Roger Cuddy

Available in PDF from Mises.org Principles of Economics

Plus there is a Study Guide

Menger Quote: Money is not an invention of the state. It is not the product of a legislative act. The sanction of political authority is not necessary for its existence.

Available online at Econlib Economic Sophisms

First published in 1845, you will be amazed at how few words would need changed to apply to our current time.

Bastiat Quote: The state is that great fiction by which everyone tries to live at the expense of everyone else.

As we saw in part one there are 10 leading indicators included in the Conference Board’s indexes. In this post I want to examine each in a degree of detail to include:

• Why is it considered a leading indicator?
• Where does the raw data come from?

A followup posting will look at how well selected indicators do in predicting the future economic growth or decline. I had originally intended to review each here but really once the general technique is shown it becomes quite tedious to read for a large number of items.

1. Average Weekly Hours Manufacturing
2. Average weekly initial unemployment claims
3. Manufacturers new orders – consumer goods & materials
4. Index of supplier deliveries
5. Manufacturers new orders – non defense capital goods
6. Building permits, new private housing units
7. Stock Prices (really the S&P 500)
8. Money supply (M2)
9. Interest rate spread, 10yr Treasury less Fed Funds
10. Index of consumer expectations

Average Weekly Hours Manufacturing , Data Source: BLS Databases, Employment

Most manufacturing businesses will increase hours for their existing labor force before hiring additional members. Each company will have some trade off point where the overtime expense and decreasing productivity per hour will cross over and they will begin to bring on new staff instead of increasing hours. The period of time where it is more economical to increase hours is one of the reasons that overall employment tends to lags economic growth, especially in the case of a recovery following a recession.

Average weekly initial unemployment claims, Data Source: BLS Databases, Unemployment

Initial jobless claims are viewed as being more sensitive to changes in economic growth than other other employment statistics and are thus considered a leading indicator. The value of the indicator is reversed for inclusion in the index as the larger the number of claims the poorer expectations for the future.

Manufacturers new orders – consumer goods & materials, Data Source: Census Bureau M3 Report

An increase in new orders causes an increase in production and a decrease in inventory.

Index of supplier deliveries, Data Source: ISM

Also known as Slower Deliveries Diffusion Index, this indicator shows if orders and production are causing a backlog in delivery systems. A slowdown being bullish.

Manufacturers new orders – non defense capital goods, Data Source: Census Bureau M3 Report

As above, new orders lead the cycle.

Building permits, new private housing units, Data Source: FRED

New permits turn into future construction.

Stock Prices (S&P 500 Index), Data Source: Standard & Poors

The stock market is traditionally forward looking and values are based on the belief of future earnings rather than current.

Money supply (M2), Data Source: FRED

Increases in demand deposits net of inflation makes capital available for expansion. Decrease does the opposite and make expansion more difficult.

Interest rate spread, 10yr Treasury less Fed Funds, Data Source: FRED

Inversion of the yield curve has been one of the most reliable indicators of looming recessions.

Index of consumer expectations, Data Source: University of Michigan

When expectations are high then consumers are purchasing and ordering more freely which leads to increased production and earnings.

Leading
Indicators

1. Average Weekly hours Manufacturing
2. Average weekly initial unemployment claims
3. Manufacturers’ new orders – consumer goods & materials
4. Index of supplier deliveries
5. Manufacturers’ new orders – nondefense capital goods
6. Building permits, new private housing units
7. Stock Prices
8. Money supply (M2)
9. Interest rate spread, 10yr Treasury less Fed Funds
10. Index of consumer expectations

Lagging
Indicators

1. Average unemployment duration
2. Inventories to sales ratio, manufacturing and trade
3. Change in labor cost per output, manufacturing
4. Prime rate charged by banks
5. Commercial and Industrial loans outstanding
6. Consumer installment credit to personal income ratio
7. Change in consumer price index for services

Coincident
Indicators

1. Nonagricultural payrolls
2. Personal income minus transfer payments
3. Index of industrial production
4. Manufacturing and trade

It’s import to look at both values together. It’s ‘common knowledge’ That US manufacturing moved overseas but that statement isn’t true. We produce more today than in the past. The reduced number of workers required to generate this production is due to productivity gains. This is similar to what occurred in agriculture earlier in the 20th century. Displacement of workers as an economic sector becomes more productive per worker is painful for those affected. The longer term impact however is extremely positive as those workers are now available to move into the newly emerging industries. Remember how manufacturing was able to grow only because of the ready supply of workers freed from farm labor. Rather than attempting to keep these jobs around we would be much better off to put that effort toward readying the displaced to step into new careers.

There are numerous free resources available to read and understand this valuable work.

1. Here is a playlist of the 12 videos that the Mises Institute has assembled.
2. A pdf version of the book is available from the Foundation For Economic Education.

Invest the time to read this masterful book and also watch the videos as you read. Like myself, you may well find you return to read it again and again throughout the years. It’s truely a timeless masterpeice.