Leading Indicators vs August 2013 – Easynomics Court

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

NOTE: In case you are accessing this post long after it was originally posted, you may also be interested in the most recent Easynomics Court case.

As of today, the official Easynomics Court conviction record for categorizing the growth level six months into the future is:

  • 4 – Guilty (Win)
  • 6 – Not Guilty (Loss)
  • Conviction Rate = 40 percent

Leading Indicators from February 2013

Charges Filed: “The Leading Indicators hereby charge that August 2013 shall be a NEUTRAL month, as indicated by a positive annualized growth rate but below the historical average of 3.3 percent.”

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

In the six months leading up to February 2013, the e-Forecasting eLEI rose at an annualized rate of about 2.8 percent.  This is consistent with an economy that is growing but at a slower-than-average rate, historically speaking.

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.”  NOTE: I will use the first available data for the month where possible – i.e., I won’t use revised data – this way, I’m simulating what the leading indicators really believe at the time they are released.

Exhibit B – The Conference Board Leading Economic Indicator | POSITIVE

Leading Economic Index US - The Conference Board - February 2013

Source: Conference-Board.org

In the six months leading up to February 2013, the Leading Economic Index from The Conference Board rose at an annualized rate of about 4.6 percent.  This is consistent with positive growth faster than 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.”  NOTE: I will use the first available data for the month where possible – i.e., I won’t use revised data – this way, I’m simulating what the leading indicators really believe at the time they are released.

Exhibit C – Federal Reserve Bank of Philadelphia Leading Index  | NEUTRAL

The Federal Reserve Bank of Philadelphia publishes a leading index for every state on a monthly basis (see my most recent analysis here).  But they also list one for the United States as a whole.  The number is essentially a predicted annual rate of growth for the U.S. economy over the next six months.  In February 2013, the predicted growth rate of the U.S. economy for the next six months was 1.51 percent.  This is consistent with a positive growth rate but below historically average rates.

Easynomics Rating Methodology: The index itself equals the expected annualized growth rate over the next six months.  If that 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.”  NOTE: I will use the first available data for the month where possible – i.e., I won’t use revised data – this way, I’m simulating what the leading indicators really believe at the time they are released.

Exhibit D – OECD Composite Leading Indicators | NEUTRAL

OECD US Composite Leading Indicators February 2013

Source: OECD.org

In the six months leading up to February 2013, the OECD CLI increased at an annualized rate of 1.8 percent.  This is indicative of an economy that is growing but at a slower rate than historical averages 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.”  NOTE: I will use the first available data for the month where possible – i.e., I won’t use revised data – this way, I’m simulating what the leading indicators really believe at the time they are released.

Case Status

The prosecution (Leading Indicators) has rested its case.  We will hear preliminary arguments from the defense (August 2013) after data from that month is complete.

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