Between the impact of the government shutdown and President Donald Trump’s trade wars with China, economists fear that the US is headed towards a drastic economic downturn. Presiding over a strong economy is part of President Donald Trump’s main argument for re-election.
According to Business Insider, a metric that could indicate the future of America’s financial health must combine a complex set of factors and focus on change—rather than current levels—of these variables.
The Insider highlights the work of Neil Shearing, the group chief economist at research house Capital Economics.
“If you only watch one chart, make sure its this one,” Shearing points out.
“Will the recent weakness in a broad swathe of economic data be a flash in the pan or does it herald the start of a new global downturn?” Shearing asked, based on the chart. “The answer is likely to depend in part on what happens to financial conditions.”
These conditions include variables like interest rates, credit spreads, stock prices, and currency levels.
He notes that because each nation’s economy is so tied up to the fate of other nations, any probe into US’s economic future require looking on the global stage. “It’s rare that financial conditions in one major economy tighten without there being a similar tightening in the others,” he writes.
He adds that change in economic indicators is more important than whether they are high or low. “We should therefore put more emphasis on changes in our financial conditions indicators rather than their level,” Shearing said.
He makes the following prediction.
“If the recent stabilization is a sign of things to come then it becomes easier to believe that the weakness in the latest economic data will be a flash in the pan,” he writes.
“By contrast, if financial conditions start to tighten once again (and our sense is that they probably will) then we’re likely to feel the consequences in terms of a further slowdown in growth over the coming quarters.
“Either way,” he says. “This is the chart to watch over the coming months.”