Where do you think we
are in the business cycle today?
ECONOMIC INDICATORS
MacroEconomics for
Dummies
Paying attention to a few statistics can help you get a feel
for when you think we will be coming out of these difficult times. Let’s look
at the concept, then some data, and make some assumptions about where the
economy is headed. After all, it’s your money and a part of your investment
responsibility. It is NOT an exact science; there is plenty of room for
interpretation and disagreement. Remember, were there are sellers, there will
always be buyers!
INDICATORS
Business
Business indicators,
statistics about the economy, are used to analyze economic performance and
predictions of future performance of the country’s business cycles. Our economy
has natural cycles from economic growth to relative decline. These
fluctuations are measured by the final goods and services in an economy which
is known as the gross domestic product (GDP). The National Bureau of Economic
Research, Bureau of Labor Statistics, US Census Bureau and the Bureau of
Economic Analysis track and produce indicator and GDP statistics.
Leading
Leading indicators usually change
before the economy changes. That makes them useful as short-term predictors of
the economy. Stock market returns, for example, are a leading indicator, as the
stock market usually begins to decline before the economy declines and usually
begins to improve before the general economy begins to recover from a slump
(recession). The leading indicators are the most important type for
investors as they help predict what the economy will be like in the future.
These 10 leading indicators are often
aggregated in a composite report, though not all 10 move in the same direction
or in the same magnitude:
Average weekly hours,
manufacturing
Average weekly initial
claims for unemployment insurance
Manufacturers’ new orders,
consumer goods, and materials
Vendor performance, slower
deliveries diffusion index
Manufacturers’ new orders,
non-defense capital goods
Building permits, new private
housing units
Stock prices, 500 common stocks
(S&P 500)
Money supply,
M2 (cash, checking, savings, money accounts &
funds,
small CDs)
Interest rate spread - 10-year
treasury bonds less federal funds
Index of consumer expectations
Coincident
Coincident indicators are those
which change at approximately the same time as the whole economy, thereby
providing information about the current state of the economy. Coincident
indicators include:
Personal income
GDP
Industrial production
Retail Sales
Lagging
Lagging indicators usually change after the
economy as a whole does. Typically the lag is a few quarters of a year. The
unemployment rate is a lagging indicator: employment tends to increase two or
three quarters after an upturn in the general economy.
Value
of outstanding commercial and industrial loans
Change
in the Consumer Price Index for services from the previous month
Change
in labor cost per unit of labor output
Ratio of
manufacturing and trade inventories to sales made
Ratio of consumer credit outstanding to personal income
Average prime rate charged by banks
Average duration of unemployment
In the July-September period, the government initially said the economy (GDP) grew at a 3.5 percent annual rate,
ending a record of four straight quarters of decline (recession).
Will this apparent recovery continue?
On November 19, the composite index of leading economic
indicators rose 0.5 percent in October. The index, which is meant to
project economic activity in the next three to six months, climbed 1 percent in
September. The growth in the six months through September was the strongest
since 1983.
The stock market dropped from Oct 2008 but began its climb in early March, 2009, 9 months ago -
leading indicator # 7.
Meanwhile, the coincident economic index has been
essentially flat since June, after declining since November 2007.
The composite lagging indicators declined 0.2
percent in October, following a 0.5 percent decline in September, and a 0.4
percent decline in August. An especially troubling indicator is joblessness.
The unemployment rate in October hit a 26-year high of 10.2 percent.
Based on this information, where are you willing to put your money? Jury
still out? Pay attention to news reports of these concepts, and your
understanding and confidence in your investment sophistication will grow.