a guide to economic indicators chapter 5 danielle ko trent musso september 5, 2006
TRANSCRIPT
A Guide to Economic IndicatorsChapter 5
Danielle KoTrent MussoSeptember 5, 2006
“Reliable” Indicators
Economic indicators are considered reliable if:1. They undergo minimal revision on average2. They accurately signal turning points in the
economic life cycle Consist of initial unemployment claims,
average manufacturing workweek, non-farm payroll employment, hours worked, industrial production
The Reliables: Initial Unemployment Claims
Most reliable indicator Measured as new claims for
unemployment compensation under state programs
Begin rising just over a year before the start of a recession
Give a shorter warning period before an expansion
The Reliables: Average Manufacturing Workweek
Released monthly by Bureau of Labor Statistics
Accurate, clear pattern Manufacturers increase the
workweek as demand rises, decrease the workweek as demand falls
The Reliables: Non-Farm Payroll Employment
An employment statistic based on 250,000 non-farm establishments
Released monthly by Bureau of Labor Statistics
Preliminary reports are pretty accurate over time
The Reliables: Hours Worked
Released monthly by Bureau of Labor Statistics
Extremely accurate Generally increases at the
beginning of recovery and early in revival
Declines as the expansion matures
The Reliables: Industrial Production
A measure of basic manufacturing health
Estimates physical output of mines, factories, and utilities
Moderate revisions over time Rises after revival phase begins As the U.S. becomes more of a
service economy, may become less relevant
The Reliables: Help Wanted Advertising
Measured by the Conference Board, a nonprofit private research organization
Reflects relative level of the number of openings in existing and new jobs
Uses data from classified sections of newspapers
Rises at the beginning of expansion, falls as soon as expansion matures
Other High Quality Indicators
Housing Starts & Building Permits Reflects the health of the housing market Housing markets among earliest indicators of
change in economic life cycles Housing starts slightly less reliable than
permits Starts vary because of weather conditions Permits can be filed regardless of weather
Bottoming of housing market can indicate that start of an economic Revival
Other High Quality Indicators
Composite Index of Leading Economic Indicators Includes 11 major components
Initial unemployment claims, building permits, stock prices, consumer goods, etc.
Useful in helping to signal economic changes Useful but considered overrated Takes into account extraordinary factors
Strikes, severe weather, major stock price movements, etc.
The Unreliables
Why? Extensive revisions Fail to reflect changing composition of
U.S. economy Slow to incorporate faster growing,
smaller firms that are taking market share from larger firms
Federal budget cutbacks Limit ability to expand samples, process
data, and improve accuracy
The Unreliables
Retail Sales “Unreal Tale” Initial report is extensively revised
Durable Goods Orders Include big-ticket Department of Defense
contracts that are spread unevenly over the year, this skews the data
Purchasing Managers Survey Ignores managers at fast growing smaller
firms
The Unreliables
Unemployment Rate Problems with rate calculations and includes
such groups as teenagers Corporate Profits
Reported late, 45 to 75 days after quarter end
Consumer Sentiment Survey Not very practical and has not done well
identifying phases in the economic cycle Reflects present conditions rather than future
A Trip Through the Economic Life Cycle
Revival Housing market, building permits, and
housing starts to bottom out Initial unemployment claims fall Industrial production figures rise
Acceleration Key indicators of Revival remain positive Business spending takes off Average manufacturing workweek drops
A Trip Through the Economic Life Cycle
Maturation Building permits & housing starts fall Less help wanted advertising Leading economic indicators drop Significant increase in initial
unemployment claims
A Trip Through the Economic Life Cycle
Ease-off Major economic indicators show sharp
negative trends, especially non-farm payroll unemployment, hours worked, manufacturing workweek, & industrial production
Plunge Negative trends of ease-off continue First sign of recovery is increase in
manufacturing workweek
Putting It All Together
Where to look The Wall Street Journal, Business
Conditions Digest Watch your step
A matter of constant comparisons Revisions Understand terminology: real vs.
nominal, seasonally adjusted Making your own adjustments
Making Final Investment Decisions
Identify trends in individual indicators, compare to trends in other indicators
Consider what kind of investor you are
Economic indicators important in transition from Ease-off to Plunge!
Economic understanding…and judgment!