When all you read is gloom, turn here for a much different perspective.

Saturday, January 10, 2009

A Look at Leading Indicators - Most Times They're Late

So here we are close to mid-January and many are still looking at and reporting economic indicators that are weeks if not months old. What indicators should we be watching? The leading ones.

A great compilation/glossary on the definitions of the top ten "leading" indicators is provided at The Street.

But history indicates that it's difficult to track all those indicators on a timely basis. Why is timely tracking of them important? Because it is in these indicators that you first spot a slowdown or speed-up of the economy. For an economy in recession, it's where you spot the good news; glimmers of hope for recovery.

The Conference Board (CB) is a great place to start. These folks track the indicators and report every month their findings. With a close look of their report, you'll notice that their latest release in December is summarizing November's data. Isn't that a long time ago? But wait! Even back in November, the CB reported that:

"Four of the ten indicators that make up the leading index increased in November. The positive contributors — beginning with the largest positive contributor — were real money supply, the interest rate spread, manufacturers' new orders for non-defense capital goods, and manufacturers' new orders for consumer goods and materials."

Okay, so that's only 4 positive signs out of 10. But that was back in November.

Let's have a look at what has happened since then.

The Institute for Supply Management (ISM) released its report on non-manufacturing services this past Tuesday. Their business activity index came in at 40.6 on their scale, compared to 37.3 in November. (See their chart at left)

Production, new domestic orders, employment, backlogs, and new export orders all ticked higher than in December. Their overall-business-activity index was higher by 6.6% November to December. And get this: the segment reporting the largest increase in business activity? Are you sitting down? Retail.

A factory-orders report is also not yet out for December, but have a look at November over October... Orders for long-lasting durable goods for November declined by only 1.5% compared to an 8.5% decline reported for October. Not super news, but nevertheless a slowing decline. However there were three very impressive pieces of positive news. (Little reported of course - and usually buried in a gloomy headline.) Those tidbits included a 3.9% jump in orders for non-defense capital goods, a 12.5% rise in orders for computer products, and a 5.7% increase in orders for information technology goods. All three of those areas were negative in October, and a turn around in demand for them indicates that businesses were again purchasing equipment and spending on infrastructure in November already.

You've been reading positive news on home sales here since late November. One in five major markets now report increases in home values. Applications for new mortgages continue to surge into the new year. And now the urban markets hit hardest by the downturn out West, are up 27 percent since their August 2007 bottom.

Can you find gloom in commercial construction? Again, not in the November reports. And the good news is only buried under a dour headline about residential construction. Activity actually rose 0.7 percent annually in November, and was up 12.1 percent if you include the three months prior. That construction activity includes a strong pickup in nonresidential construction — which includes office buildings, shopping centers and hotels. Of particular note is that October activity numbers were revised upward from an original estimate that construction had dropped 1.2 percent that month.

When examining the November personal-income report from the Bureau of Economic Analysis, you'll see that real disposable income jumped 1 percent for the month and is up 7.1 percent at an annual rate over the past three months. Real consumer spending in that report actually rose 0.6 percent in November.

If you've been reading this blog since November, that revelation comes as no surprise. Why? Gasoline prices. Since the July peak, the unleaded price at the pump is now $2.50 per gallon less. (A buck 33 in my back yard.) Currently, the US consumes about 300M gallons per day. So let's do the math again. That's a $750,000,000 "gas tax cut" per day for the US commuter. A bi-partisan "stimulus" to the US economy of close to $275B for 2009. (Provided of course that prices stay put at current levels.)

You've also seen illustrated here several times, that LIBOR rates are way down since the big chill in October. The chilly credit conditions continue to warm. The three-month LIBOR rate is all the way back down to 1.4 percent. Corporate bond rates continue to decline, an additional sign that private capital markets are starting to function again.

And contrary to all the gloom reported in jobs markets late last week. The leading indicator for jobs data has actually turned positive. Yes, total jobs losses increased, but the *rate* of those losses has slowed significantly. (Note the negative numbers in the chart released last Thursday)

For a more historic look have a quick peek at the chart that accompanies this article at seekingalpha.com. It demonstrates quite clearly the spike downward in initial unemployment claims and how that relates to previous exits from recessions.

So back to the conference board. What do you think they will report for December? All indications point to an up-tick in their index; Some more positive news indicating an economy on the mend.

Unfortunately for the mainstream media and for US citizens searching for any good news, it may be a month late.


  1. Read again... The employment that was gone was +900k, not the beat estimate.....

  2. Anonymous,

    The chart here highlights the leading indicators on jobs data, not the lagging ones.



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