Easynomics Court: Leading Indicators vs May 2012

NOTE: The “charges” against April 2012 as laid out in the previous Easynomics Court case have been modified due to a calculation error I made with the Conference Board Leading Economic Index figures.

I’ve decided to start a new feature called “Easynomics Court” where a specific month is analyzed using the available evidence and determined to be one of the following:

• “Positive” – Growth at or above historically average rates
• “Neutral” – Positive growth but below historically average rates
• “Negative” – Negative growth rate

This won’t be an exact science with super clear rules, at least at first.  But the general flow will be the following:

• First, a group of leading indicators will “press charges” six months in advance of the month in question (i.e., Leading Indicators will press charges against April 2012 using their data from October 2011).
• The trial will immediately begin with the prosecution (Leading Indicators) presenting its case, after which it will rest.
• The defense won’t begin until the end of the month in question, when there will be a preliminary look at some indicators that give us a hint about what kind of month it was.
• About 3 months after “the month” is over, the defense will present its final evidence.  It takes 3 months because many indicators (GDP, national composite indicators, housing prices) don’t get finalized until 2-3 months after the fact.
• Easynomics (that would be me) issues its verdict at that time.  ”Guilty as charged” would mean the leading indicators picked the right rate of growth (positive, neutral, negative).  ”Not guilty” would mean they got it wrong.

I have no idea if my readers will find this interesting or maybe even fun.  But I thought it might be something unique to my site and might be a different way to talk about economics.  The group of leading indicators I have chosen are ones that are understood to predict where the economy is headed about six months later.

On to the case …

---

Leading Indicators vs May 2012

“The Leading Indicators hereby charge that May 2012 shall be a NEUTRAL month, as indicated by a positive growth rate below the historical average of 3.3 percent.”

Exhibit A – ECRI Weekly Leading Index Growth Rate | NEGATIVE

The growth rate of the Weekly Leading Index at the ECRI is at an extremely low level (-8.4 percent).  This is consistent with a very weak economy about six months from now.  In fact, the ECRI believes the U.S. economy will certainly be in recession by the first half of 2012.  Learn more about the ECRI here.

Easy Description: The Economic Cycle Research Institute (ECRI) does something very similar to the Leading Economic Index already mentioned, but they are not at all transparent about how they do their calculations.  We can only wait to see what they publish as their index level and see where it leaves us.  But many people believe this is a good leading indicator for the economy.

Specifically, investors look at the indicator’s growth rate, which is annualized.  It is unclear exactly how ECRI calculates this, however.  When that is significantly below zero, there is usually a stronger chance of a recession.

Exhibit B – The Conference Board Leading Economic Indicator | POSITIVE

The Leading Economic Index from The Conference Board rose in November 2011 by 0.5 percent.  The trajectory of the rise in the LEI over the last six months is likely consistent with growth above historically average rates.

Easy Description: Basically, this index from The Conference Board is a combination of several indicators that traditionally correlate well to the future state of the economy, generally 6-9 months ahead.  For simplicity, we won’t talk about all the indicators that it combines.  You can read about it yourself by clicking on the source link above.

From The Conference Board’s website:

The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle.

We’re singling out the “leading” part of their index.  They have other indices that tell us how things are now (coincident) and how they have been (lagging).

When this index declines in value by about 1-2% over several months, and during that time most of the individual components of the index are declining, that is a pretty good sign that a recession is coming soon.

Exhibit C – USA Today / IHS Global Insight Economic Outlook Index | NEUTRAL

The USA Today / IHS Global Insight Economic Outlook Index projects that in May 2012, there will have been an annualized growth rate of 1.8 percent over the six month lead up time.  This would clearly be below historically average growth rates, but it would be growth.  Click here for an Easy Intro to this index.

Exhibit D – OECD Composite Leading Indicators | NEGATIVE

The OECD CLI for the U.S. in November shows signs of hope in this leading indicator.  The change in November was slightly upward, but the OECD has not identified this as a possible turning point just yet.  As a result, this indicator is still negative, suggesting a recession will have begun before the May 2012 time frame.

Easy Description: The OECD has been publishing its CLI (Composite Leading Indicators) for countries around the world since 1981.  From the OECD website:

Turning points of CLIs tend to precede turning points in economic activity relative to long-term trend by approximately six months.

Translation: If you see the CLI go from “uphill” to “downhill” you can expect your country’s economy to enter a recession, most likely about six months later.

Case Status

The prosecution (Leading Indicators) has rested its case.  We will hear preliminary arguments from the defense (April 2012) after the month of April 2012 is complete.

No related posts.