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By Jason Stipp and Robert Johnson, CFA | 08-07-2013 12:00 PM

Indicators Looking Up, But Mind the Headwinds

Coincident indicators are turning up after a dip over the last year, and many leading indicators look stronger, but don't overlook the yellow flags, says Morningstar's Bob Johnson.

Jason Stipp: I'm Jason Stipp from Morningstar.

Some conflicting data in recent times may leave some wondering, where are we now with the economy, where are we headed, what are the worry signs, what's looking up? Here to offer some insights is Morningstar's Bob Johnson, our director of economic analysis.

Thanks for being here, Bob.

Bob Johnson: Great to be here.

Stipp: A good way to gauge where we are now, or at least a good starting point, is to look at the so-called coincident indicators, which are supposed to tell us what the health of the economy is right now. You have a list of some widely used coincident indicators. What do they say?

Johnson: Four of them are used by the National Bureau of Economic Research that help us set whether or not we're in a recession--we're certainly not at that point right now--but there are four interesting benchmarks to look at.

The first one I always like to look at is manufacturing. Then we also have income, employment, and finally retail sales.

Stipp: Let's start with manufacturing. There has been some softness in manufacturing recently related to trade.

Johnson: Yes. The manufacturing data has been softening for quite some time. The year-over-year growth rate, the highest it's been over the last period of years, was last July, and at that time, growth was about 5.1%. Well, now we've dipped all the way back to 2% growth in industrial production, so we've really fallen back. But now it looks like maybe for July we'll finally increase that. Maybe we've hit bottom in that manufacturing number.

Stipp: That's a trend that you've seen across some of these different [coincident] indicators is that we did hit a peak [in the middle of] last year, and then we started to see some softness. Let's talk about employment growth. You can tell a little bit about the current state of the economy by looking at that growth rate, and that's been relatively steady.

Johnson: Yes, and that's real people putting money into their businesses when they're hiring. So I tend to gauge it as a true strength of the economy. And on the private sector employment growth, we got a peak last July of about 2.2%. We dipped back this spring to about 1.9%, and now we're back to 2.0%. So, again, not quite back to where we were, but at least we've got the boat turned in the right direction again.

Stipp: Retail sales is an important part of gaining a sense of where the economy is right now. And we also saw some recent softness there. But the numbers are looking a little bit better now?

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