Roger Cuddy

This is part 2 of a series. The lead post is at Conference Board Economic Indicators Part One .

Economic indicators such as the unemployment rate comprise a large part of the business news. Understanding the main indicators and their relationship to the overall economy will aid in understanding both the current economic condition and the most likely future developments. It’s well worth the time investment to learn the main indicators and how they relate to the overall economy.

Let’s start with some general characteristics applicable to all indicators. Indicators can be classified according to their correlation to the economy and their time relationship to the economy.

• By Correlation, does the indicator move in step or opposite the direction of the overall economy
  • Positively correlated indicators are referred to as Procyclic
    • Example, growth of GDP
  • Negatively correlated indicators are called Countercyclic
    • Example, the Unemployment Rate
  • Indicators not correlated to the economy are Acyclic and are of limited use for predicting or confirming movement
• By Time relationship
  • Leading indicators change before the economy does
    • Example, the stock market is forward looking and more indicative of expectations about future economic conditions than present
  • Lagging indicators change later than the economic state
    • Example, unemployment tends to continue rising for some time after a recession ends and the economy is on the upswing.
  • Coincident indicators that move in step with the economy
    • Examples, GDP, Personal Income.

The Conference Board publishes indexes of indicators corresponding to each temporal relationship. These indexes are widely followed and studied and the same applies to the components comprising the indexes. I will confine this discussion to indicators that are part of the Conference Board indexes but you should be aware there are other less widely used or published indicators. Some are quite fanciful such as the hemline and super bowl indicators. At the time I write this the ‘Hot Waitress’ indicator is garnering much attention. This table presents the individual components of the leading, lagging and coincident indicator indexes.

The Conference Board publishes a guide to their indexes that makes good reading both from understanding the indexes and general economic knowledge at well. You can get a copy at http://www.conference-board.org/publications/describebook.cfm?id=852 .

In the second part of these posts we will start to look at the leading indicators in depth. I’ll be coming back to this post and updating links to the others so just keep this one marked and you will be able to follow the whole series as I get it done.

8/25, Changed the title to make clear this is only covering the indicators included by the Conference Board.

Poking fun at Minkiw’s 10 Principles. Yoram Bauman has several hilarious routines and this one at YouTube is great.

If you’re a fan of Robert Schiller (Homepage, Wikipedia) then you should follow through his open course ware at Yale. Check out http://oyc.yale.edu/economics/financial-markets/content/sessions.html for the recorded lectures, notes and resources.

Not for everyone but Mr.. Rockwell is a fantastic speaker with strong ideas. If you have any Austrian school ideology then you especially will enjoy. All three parts below:

• Part one
• Part two
• Part three

The term moral hazard is seen often right now in commentary directed towards bailouts of industries or individuals. While used often, it is explained rarely and anyone who without education in economics can easily be left with only a partial understanding of what is meant. I’ll attempt to explain the meaning in the current context in a succinct manner.

Moral hazard simply means that a person or business that is protected from the negative consequences of an action may behave differently than if they were not. Consider a state lottery or as my kids refer to it ‘the stupid tax’. The chances of a positive outcome are so skewed that no one understanding the odds would waste the time or money to purchase a ticket.  Now, what if at the end of the month you could turn in losing tickets for a refund? The situation has now been changed so that the best outcome for an individual would be to expend their entire wealth on purchasing tickets each month since the risk has been removed.

Obviously no state is going to give back the money it managed to extract from it’s less informed inhabitants so l will move on to a more feasible example.

Consider the case of a young person working for company X.

• The young worker is in line for a promotion which would come with a 20% increase in salary.
• Real Estate prices have been rising rapidly for the last few years
• They have seen many articles recently reminding them of how much money is being ‘wasted’ by renting.
• The economy seems to be slowing down and if it gets any worse the promotion won’t happen.

Being a diligent sort by nature the young worker calculates the maximum mortgage payment they could afford both ways, including the promotion and excluding it. They feel the safe course would be to limit any mortgage to what is affordable even if the promotion doesn’t come through and most of us would probably agree with that. However, what if in the last real estate downturn the government had stepped in an limited mortgage payments so that they were had to be revised to match the owner’s income? If the person in this example feels that is likely to happen again then their best interest might be better served with the more expensive mortgage. If the economy tanks and the promotion doesn’t come through they can count on their payment be forced lower to match their income. In this case their behavior has been influenced by a belief that they are protected from the negative consequences of choosing a mortgage they might not be able to afford.

Adding a business example to the above would be the case of a CEO for a firm issuing credit insurance. If the CEO believes the government will step in to cover any catastrophic losses then he is going to have company take much more risky bets than otherwise. Note that in this case there is also the agent issue to worry about since the best interests of the shareholders may well not align with the best interests of the CEO. In fact that seems so common currently that I often wonder if we need to rethink corporate governance completely.

This was a very brief introduction to the topic of moral hazard and there are plenty of places around the web you can look for more in-depth examples and explanations if you wish. Wikipedia has a decent write-up to start with for further study. As we add more economic content to this site we may also come back and flesh out this small text also.

There are a few things in the world that are considered to be present in such abundance that they are in effect free to all. The classic examples usually given are seawater and air. All other needs and wants are subject to scarcity. There being a limited supply of the good (or service) to satisfy the wants and needs of everyone. Throughout this short write-up I shall use the term ‘good’ or ‘goods’ with the understanding that the word also includes services. There being little difference in the two anyway other than our common usage of the term service for a good that is comprised of someone’s time and skills. This concept that most goods are finite in availability but are often desired infinitely is the heart of economics.

The availability of these resources limit the production of any good and the allocation of each towards production of specific goods determines in part the relative scarcity of different goods. The resulting amounts of different goods as a result of specific allocations of the factors of production is referred to as the Production Possibilies Frontier .

Land used for grazing cattle removes that land from the quantity available for production of grains, fruits and vegetables. Thus the balance of land used towards each requires a trade off or opportunity cost of not producing the other good. Opportunity cost is another central concept of economics. Use of resources towards one purpose normally precludes their use towards another. A simple example should suffice to help understand.

If you have $20 then you could take a date to the movies or to a modest dinner but not to both (at least not where I live). You will make your decision as to which way to spend your money based on the value you perceive each to offer you and your companion. This is a trade off you must make because your resources (money) are not sufficient to purchase all the goods you would like to have. This is an example of scarcity at the micro scale. At the macro level you might consider the trade offs that a society makes in providing health care to it’s population. Since resources are limited, there is a trade off that to provide health care services removes those factors from other areas of production. Within the area of health care further trade offs occur. Researchers and their facilities searching for effective vaccines to the current flu variation are removed from searching for treatments to cancer.

So, to review; the factors of production are limited and thus only a limited supply of any good may be produced or purchased. The allocation of the production resources available will determine the mix of goods that are produced.