The Conference Board’s Leading Economic Index for September printed in positive numbers for the fifth consecutive month increase, in September, but the report says:
The weaknesses among the leading indicator components have become slightly more widespread in September. Moreover, the CEI suggests current economic conditions have been slow, with weak gains in all four components over the past six months. The slow pace in the LEI suggests a growing chance that this sluggish economy is going to be here for a while. …
Says Ken Goldstein, economist at The Conference Board: “The LEI is pointing to soft economic conditions through the end of 2011. There is a risk that already low confidence – consumer, business and investor – could weaken further, putting downward pressure on demand and tipping the economy into recession. The probability of a downturn starting over the next few months remains at about 50 percent.”
This chart makes it look like the economy is booming , but as we all know, it isn’t. The Q3 advance report is coming out on Thursday.
The Conference Board measures these ten factors:
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods and materials
- Index of supplier deliveries – vendor performance
- Manufacturers’ new orders, nondefense capital goods
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Money supply, M2
- Interest rate spread, 10-year Treasury bonds less federal funds
- Index of consumer expectations
In analyzing these factors they say:
Positive contributions from the interest rate spread, real money supply, index of supplier deliveries (vendor performance), index of consumer expectations, and manufacturers’ new orders for consumer goods and materials. In the six-month period ending September 2011, the leading economic index increased 1.8 percent (about a 3.7 percent annual rate), slower than the growth of 4.0 percent (about an 8.2 percent annual rate) during the previous six months.
The negative contributors – beginning with the largest negative contributor – were building permits, manufacturers’ new orders for nondefense capital goods, stock prices, and average weekly initial claims for unemployment insurance (inverted). The average weekly manufacturing hours held steady in September.
If their indicators were that good, they would have called all the recessions in the past. They claim they do, but it looks like a lot of curve fitting to get there. Not being a statistician, I’m not going to try to confront their methodology.
We look at similar things but they have a rather mechanistic formula that begs interpretation and can make it misleading. We put heavy weight on money supply growth (True Money Supply, or what Michael Pollaro calls TMS2) because the creation of new money through bank lending is an important sign of health or weakness in the economy. We also focus on industrial activity with special emphasis on manufacturing output and new orders, and certain other measures related to production (delivery times, inventory, etc.). We also like the small business sentiment indices. We see the unemployment level as more of a confirmation of the direction of the economy rather than being a leading indicator. Things like a positive yield curve can be misleading, as DoctoRx points out. As well, consumer expectations are more confirmatory than leading indicators.
So it comes down to the point that forecasting is more of an art than a science and the Conference Board’s mechanistic approach is not very satisfactory in my opinion.
P.S. We are working on a scorecard for our forecasts so you can see exactly how accurate we have been here at the Daily Capitalist.