These Are 3 Little-Known Metrics That May Tell Us if a Recession Is Coming
Entrepreneur's New Year’s Guide
Is a recession coming? Absolutely, positively yes. When? Who the heck knows?
Even with the economy as strong as it is, some economists warn that it could be sometime in the next year. Others are not so pessimistic. The media reports that unemployment is low and that Gross Domestic Product is on the rise. But then "They" say that housing starts have stalled and that wages are stagnant. But then "they" say that small and consumer confidence is at an historical high. Is all this conflicting data really helpful?
I've learned, as a result of the Great Recession of 2009, to keep an eye on three little known metrics that helped me to gauge whether or not an economic slowdown is coming. Of course, they're not completely foolproof. But they each have a reliable history of predicting downturns.
The Baltic Dry Index
No, this not a measurement of the price of spices in the Baltic. It's a freight index. It measures the cost of freight for products being shipped across the Baltic Sea, which is one of the world's busiest shipping lanes. The idea is that when global shipping begins to decline there is less of a demand for freight and therefore the price of transportation falls. This decline often precedes an actual turndown in the global economy, so a trend downward may give you a strong indication that slower times are coming. The good news is, as of today, the index has been holding steady around the same level as four years ago and is even trending up a little. But keep an eye out -- a decline over a few months period of time means that demand is weakening.
ISM Report on Business
According to its website, the Institute for Supply Management is “the first and largest not-for-profit professional supply management organization worldwide” and has more than 50,000 members located in 100 countries. It's basically an organization of people in the supply management chain. You know: purchasing managers. You know: the guy from the big company who beats you up on pricing and delivery and drives you crazy with his demands because that's what he does all day, every day, every week of the year. So who better to ask about the state of the economy?
Every month the ISM polls their membership about their current and future orders, production, inventory, employees, purchasing plans and business conditions to come up with their Report on Business for both manufacturers and non-manufacturers. You won't find these results mentioned on the evening news, but you'll notice economists talking about this data. More good news: last month's manufacturing index grew for the 112th straight month. A slowdown should raise your antenna.
Chemical Activity Barometer
Let's face it -- one of the facts about modern society is that all of the products that we use (and eat) contain some form of chemicals. Ugh.
But they’re not all that bad, and it's natural to contend that the more chemicals that are being produced and purchased, the more products are being sold. Of course, the opposite is true, too. The American Chemistry Council, an industry group for the chemical industry, likes to track that in their monthly Chemical Activity Barometer. This leading metric is a composite index that takes into account different sectors from chlorine to plastic resins and measures sales, prices, production, hours worked, orders and even building permits. The result is a two-to-14 month leading indicator that gives a pretty good idea where the economy is heading. Last month's index was flat, which may be a concern. The next barometer will be released on September 25th.
Yes, I'm leaving out a bunch of other interesting metrics. But these are the ones I personally use and c’mon…let’s not get too complicated here. The important thing to remember is that you, as a business leader, must decide on a few good macro-metrics to make sure you're getting some idea of the future so that you can navigate your business through any upcoming downturn. That's your job and mine. Too many people -- our customers, suppliers, partners, employees...and their families -- are relying on us to be doing this. So please, have a few good metrics. People’s livelihood may depend on it.