The Outlook for Tomorrow: Five Numbers to Watch

The economy looks strong at present: GDP growth is solid, the unemployment rate is low and inflation is firming toward the Fed’s 2 percent target. I am watching five metrics in particular to assess the economy’s potential: Business investment is a strong indicator of confidence. It’s lagged the past 10 years but picked up recently. We need that confidence to continue for the economy to keep growing at its current rate. Productivity growth also has been surprisingly slow, although it was strong in the second quarter of 2018. If that marks the start of a sustained upturn, it could drive long-term healthy growth. If it’s a one-quarter blip, it could limit potential growth. Compensation growth for job stayers is a number I’m watching closely. Wage growth has been sluggish despite the tight labor market. We typically see faster wage increases when companies are competing for each other’s employees and have to pay their current employees more to retain them. Prices for durable consumer goods are a key indicator of core inflation. As consumer goods companies’ margins continue to be squeezed, they may have no choice but to try to raise prices. If these efforts are successful, inflation might well pick up pace. The yield curve is one indicator of the market’s economic outlook. The 2-year/10-year spread has compressed, but research suggests nearer-term spreads have a better forecasting record. These spreads don’t show an elevated risk of recession at present.