This is probably the greatest economic indicator of all.

It will tell you when unemployment will truly start to decline, when GDP will surge, and when the American consumer will start truly shopping again.

You won’t see it in the headlines though.

The Bloomberg Economic Calendar says there’s more than a dozen economic reports slated to come out this week.

It’s not in there.

This indicator is actually buried deep in the reports from a small government bureaucracy the financial news never pays any attention.

Yet it explains when a true economic recovery will finally start really rolling and when a few ultra-economically-sensitive stocks (they’re revealed below) will launch exponentially higher.

Here it is and the full explanation.

Warning, it’s a bit long. Will take six minutes to read it through. But if the potential of the stocks that will benefit from understanding it will make it more than worth your time to check it out.

The Greatest Economic Indicator of All

You’ve surely heard the cliche that small business is the heart/growth engine/foundation of the U.S. economy.

That’s wrong.

Small business is the marginal part of the economy. But it’s the marginal part where small business is the difference between slow-growth economic malaise and truly boom times.

Think about it.

There were 18.5 million net new jobs created between 1993 and 2011. About 11.8 million -- or 64% -- of those were created by small businesses.

It is essential for small business to get the unemployment figures down.

Because if unemployment can reach it’s past lows of 5%-6% instead of the current 9% to 10% (we’re including the people who quit looking for work so are no longer officially “unemployed”), that would easily get GDP growth back up to 3%-5% an unleash an economic surge like the booms of the top of the housing and technology bubbles.

It’s all because of a few million extra employed people that make the difference between current malaise and tremendous growth.

That’s why the economic indicator you’re about to see covers what’s actually going on in small business sector.

It’s not some survey of a thousand small business owners that’s not very accurate (ask President Romney how flawed the small-size sample surveys can be).

It truly shows how businesses are doing, how confident they are about the future, and how much potential remains to be unlocked in the current economy.

First, take a look at the chart of the indicator (source):

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This chart shows the prepayment of small business loans made through the Small Business Administration’s (SBA) loan guarantee program under section 7(a) of the Small Business Act of 1953.

This is absolutely perfect economic indicator for a number of reasons.

You see, the SBA 7(a) loan guarantee program caps loan amounts at $5 million. So it’s truly only really small businesses that use the SBA 7(a) loan guarantees.

And the chart shows the prepayments of loans made under this program which we can extrapolate into a real time snapshot of small business success.

Here’s how.

There are two lines - both red and green.

The red line is for pre-payments due to default.

Think of a gas station that can’t make its loan payments. It goes into default. The creditors liquidate the business and sell off the assets. They take the cash from the sale to prepay the outstanding loan.

So in economically tough times, the rate of default-driven prepayments should jump.

The chart bears this out. Loan prepayment rates due to default surged twice in the last 15 years. The rates jumped in 2001 and 2002 and again between 2008 and 2010. Both periods of recession.

That current rate of defaults is now at it’s lowest point in the 15 years covered by the chart so small businesses are hanging in there.

Now, that’s good. But it’s not going to do much drive the economy. That’s where the green line comes in.

The green line shows the rates of voluntary prepayments of these small business loans.

This rate is basically the perfect indicator of small business confidence, their willingness to invest in capital and equipment, and their ability to hire.

After all, if the small business owner is confident in the future, he will pay the loan down early. If he’s not confident he will sit on that cash because he will need it to help during a downturn.

So far small business owners are struggling or fearful, they will not want to or be able to make prepayments on the loan.

Either way, the voluntary prepayment rates show the true state of small business confidence and success.

Right now, voluntary prepayment rates are lower than they ever was during the “Roaring 2000s.”

That shows there’s a problem with small businesses as a whole and economic growth and employment is suffering because of it.

The good news is the rate is recovering. And if this trend continues, it will signal a true recovery isn’t far away.

That’s why we’ll watch this rate closely and it also helps demonstrate something that’s critical for investors looking for some big wins in the next couple of years to realize right now.

The Boom-and-Bust Trade

The current market rally has been driven by a number of factors. The most important of which is future earnings and growth potential.

The market is not priced for current conditions. It’s priced for the future. And at current levels, it’s priced for quite a bright future.

That’s why fears of a crash are so pervasive. There is a gap between current stock prices and reality. But that doesn’t mean stocks must go down.

As the chart shows, the future is still loaded with potential. It will take time. But if you watch indicators like this one, which show what small businesses are truly doing, you will know when a surging recovery is about to come.

At that time, it will be time to jump into certain sectors that will absolutely shine during a boom time.

Think of hospitality industries like hotels, cruise line operators, and recreational vehicles like ATV’s and Harley Davidsons.

They’re the ultimate expensive, non-essential products and services which sell tremendously well during economic booms.

Historically, when a boom comes, these stocks will launch hundreds of percent as their earnings soar.

Now, those stocks are boom and bust plays. They’re not long-term holds. But they will soar when the marginal customer comes back.

And with this unique insight into small business, we’ll know precisely when that marginal customer is about to come back and we’ll be able to jump into the shares of companies which sell the ultimate non-essential products and services and watch them soar.


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