Ok, so I’ve looked at the different routes that the U.S. recession could go down. Now it’s time to continue looking at the economic indicators that will determine which route it goes down. Last time, I had a quick look at Housing and Jobs. This time, I’ll focus on U.S. Sales and Surveys. Out of respect I’ll give a quick paragraph to U.S. Interest Rates, but they’re not that important in this recession. I’ll finish off by distinguishing leading, lagging and coincident indicators.

Sales
I’m going to group two biggies under the “sales” heading – Retail Sales and Durable Goods Orders. Retail Sales tells us how much consumers have been spending. Durable Goods Orders let’s us know much capital expenditure companies have been undertaking. To get out of this recession, the U.S. will need both of these indicators to improve substantially.

As the graph indicates, it’s fair to say that it looks like Retail Sales have fallen off a cliff in the past year. But the little upturn that was the January and February readings caused a lot of optimism. This was put to an abrupt end by the -1.1% March figure. This leaves Retail Sales at a crossroads – was March just a speed bump on the road to recovery or was it the resumption of the downtrend? My feeling is that the latter is closer to the truth. January and February may just have been a temporary bounce following some particularly bleak readings in the fourth quarter 2008.

Durable Goods Orders paints a relatively similar picture to Retail Sales – a complete collapse in 2008 followed by a decent start to 2009. Still, at the moment Durable Goods Orders are down about 25% from a year ago. While the reading is always volatile, I think that it will be negative for 2009 on the whole. I simply don’t see many companies going on big spending binges at a time when demand is very low.

Surveys
Economic, Business and especially Consumer surveys can be unreliable, but it is what a lot of the recent market rally is based on. A lot of the U.S. surveys out there are picking up and many trader bulls are using this to get a first jump on the coming economic recovery.

On the economic side, the Obama Administration and the U.S. Federal Reserve (Fed) have been playing up that the worst is nearly over. In a recent report, the Fed said that 5 of its 12 regional banks reported the pace of economic decline was moderating. On the business front, ISM Services seems to have found a bottom. It’s now at 40.8 from a low of 37.4 in November 08. Similarly the ISM Manufacturing report climbed to 36.3 in March after being 32.9 in December. The consumer readings continue to be weaker with the University of Michigan Consumer Sentiment Survey at 57.3, barely higher than its lows. For the stock market rally to be maintained, these will need to continue improving. Any weakness will be seized upon by the bears.

Why Interest Rates Don’t Matter
In normal times interest rates have a big influence on markets. If the Fed lowered rates, stocks and indices would generally rise and vice versa. Even the indication that the Fed might change their rates is often enough to substantially move the market. But the Fed have played their card – they have already lowered their interest rates to nearly zero – they can’t go any lower. On the other side, because of the deep recession, the Fed won’t be raising their rates for a long time yet either. As a result, the monthly interest rate decision is a bit of a non-event and is likely to stay that way until at least into 2010.

Timing Of The Economic Indicators
One more thing about economic indicators – they can be leading, lagging, or coincident. This indicates the timing of their changes relative to how the economy as a whole changes. This is important as depending on which group the indicator is in determines how much importance traders attach to them. Also different types of indicators are used in different trading strategies. For example, using leading indicators as a tool in your trading is riskier than using lagging indicators. So let’s look at them.

Leading economic indicators change before the economy changes. In other words, they signal future events. Because they help predict what the economy (and stock market) will be like in the future, they are the most important type for traders. But they can be hit-and-miss, sometimes giving false signals on which way the economy is going. For example, surveys of consumers are leading economic indicators, as they are meant to show what consumers are going to do in the coming year. But they are notoriously unreliable, as they are not that accurate at forecasting what consumers actually do. Surveys in general (economic, businesses and economic) are leading economic indicators. In terms of hard data, Nonfarm Payrolls and Durable Goods Orders are leading economic indicators.

On the other side are lagging economic indicators which do not change direction until after the economy does. While not as important as leading economic indicators, they are used to confirm that a pattern is occurring. In this recession, lagging economic indicators will be used to confirm if a legitimate bottom has been reached. For example, the unemployment rate is a lagging indicator that will only stop ticking up a couple of quarters after the economy has bottomed. When this does happen, traders will feel a lot more confident in getting back into long equity and indices trades. The Trade Balance, Bankruptcies and Leading Indicators are other lagging indicators. Although paradoxical, Leading Indicators is in fact a lagging indicator because it is merely a collation of ten other leading economic indicators (e.g. initial Jobless claims, University of Michigan Survey).

Finally there are also coincident economic indicators, which are indicators that simply move at the same time the economy or stock market does. They are often used as an early confirmation of what the leading economic indicators are suggesting. Gross Domestic Product (GDP) and Personal Income and Expenditures are coincident indicator. For example, leading indicators may suggest that the economy is improving; traders will actually want to see that reflected in an improving GDP figure. Similarly in surveys, consumers may say that they are going to increase their spending, but traders will actually want to see that confirmed in the statistics.

Like I’ve looked at above and in Part I, at the moment, lagging economic indicators like Unemployment are getting worse. Coincident economic indicators such as GDP, Housing and Consumer Spending are sort of stabilising. By that I mean that the pace of their decline is moderating. The same can be said for leading economic indicators. Surveys in recent months have been ticking up from their record lows. Remember though that it’s risky to read too much into this. Talk is cheap. But it is this talk that this rally is largely being based on. We’re going to find out in the coming months whether this translates into improving hard data or whether the talk was just a load of irrational codswallop.