Should we fear a spring economic slowdown? Not just yet, but if a key economic index keeps falling then we very well could be in a mini-recession before summer.
Our New Economy Index (NEI) measures the overall strength of the U.S. retail economy in real time. It’s an average of the most sensitive consumer retail and business services stocks and is updated on a weekly basis. When viewed in conjunction with its 12-week and 20-week moving averages, NEI provides an excellent picture of the short- and intermediate-term health of the U.S. retail economy. It has flashed only one signal of weakness in the retail economy in the last four years – a brief one in the spring of 2010. For the better part of the last four years, NEI has given the all-clear sign for the U.S. economy but is in danger of giving another sell signal if recent trends persist.
Here’s what the NEI looks like as of its latest update on April 5.
As you can see, the index remains above the 12-week (red line) and 20-week (black line) moving averages but has made a series of lower highs and lows for the last few weeks. The recent pattern of conspicuously lower peaks is the most ominous I’ve seen the NEI look since 2007 before the last recession began. While it’s not too late for NEI to reverse its recent decline and keep the interim uptrend intact, the pattern over the last few weeks is troubling and could well be a harbinger of worse things to come.
Note also that the NEI trend closed slightly below the important 20-week moving average last week. While this alone doesn’t qualify as a “sell” signal, it does imply weakness in the retail economy. With the first quarter earnings season now underway it will be interesting to see how the sales trends of leading retail companies stack up to Q4 2012 sales. This will give us a clearer picture of what we can expect for the retail economy this spring.