With today’s chart, we’re going to explain why bull markets and economic expansions don’t die of old age. They fail when overindulgence prevails.
With that in mind, LPL Financial created an “Over Index”, measuring three key economic drivers: borrowing, confidence, and spending. As you can see, they follow similar paths, especially around the gray vertical bars which signify the three most recent recessions.
When the three indexes are combined into one, it becomes apparent that the measure peaks just before a recession.
Three years before the last three recessions, the index had scores of 59, 64 & 82.
According to LPL’s Over-index, our economy is not over-indulgent, giving us confidence that the expansion could continue for quite a long while.
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IMPORTANT DISCLOSURES:
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for your clients. Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All indexes are unmanaged and cannot be invested into directly
METHODOLOGY:
To complete the Over Index, LPL Research measures trends in three broad economic drivers: spending, borrowing, and confidence. For each of these three drivers, we found four diverse components that reflect the economic activity of that sub-index from a different angle. The Over Index takes each of the subcomponents and uses a sophisticated statistical process to normalize and index each data series into an overall score for each of the three drivers. The combined aggregated data helps to measure the likelihood that the economy is showing signs of over activity and that we may be approaching a cyclical peak. Spending is measured by the selected criteria: real home prices, big ticket purchases, business spending, and commodity prices. Borrowing is measured by the selected criteria: credit card debt, consumer debt payments, business debt, and commercial loan growth. Confidence is measured by the selected criteria: consumer confidence, valuations, wage growth, and business leverage.
SOURCES: Bloomberg, Conference Board, Federal Reserve, National Bureau of Economic Research (NBER), Robert Schiller, Standard & Poor’s, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics
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