Easynomics Court

Background

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.

So that you can see what a verdict might look like, I decided to demo one for September 2011 … I am short on time tonight, so I won’t include images and some additional language.  But hopefully you get the idea.

Leading Indicators vs September 2011

The original charge: “The Leading Indicators hereby charge that September 2011 shall be a POSITIVE month, as indicated by a strong positive growth rate.”

NOTE: I don’t have all the historical data perfectly the way I’d like to see it from March 2011 (the date the “charges” would have been made) so I am only reasonably certain that the leading indicators would have charged it this way.

Exhibit A – ECRI U.S. Coincident Index Growth Rate | NEUTRAL

The growth rate of the U.S. Coincident Index for September 2011 (1.3 percent) at the ECRI is positive but below a historically normal level.  This is consistent with a weak economy that is not in recession.

Easy Description: The Economic Cycle Research Institute (ECRI) does something very similar to the Coincident Economic Index from The Conference Board, 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.

We can examine the indicator’s growth rate, which is annualized.  It is unclear exactly how ECRI calculates this, however.  When that is well below zero, we are probably in a recession.  If it is well above, we are in a healthy expansion.  Anything in between is likely a weak economy that is not in recession.

 

Exhibit B – The Conference Board Coincident Economic Indicator | NEUTRAL

The Coincident Economic Index from The Conference Board rose slightly in September 2011 by 0.1 percent.  The trajectory of the rise in the CEI over the last six months (0.5 percent annualized rate) is consistent with growth below historically average rates.

Easy Description: Basically, this index from The Conference Board is a combination of several indicators that traditionally correlate well to the current state of the economy.  For simplicity, we won’t talk about all the indicators that it combines.

 

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

The USA Today / IHS Global Insight Economic Outlook Index reflects that in September 2011, there was an annualized growth rate of 1.7 percent over the six month lead up time.  This was clearly below historically average growth rates, but it was growth.  Click here for an Easy Intro to this index.

 

Exhibit D – Chicago Fed National Activity Index 3-Month Moving Average | NEUTRAL

The moving average of the last three months (CFNAI-MA3) for September 2011 was minus (-) 0.21.  This is consistent with an economy that is growing but at a below-historical-average rate.

Easy Description: The Federal Reserve Bank of Chicago combines 85 different indicators into one number to give a sense of whether the overall U.S. economy is growing (numbers above zero) or shrinking (numbers below zero).  If you average the last three months’ index values, you get the CFNAI-MA3 (“moving average 3 months”).

 

Exhibit E – ADS Business Conditions Index | NEUTRAL

The average daily value of the ADS Business Conditions index for September 2011 was minus (-) 0.151.  This is consistent with an economy that is growing but at a below-historical-average rate.

Easy Description: Combines several indicators together to describe current business conditions.  A value above zero means that conditions are better than average, but below zero means worse than average.

Verdict

NOT GUILTY – Easynomics has determined that September 2011 was a NEUTRAL month.  The month is acquitted of charges of being a POSITIVE month six months earlier by leading indicators.

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Related posts:

  1. Easynomics Court: Leading Indicators vs April 2012
  2. Economic Indicator Roundup: Latest Data Confirms Economy With Slower-Than-Average Growth (Jan 9, 2012)
  3. Easy Trends: ECRI Weekly Leading Index Growth Rate – Slower Sinking? (thru Oct 14, 2011)
  4. Economic Indicator Roundup – Modest Growth is Better Than No Growth (Dec 5, 2011)
  5. Easy Trends: Real Gross Domestic Product (GDP) – Slower Growth This Year (Advance Estimate Q3 2011)