© 2000 John Petroff
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© 2000 John Petroff |
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Recognizing the importance of knowing about future economic conditions, the US government has published since 1938 a list of measures and indexed that are indicative of what has happened, what is happening and what is about to happen. These are the lagging, coincidental and leading indicators which were mentioned in Chapter 1 Section D-3 . The leading indicators are those that precede the cycle; they usually peak before the entire economy, and reach their trough likewise; they are therefore used to anticipate the timing of the turning point (and thus, are often considered as the important ones). Coincidental indicators are indicative of what is taking place in the economy right now. Lagging indicators are those that come after the turning point; they are used to confirm that a phase of the business cycle has indeed been completed. Table T-15.2 shows the series included in each group.
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| Leading Indicators | |
| Net business formation index | |
| Building permits index | |
| Common stock prices index | |
| Percent lay-offs in manufacturing | |
| Percent change in sensitive prices | |
| Percent change in total liquid assets | |
| Percent vendor companies reporting slower deliveries | |
| Average workweek in manufacturing | |
| Net change in inventories | |
| Plant and equipment contracts and orders | |
| New orders for manufacturing consumer goods and materials | |
| Money supply | |
| Coincidental indicators | |
| Industrial production index | |
| Employee payroll (non-agricultural) | |
| Personal income less transfer payments | |
| Sales manufacturing and trade | |
| Lagging indicators | |
| Labor cost index | |
| Ratio of consumer installment debt to personal income | |
| Average prime rate charged by banks | |
| Average unemployment duration | |
| Inventories manufacturing and trade | |
| Commercial and industrial loans outstanding | |
| Source: US Bureau of Economic Analysis, Survey of Current Business | |
Table T-15.3 presents values of the three indicators for the period 1970-1997, and the same values are converted into annual rate of change and shown in Graphs G-15.2, G-15.3 and G-15.4 below.
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| . | Leading Indicators | Coincidental indicators | Lagging indicators |
| 1970 | 68 | 61 | 84 |
| 1971 | 74 | 61 | 78 |
| 1972 | 81 | 66 | 78 |
| 1973 | 86 | 71 | 90 |
| 1974 | 80 | 70 | 101 |
| 1975 | 75 | 64 | 92 |
| 1976 | 85 | 69 | 86 |
| 1977 | 90 | 74 | 89 |
| 1978 | 94 | 80 | 95 |
| 1979 | 94 | 83 | 102 |
| 1980 | 89 | 80 | 104 |
| 1981 | 91 | 80 | 101 |
| 1982 | 90 | 75 | 98 |
| 1983 | 105 | 76 | 90 |
| 1984 | 110 | 84 | 99 |
| 1985 | 112 | 87 | 106 |
| 1986 | 119 | 89 | 110 |
| 1987 | 126 | 91 | 109 |
| 1988 | 129 | 96 | 113 |
| 1989 | 130 | 99 | 118 |
| 1990 | 99 | 100 | 107 |
| 1992 | 100 | 100 | 100 |
| 1994 | 101 | 106 | 100 |
| 1995 | 101 | 110 | 104 |
| 1996 | 102 | 113 | 104 |
| 1997 | 104 | 116 | 105 |
Graph G-15.3 shows the behavior of the leading indicator for the period of 1970 through 1997, and generally confirms in label given to it, except in the mid 1990's when it remained very subdued compared to the overall healthy economy.
Graph G-15.3 shows the pattern of change in coincidental indicator for the period 1970 to 1997. It confirms that the indicator deserves its name as it tracks the changes in the overall economy very tightly.
Graph G-15.4 presents the pattern of change in lagging indicator for the period of 1970 to 1997. The pattern is clearly one that follows the changes in GDP. One exception is apparent in 1990 when it moved up while the economy was going down.
Forecasting with economic indicators is really only a variation of judgmental forecasts. Most of the work is already done for us: it appears to be easy to tell whether the economy is just before or just after a turning point with the help of leading and lagging indicators. But, not all the indicators behave in a parallel manner, and conflicting signals can be misleading. Forecasts for less than a year are reliable. As far as forecasting beyond one year and forecasting the magnitude of a change, that is almost out of the question. Yet, econometric models are not very successful in predicting turning points (and input-output tables none at all). Forecasting turning points is where economic indicators shine. It was earlier indicated (for instance in Chapter 4 Section D-2 for bonds) that anticipating turning point correctly is very profitable to traders. These indicators do help in this vital aspect. Unfortunately (or fortunately), all investors have access to this information at the same time, and it is not possible for anyone to make a killing in the stock market using it. Thus, an analyst must still rely on his/her own skills to scrutinize economic data before anyone else.
See review questions Q-15C5.1 through Q-15C5.10.
See research assignments R-15C5.1 and .2.
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