Why "Leading Indicators" may tell us Less than we think

[Beet]

Since some posters here (heh) seem to be obsessed with 'leading indicators', I will post this. I'm a big fan of breaking down the numbers to see the actual story behind them, rather than accepting them on face (the mortgage meltdown proves the wisdom of going this latter route). Particularly when it is claimed that an index composed of economic reports from the past 'looks into the future'.



http://wallstreetpit.com/index.php?s=continuing+claims

See, the overwhelming bulk of the 'rise' in leading indicators has been composed of stock prices, the yield spread, and consumer expectations. There are alternative explanations for the yield spread, but even if you take the most optimistic interpretation, then as Hamilton correctly points out:

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In other words, a classical psychological spring rally.

[Swing low, sweet chariot. Comin' for to carry me home.]

as this chart from your article shows, the LEI has been a bit too pessimistic over the last 50 years, having given some minor false negatives.  But, it hasn't given any false positives.



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in any case, instead of the LEI, I recommend ECRI's Long Leading Index as well as their Weekly Leading Index (WLI).  ECRI was founded by Geoffrey H. Moore who created the LEI you mentioned back in 1967.  Their current mixes of leading indexes are a few generations more advanced than the LEI.

The WLI was just released this morning:  "The ECRI Weekly Leading Index remained at 117.6 for the week ending June 26, with no revisions to the prior week. The smoothed, annualized growth rate rose to 4%, from an unrevised 2.1%."

ECRI is the ONLY firm to correctly predict the last 3 U.S. recessions, without having given a single false signal.  Prior to last week, it had been 22 months since the last time the WLI was in positive territory, so they are NOT cheerleaders.

Simply put, their record is unmatched, but that doesn't guarantee future success.

[Swing low, sweet chariot. Comin' for to carry me home.]

Beet,

The ECRI made it's recovery prediction call back on March 19th.  So, what they saw had little to do with stock prices.

Also, the ECRI Long Leading Index (LLI) and Weekly Leading Index (WLI), bottomed and started trending higher back in Dec08 (for the LLI) and Jan09 (for the WLI), so they're picking up much more than the stock upswing that started in March. 

But I don't know enough about their indexes to know which components were positive and which were negative.  But it is safe to say ECRI was seeing a positive sea change while stocks and consumer confidence were in a nose dive in Feb09.  So the whole argument against the LEI stated in the article you cited doesn't really apply to ECRI's indexes.

[Swing low, sweet chariot. Comin' for to carry me home.]

ECRI is sticking to its guns today, despite the unemployment report:

http://www.businesscycle.com/news/press/1474/

Reuters
July 02, 2009

(Reuters) - A gauge of future U.S. economic growth stood unchanged in the latest week but its yearly growth rate climbed to an almost two-year high, reaffirming hopes that the grips of deep recession are loosening, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index was unchanged from its prior reading of 117.6 for the week ended June 26.

But the index's annualized growth rate, which finally entered positive territory last week, spiked to just under a two-year high of 4.0 percent from its previous rate of 2.1 percent.

It was the growth rate gauge's highest yearly reading since the week ended Aug. 3, 2007, when it stood at 4.3 percent, bringing a solid end to its 22-month stretch in the red.

"With WLI growth rising further into positive territory, it is clearly looking ahead to positive U.S. economic growth in the near term," said Lakshman Achuthan, managing director at ECRI, who has lately projected that the recession will end sometime this summer.

The weekly index rose in the latest week due to lower interest rates, but was partly offset by weaker housing activity, Achuthan said.

[Vepres]

Since some posters here (heh) seem to be obsessed with 'leading indicators', I will post this. I'm a big fan of breaking down the numbers to see the actual story behind them, rather than accepting them on face (the mortgage meltdown proves the wisdom of going this latter route). Particularly when it is claimed that an index composed of economic reports from the past 'looks into the future'.



http://wallstreetpit.com/index.php?s=continuing+claims

See, the overwhelming bulk of the 'rise' in leading indicators has been composed of stock prices, the yield spread, and consumer expectations. There are alternative explanations for the yield spread, but even if you take the most optimistic interpretation, then as Hamilton correctly points out:

You must be logged in to read this quote.

In other words, a classical psychological spring rally.

What people think is very important leading indicator of the overall economy. If people perceive improvement, then they spend more, which in turn stimulates the economy.