Leading Indicators vs June 2012 – Easynomics Court

NOTE: This is a corrected post.  Previously, the LEI from The Conference Board was incorrectly rated as “positive” because I didn’t have access to six-month historical data and had to use three-month data.  Moreover, the index has been significantly changed recently, so I am using the newer version here.  I have since located the correct data, which downgraded that indicator to “neutral” – thus changing the expected economic performance for six months later.

For an explanation on “Easynomics Court” and how it works, read this page on leading indicators vs six months into the future.


Leading Indicators from December 2011

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

Exhibit A – e-Forecasting Leading Economic Indicator (eLEI) | POSITIVE

Leading Indicators - e-Forecasting Leading Economic Index eLEI - March 2012

Source: e-Forecasting.com

In the six months leading up to December 2011, the e-Forecasting eLEI rose at an annualized rate of about 4.0 percent.  This is consistent with a stronger than average economy over the next six months.

Easy Description: e-Forecasting.com has many useful tools for tracking the economy.  Their Leading Economic Indicator (eLEI) is a proprietary model to predict the direction of the economy several months in advance.  The concept is similar to The Conference Board’s LEI does.  Many people believe this is a good leading indicator for the economy, and there is some very good work that validates that.

Easynomics Rating Methodology: I will calculate the change in the eLEI over the six months leading up to the month the “charges” are being filed.  I will convert that change into an annualized rate.  If the annualized rate is less than zero, I will issue a “negative” rating – 3.3 percent or higher will be “positive” – anything in between will be “neutral.”

Exhibit B – The Conference Board Leading Economic Indicator | NEUTRAL

Leading Indicators - Leading Economic Index US - The Conference Board - Feb 2012

Source: Conference-Board.org

In the six months leading up to December 2011, the Leading Economic Index from The Conference Board rose at an annualized rate of about 0.8 percent.  This is consistent with growth below historically average rates over the next six months or so.

Easy Description: 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 in the past (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.

Easynomics Rating Methodology: I will calculate the change in the LEI over the six months leading up to the month the “charges” are being filed.  I will convert that change into an annualized rate.  If the annualized rate is less than zero, I will issue a “negative” rating – 3.3 percent or higher will be “positive” – anything in between will be “neutral.”

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

Leading Indicators - USA Today IHS Global Insight Economic Outlook Index January 2012

Source: USAToday.com

The USA Today / IHS Global Insight Economic Outlook Index projects that in June 2012, there will have been an annualized growth rate of 1.6 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 | NEUTRAL

Leading Indicators - OECD US Composite Leading Indicators December 2011

Source: OECD.org

In the six months leading up to December 2011, the OECD CLI was unchanged.  This is consistent with growth well below historically average rates over the next six months or so.

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.

Easynomics Rating Methodology: I will calculate the change in the CLI over the six months leading up to the month the “charges” are being filed.  I will convert that change into an annualized rate.  If the annualized rate is less than zero, I will issue a “negative” rating – 3.3 percent or higher will be “positive” – anything in between will be “neutral.”

Case Status

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

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