Variant Perception’s Leading Economic Indicator Framework

Leading Economic Indicators (LEI) enable the forecasting of

> Recessions> Turning Points in Growth> Inflation> Market Volatility

Turning Points are Hard to Identify

Most analysts merely extrapolate recent trends

LEIs Forecast Turning Points

Variant Perception focuses on leading indicators

> Vintage Data & Lagging Indicators

Consensus Economists Focus on the Wrong things

Almost all economic data is revised 3 and 12 months later

> Inflation> Unemployment> GDP

> Savings Rates> Industrial Output> Trade, etc

This makes for greater historical accuracy, but does not help inform decision makers in real time

Wrong Focus - Vintage Data (1)

> Making decisions based on incomplete data or, even worse, data that will tell a completely different story upon revision, is a recipe for disaster

> Variant Perception focuses on economic data and prices that are not revised (ISM survey, yield curve, initial unemployment claims, etc)

Wrong Focus - Vintage Data (2)

> Inflation typically reaches its peak in the middle of a recession and troughs when an expansion is strongest

> Unemployment is always at its lowest point when a recessions starts

Wrong Focus - Lagging Indicators

Consensus Economists Do a Bad Job at Forecasting Recessions

“Quite simply, the record of failure to predict recessions is virtually unblemished. Only 2 of the 60 recessions that occurred around the world during the 1990s were predicted a year in advance”

Prakash Loungani, Assistant to the DirectorExternal Relations Department, IMF

Alan Greenspan:

"In the very near term there's little evidence that I can see to suggest the economy is tilting over [into recession]." July, 1990

"...those who argue that we are already in a recession I think are reasonably certain to be wrong." August, 1990

"... the economy has not yet slipped into recession." October, 1990

1990 Recession: Large Industrial Downturn

The Economist, January 2005:

“In a survey in March 2001 95% of American economists said there would not be a recession.”

The recession started the month of the survey, March 2001, and industrial production had already been contracting for five months.

2001 Recession: Dotcom Bust (1)

2001 Recession: Dotcom Bust (2)

Alan Greenspan, May 2001:

“Moreover, with all our concerns about the next several quarters, there is still, in my judgment, ample evidence that we are experiencing only a pause in the investment in a broad set of innovations that has elevated the underlying growth rate in productivity to a level significantly above that of the two decades preceding 1995.”

2008 Recession:Subprime Bust, Banking Crisis

Ben Bernanke, October 2008:

“The risk that the economy has entered a substantial downturn appears to have diminished over the past month or so.”

The 2008 recession started in December 2007

Leading Indicators make it Possible to Forecast …

(1) Recessions

(2) Turning Points in Key Metrics, such as IP and ...

... US Manufacturing

(3) Inflation

(4) Market Volatility

> Business Cycle Financing> Real Money Growth> Market Volatility > Manufacturing> Car Sales

> Durable Consumption > Shipping > Construction > Key Commodities

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Variant Perception has also developed Leading Economic Indicators for the following measures

And many more...