Conference Board Economic Indicators Part 2 – The Leading Indicators

Roger Cuddy — Sat, 29 Aug 2009 21:52:50 +0000

This entry is part of a series, Conference Board Indicators»

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

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.

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

Author Roger Cuddy claims no special knowledge of subject beyond a strong interest and slight opinion. Your mileage may vary.

Entries in this series:

Conference Board Economic Indicators Part One
Conference Board Economic Indicators Part 2 - The Leading Indicators

Conference Board Economic Indicators Part One

Roger Cuddy — Mon, 10 Aug 2009 14:10:00 +0000

This entry is part of a series, Conference Board Indicators»

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.

Leading Indicators	Average Weekly hours Manufacturing Average weekly initial unemployment claims Manufacturers’ new orders – consumer goods & materials Index of supplier deliveries Manufacturers’ new orders – nondefense capital goods Building permits, new private housing units Stock Prices Money supply (M2) Interest rate spread, 10yr Treasury less Fed Funds Index of consumer expectations	Lagging Indicators	Average unemployment duration Inventories to sales ratio, manufacturing and trade Change in labor cost per output, manufacturing Prime rate charged by banks Commercial and Industrial loans outstanding Consumer installment credit to personal income ratio Change in consumer price index for services
		Coincident Indicators	Nonagricultural payrolls Personal income minus transfer payments Index of industrial production Manufacturing and trade

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.

Author Roger Cuddy claims no special knowledge of subject beyond a strong interest and slight opinion. Your mileage may vary.

Entries in this series:

Conference Board Economic Indicators Part One
Conference Board Economic Indicators Part 2 - The Leading Indicators

Roger Cuddy » Stock Market

Conference Board Economic Indicators Part 2 – The Leading Indicators

Conference Board Economic Indicators Part One