Thursday, June 25, 2009

What Leading Economic Indicators Predict Inflation or Economic Growth?

Comrade Coinz asked what leading economic indicators do you watch.

The Conference Board is a good start:

  • The Conference Board Leading Economic Index™ (LEI)
  • The Conference Board Coincident Economic Index™ (CEI)
  • The Conference Board Lagging Economic Index™ (LAG)
The Organization for Economic Co-Operation and Development (OECD) Composite Leading Indicator (CLI) is another source.

Both organizations also track international data.

The Conference Board LEI components are summarized by
  1. The average manufacturing-worker workweek (from the employment report)
  2. Initial jobless claims
  3. Manufacturers' new orders for consumer goods and materials (from the factory orders report)
  4. Vendor performance (from the Purchasing Managers' Index report)
  5. Manufacturers' new orders for nondefense capital goods (from the factory orders report)
  6. Building permits (from the housing starts report)
  7. The level of the S&P 500
  8. The inflation-adjusted measure of the M2 money supply
  9. The interest-rate spread between the 10-year Treasury note and the fed funds rate
  10. The expectations portion of the University of Michigan's Consumer Sentiment Index
Consumers often reduce durables and big-ticket items before non-durables (including services) and small-ticket items.

Companies often increase/decrease hours before they increase/decrease people.

Unemployment is more of a coincident (on recession start) or lagging (on recession end) indicator and unemployment insurance benefits claims do not count the armies of ineligible workers:
  • Self-employed
  • Sub-contractees ("independent contractors," freelancers, nonemployee compensation, 1099 IRS tax form)
  • Underemployed workers (part-time instead of full-time involuntarily)
  • Discouraged workers (unemployed and stopped looking)
  • Expirees (unemployed but benefits ran out after time limit)
I also might note (if reliable data):

For economic growth/decline:
  • Energy consumption (volume, not cost)
  • Miles driven
  • Shipping (retail package volume (UPS, etc.), port activity, Baltic Dry Index (BDI))
  • Garbage volume
  • Inventory (housing inventory, manufacturer inventory, retail inventory, food-bank inventory and turnover)
  • Production (percentage of industrial capacity utilized)
  • Productivity (labor productivity and capital productivity)
  • Stocks Price/Earnings ratio (P/E ratio) (S&P500 real P/E debate)
  • Business capital investment (ex commercial real estate (CRE), which lags residential real estate)
Housing inventory declines precede/determine significant new residential construction starts, although even high inventory will see some new starts because of custom dream homes, location assymetries, or regulatory devaluation of older homes (environmental, health, or energy-efficiency taxes/subsidies, etc.).

For prices:
For inflation:
Bubble Mafia Wrongly Call for High Prices under Guise of "Stabilization"

Increased productivity is the true source of real growth and real wealth and naturally results in lower prices (the falling real price for the Ford Model T or an IBM laptop computer).

"[S]table" real-estate or stock prices might mean a freeze at 2005 prices or a freeze at 80% below 2005 prices but most people who say "stable" want bubble pricing.

Increasing stock prices, home prices, or home construction (none necessarily a good thing) might be an indicator of "recovery" but not causal of recovery ("bullish" as consequence, not cause, of underlying/preceding real growth).

Confusing cause with consequence is like Homer Simpson using pliers to force the temperature-gauge needle to a safe reading even as the nuclear reactor melts down.

Bad information causes bad decisions.

Central planners tried to pump the housing indicator artificially through inflation, debt, and regulation--and catastrophically brought the world financial system to its knees.


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