non-Farm Payrolls are highly watched numbers, but how much importance should we ascribe to them?

No one person or statistic will ever be able to accurately guess the timing on an economic business cycle shift. Any single indicator paints only a small part of the picture, but taking a look at a collective set of indicators may presage a larger economic event.

In periods of economic decline, consumers often demand gold in a flight to safety. What makes the next recessionary period interesting, from our perspective, is the potential shortage of new supply to feed that demand. The three year period of down gold prices has caused many producing mines to shutter, and has all but halted any new exploration. So let’s examine four common warning signs.

  1. The ISM Index. This index is monitored and produced by the Institute for Supply Management from a survey. The PMI survey tracks sentiment among purchasing managers at manufacturing, construction and or services firms. An overall sentiment index is generally calculated from the results of queries on production, orders, inventories, employment, prices, etc. A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting. As of January, the ISM PMI has declined for four consecutive months, down to 48.2%, literally reading that 48.2% of all executives contacted believe their businesses are growing while 51.8% believe their businesses are in decline.
  2. Current Activity Index. The Chicago Fed National Activity Index (CFNAI) is a monthly index designed to gauge overall economic activity and related inflationary pressure. A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth. The index takes into account a wide array of figures and is therefore very “noisy.” To cut down on this noise, the index takes a three month moving average as the trend line. While this allows for a smoother trend line that is easier to interpret, this index only begins to show what is happening in the economy after many months of revision.CFNAI takes into account production and income, employment, consumption and housing, and sales, orders and inventories. As of January 2016, the U.S. is growing at a rate below the historical average.
  3. Cass Freight Index: This is a measure of North American freight volumes and expenditures. Data within the Index includes all domestic freight modes and is derived from $26 billion in freight transactions processed by Cass annually on behalf of its client base of hundreds of large shippers which provides a statistically valid representation of North American shipping activity. The Cass Freight Index uses January 1990 as its base month. The index is updated with monthly freight expenditures and shipment volumes from the entire Cass client base. The January 1990 base point is 1.00. The Index point for each subsequent month represents that month’s volume in relation to the January 1990 baseline. The red line is 2015 shipping volumes, which appear to have been less active than 2014, but generally more active than 2013.
  4. Non-Farm Payrolls: Non-farm payrolls are often the most quoted metric when it comes to employment figures. The U.S. Bureau of Labor Statistics provides this data which is seasonally adjusted and excludes general government employees, private household employees, employees of nonprofit organizations that provide assistance to individuals and farm employees. This figure should be viewed with some degree of speculation.

And that’s that folks. January 2016 has been, at best, a lackluster month, but are all signals pointing to a recession? We’ll put it at a solid “maybe.”

The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information.


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