Economic Indicators, An Explication (Q+A)

Q. I see that you mention various indexes or economic indicators in your Month in Review section, but I never see much in the way of what one is to derive from them.

A. My bad. A couple of other readers have lodged similar complaints about a presentation of raw data without a satisfactory explication of their significance. I have severe space limitations because the Month in Review feature is actually a compilation of my Week in Review postings that I email to realtors. When space permits I do try to elaborate a bit on their relevance. What follows are some of the indicators that I regularly mention and their relevance as well as some that have fallen out of favor over the years.

Recently, the value of many indicators has become suspect. Data that was once seen as prescient a few years ago is all but considered worthless today, while others that were once shunned are now in the spotlight. A new list has been devised of "Hot or Not" economic indicators, along with a couple that will always remain classics.

The Institute of Supply Management's manufacturing index (ISM) is everybody's current darling. It's a very good series, one of the best out there because the survey quizzes manufacturers on new orders, production, employment, and inventories, among other topics. The index has a very nice record for predicting growth and employment. The ISM numbers are compiled monthly, making them relatively timely. Released on the first business day of the next month, they don't have time to get stale. And what's the ISM telling us now? The July index fell to 55.5% from 56.2% in June. Any number over 50% shows that more firms are expanding than contracting.
Credit spreads are also very much in vogue. Even those who don't think financial market indicators tell us much about the overall economy keep a close eye on them, if only because they're worried that the next blowup will come from the financial sector. The credit spread "or difference" between three-month LIBOR and overnight index swaps is one such indicator. On June 1, it stood at about 31.325 basis points, up from about 10 basis points before the Greek credit crisis. That number shows how much players in the capital markets are willing to trust each other. If the spread starts to climb, you've got continued risk that counterparties are fearful of transacting with each other.

Employment data, say many economists, is in some ways the most important. But employment numbers are subject to maddening revisions, making any non-farm payroll data of any single month totally ridiculous. Economists say the revisions are the worst right around inflection points*right when accurate data could potentially be most useful. The solution is to try to find a trend based on the past six months of data. April*s data showed 290,000 jobs created, and May's numbers at about 500,000, but June & July reversed the trend with net losses for both.

Anything released weekly. For all the respect accorded measures such as gross domestic product and indexes of leading economic indicators, economists complain that by the time they're released, they don't contain much that's new. The markets move so instantaneously that you can't wait for the Gross Domestic Product (GDP) or the monthly jobless numbers to come out. You have to anticipate it. That's where weekly numbers come in: jobless claims, weekly same-store sales and mortgage applications among them. As with employment data, a single report is of limited use, so economists typically look at 4- to 8-week moving averages of those 'weekly' numbers.

Raw Commodity Prices. One of the series that failed miserably in the last cycle was raw industrial commodities prices. At one time, the prices of commodities actually reflected demand for that particular good. More recently, it became stylish in a great many pension funds not to own oil companies but to own oil. The demand among investors buoyed commodities prices even as demand from those who actually needed the products was fading. In the first half of 2008 many economists were saying, 'This can't be a recession, commodities prices are still strong," when In fact we were six months into a recession. Two Journal of Commerce commodities indexes fell sharply in May, leading some remaining believers in this indicator to see bearish times ahead.

Housing data. In 2007, housing was "the quintessential indicator of where we would be going. Then housing indicators such as sales levels, building levels, and permits all continued to climb without the job and wage gains that were supposed to propel them. Strong housing indicators didn't mean a strong economy; they pointed to a bubble. The data has fallen into disfavor because of its unreliability. In April, sales of previously-owned homes rose to a five-month high, but in July, sales of existing homes plunged 27.1%). Now when economists talk about housing numbers, they're more likely to be looking at weekly mortgage applications.

The Classics:

GDP is the mother of all economic indicators in the U.S. for the simple reason that it pretty much encompasses everything else. But by the time it's released, a lot of its revelations are no longer new, greatly diminishing its predictive value. Still, the GDP is so revered, that it allows someone who sees a little bit of GDP growth inside a recession to take a policy position that is 100% wrong*such as raising interest rates. First quarter GDP rose at an annualized rate of 3%, compared with 5.6% in the last quarter of 2009.

The yield curve is the granddaddy of economic indicators. In 2007, an inverted yield curve wasn't widely taken as a sign that the U.S. was headed for a recession. Many thought rates on long-term Treasurys were being kept artificially low because of purchases by the Chinese central bank. The yield curve is a no-brainer. Ignore it at your own risk. The yield curve is steep, which is consistent with the fact that the financial sector has had a good run.

Since uncertainty seems to reign these days, perhaps it's not surprising that other major indicators, such as consumer confidence and stock market prices, have no clear consensus. Now, it*s hello, ISM Manufacturing Index, and so long housing data!

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