leading economic indicators

The State of the Economy, Independence Day 2009 (IV.)

Part I of this series can be found here.

Parts II and III of this series can be read at The Bonddad Blog.

IV. The Federal Government must intervene to Rescue the States, in a morally responsible way

By far, the biggest threat to a bottom being put in to this Recession, is the continuing drumbeat of new layoffs. Thursday's June employment figures over - 450,000 and new jobless claims that have stubbornly, week after week, remained above 600,000, put the kibosh on any idea that the bottom is already here. We simply cannot stand 600,000 people putting in for jobless benefits, week after week after week. And the source of the continuing drumbeat of jobs lost appears to be coming more from anywhere else from the location of what Paul Krugman has called the "50 little Hoovers", i.e., the state (and municipal) governments, which are obliged to balance their budgets and so must throw employees out of work and cut back on spending projects, exactly when they are needed most.

The State of the Economy, Independence Day 2009 (I.)

ABC News reported an interview with with Paul Krugman last week his opinions that:

"I would not be surprised if the official end of the U.S. recession ends up being, in retrospect, dated sometime this summer," he said June 8 during a lecture in London.

However, Krugman argues people didn't listen to his entire speech, which included dire predictions about lingering unemployment. "There's a big difference between the end of a recession, which is really only when some things start to turn up, and the return to prosperity," Krugman told ABC News. "I think what people don't get is the difference between the end of a recession in a technical sense and actual recovery, which matters to people."

In my opinion, Krugman is exactly correct. In this four-part "Big Picture" look at the economy as of Independence Day 2009, I will argue that:

May Leading Economic Indicators (1)

As Calculated Risk points out, economic cycles typically run in an order. The first portions of the economy to turn positive are typically personal consumption expenditures and residential investment -- even during the recession. Afterward, investment in durable goods such as equipment and software. Finally, after the recession (in terms of GDP bottom), unemployment and non-residential investment.

Research has shown that most economic pundits miss turning points because they just project past and current trends into the future. The best way to look into the economic future is usually just to look at the Conference Board's Index of Leading Economic Indicators.

In April, Leading Economic Indicators surged 1% as 8 out of the 10 turned positive or at least neutral. With May over, let's take a preliminary look at what those indicators might show.

Why most economic forecasters get it wrong

Rummaging around for information regarding the average lead time for "leading economic indicators", I came across this 2005 article at Economist's View written by Catherine Baum who accurately called the banking crisis last year, explaining why economic forecasters are so often wrong:

The Index of Leading Economic Indicators [ ] isn't a bunch of randomly selected components .... The 10 components of the LEI were all chosen because of a demonstrated ability to predict future economic activity.

The index includes both financial (stock prices, the money supply and the spread between the funds rate and 10-year Treasury note yield) and real-side variables (building permits, capital goods orders and vendor deliveries).
The level of the LEI [ ] has an average eight to nine months lead time at peaks and troughs -- shorter at troughs ....