Goldman: Don’t Worry, U.S. Recovery Still Has Plenty of Steam

Choppy economic data aside, Goldman Sachs is reassuring its clients that the U.S. recovery “does not appear to be close to running out of steam.”

The world’s biggest economy has been in the process of bouncing back from the so-called Great Recession for just about five years, which Goldman says is the average length of a post-war recovery. But the investment-banking giant’s model still indicates this recovery is in the early-to-mid stage.

Goldman economist Kris Dawsey said in the note the economy will probably shift into a mid-cycle stage in the next year, “while the likelihood of moving to the late-cycle or recessionary phase in the near-term appears small.”

Here’s a look at 15 statistics Goldman is watching, with the respective economic phase they represent:

1. Early: Real Federal Funds Rate

The Federal Funds Rate is a metric set by the Federal Reserve that determines the interest rate banks pay to borrow from one another overnight, which has remained at historic lows since the financial crisis. The “real” rate is adjusted for inflation.

2. Early: Term Spreads

Term spreads refer to the difference in yield between long-term and short-term U.S. Treasury bonds. Fed data show the spread between two-year and 10-year Treasury bonds is running just north of two percentage points. That spread has passed through zero heading into every recession since the 1980s.

3. Early: Employment Gap

The Brookings Institution’s measure of the jobs gap indicates the economy still needs to tack on 5.7 million jobs to return to pre-recession levels while also absorbing those who enter the potential labor force every month.

While the rate has recovered markedly since hitting its widest mark in early 2010, Brookings reckons it will take about three more years for it to hit pre-recession levels, assuming 214,000 jobs are added on average every month.

4. Early: Output Gap

The output gap is a measure of an economy’s actual output, compared to its potential output. The International Monetary Fund says an output gap around 0 is preferable, since it suggests an economy is neither underworking, nor overworking. Data from the Congressional Budget Office indicate inflation-adjusted output was roughly 4.3% lower than potential in the final half of 2013. The CBO sees the gap hitting -1% in 2016, and -0.5% in 2017.

5. Early: GDP Growth

The economy expanded at an annual pace of 4% in the second quarter this year, bouncing back from a winter-induced 2.1% slump in the first three months of the year, the Commerce Department reported. The consensus among Wall Street economists is the economy will grow at a roughly 3% rate in 2014 and 2015.

6. Early: Industrial Production

Industrial production, a broad-ranging measure of output in American factories, mines and utilities, expanded at an annualized 5.5% rate in the second quarter, the swiftest growth since the third quarter, 2010. Still, the industrial production index, which is tabulated by the Fed, only surpassed pre-recession levels in December 2013.

7. Early: Manufacturing Inventory-to-Sales Ratio

The manufacturing inventory-to-sales ratio, a measure of how long it would take firms to clear out their inventory at the current sales pace, has been hovering around 1.3 in recent months, after peaking at 1.46 in the depths of the recession in 2009.

8. Early-to-Mid: Payroll Job Growth

The U.S. economy tacked on 209,000 jobs in July, the sixth-straight month of employment growth above the 200,000 jobs level. The economy has added 230,000 a month on average this year, up from 194,000 in 2013 and 186,000 in 2012, according to a FOX Business analysis of Labor Department data.

9. Mid: Change in Unemployment Rate

The U.S. jobless rate clocked in at 6.2% in July, down from 6.6% in January, and well off the recession-era high of 10%, struck in October 2009. The rate of improvement has actually surprised many economists, and led some to question the underlying factors of the recovery. In fact, the IMF sees the rate holding around 6.2% next year, and falling to 6.1% in 2016, before finally hitting 5.6% in 2018.

10. Mid: S&P 500 Volatility

The CBOE’s VIX, a measure of implied volatility on Wall Street, traded at its lowest level since 2007 earlier this year, and remains just north of those levels. The gauge spiked to an all-time high during the financial crisis in 2008, and then jumped again (failing to set a new high) during the eurozone debt crisis in 2011.

11. Mid: ISM Manufacturing

The Institute for Supply Management’s PMI gauge indicated the U.S. factory sector expanded for the fourteenth month in a row in July. The measure is struggling, however, to top post-recession highs struck in 2011, which still failed to beat 2004 levels.

12. Mid: Change in Inflation Rate

The price of consumer goods, excluding volatile food and energy items, climbed 1.9% in June from the year prior, compared to a year-over-year change of 1.6% in January. While inflation is increasing slowly, according to several metrics, the Federal Reserve is targeting stronger price growth, which the central bank says will support a more robust economic recovery.

13. Mid: Credit Standards

The Federal Reserve’s July Senior Loan Officer Survey showed “a continued easing of lending standards and terms for many types of loan categories amid a broad-based pickup in loan demand.” Indeed, according to a calculation by the Wall Street Journal, 18.3% of banks surveyed eased mortgage-lending standards for high-quality borrowers, the biggest such move in eight years.

14. Late: Unemployed Persons Per Job Opening

The number of unemployed persons per job opening slid to a pre-recession low of 2 in June, according to the Labor Department. That ratio was 1.8 when the recession began in December 2007, and surged to 6.2 by the time it ended in June 2009.

15. Late: BBB Credit Spread

The BBB credit spread tracks the yield on BBB-rated corporate bonds, compared Treasury bonds with the same duration. This spread generally climbs in times of economic and financial turmoil as traders ditch risky assets in search of safe havens (such as U.S. debt and gold). The BofA Merrill Lynch US Corporate BBB Option-Adjusted Spread soared to 8 during the crisis in 2008, and has since fallen to 1.5, according to data from the St. Louis Federal Reserve.