To track the path of the economy you need to know your indicators
Now is the time to know whether an economic indicator leads, coincides with, or lags the economy. Without knowing these differences, you will be hopelessly lost as to whether the economy is going up or down. Knowing the differences, you will recognize that in September (the latest month for which data are readily available), the economy was still moving downward, with prospects rising of its turning around.Skip to next paragraph
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Judging the direction of the economy at this time has been especially difficult with the November election upon us.
Republicans are quick to tell you the unemployment rate is a ''lagging'' indicator; it should be expected to grow worse for a while even if the economy as a whole has turned upward.
Democrats are quick to tell you that employment is a ''coincident'' indicator; as long as it is going down, the economy is going down.
The stock market is up, housing permits are up, the money supply is up, industrial production is down, the prime interest rate is down, plant and equipment expenditures are down, initial unemployment claims are worsening, commercial and industrial loans are increasing, etc. So which way is the economy going?
You have to understand that some economic measures traditionally move up before the economy does. New orders for consumer goods, for example, move up before the production of consumer goods does.
Other economic measures move up after the economy does. Inventories, for example, do not begin to rise until after production has increased.
None of these relationships are hard and fast and without exceptions. Nevertheless, a list of the more consistent leading, coinciding, and lagging indicators has been compiled to help assess what is going on at any particular time.
You must distinguish between an indicator's behavior before a recession and before a recovery in the economy. An improvement in the unemployment rate does lag an improvement in the economy. But a worsening in the unemployment rate leads a worsening in the economy.
Right now we are interested in what an economic indicator's timing is relative to the beginning of an economic recovery. Let's consider some of the more popular indicators and their average post-World War II performances.
* Leading indicators.
Stock prices. The monthly Standard & Poor 500-stock index moves upward four months before the economy.
Housing permits (a variation of housing starts) moves upward five months before the economy.
The M-2 deflated money supply moves upward four months before the economy.
Deflated retail sales are designated officially as a leading indictor, but the leads before the last two recoveries were short-lived, and there were no leads before the three recoveries preceding the last two. (More a coincident.) Consumer spending is overrated as preparing the economy for a move upward.
* Coincident indicators.
Real GNP moves upward two months before the economy. (A roughly coincident indicator.)
Deflated personal income moves up a month before the economy. (Roughly coincident.)
Industrial personal income moves up a month before the economy. (Roughly coincident.)
Industrial production moves upward exactly at the same time as the economy; nonagricultural employment a month later. (Both coincident.)
* Lagging indicators.
The unemployment rate improves four months after the economy.
The prime interest rate moves up 17 (yes, 17) months after the economy, on average. Its virtually simultaneous rise at the end of the 1980 recession was extraordinary and a major factor in the 1980-81 recovery's being cut short.
Plant and equipment spending moves up three months after the economy. Business investment, then, is not a prime mover in the turn from recession to recovery.
With this information you can put together a soaring stock market, declining industrial production, a worsening unemployment rate, falling interest rates, lackluster consumer spending, and declining capital spending and recognize an economy that is in the late stage of a recession, just before or some months before the economy begins to recover.
At this stage, commentary as to the strength of an expected recovery is pretty much pure conjecture. This accounts for the myriad views on the recovery's strength.
There is some basis historically for the idea that the more severe the recession, the more rapid the ensuing recovery in the early stages but the longer it takes to regain prerecession levels.
The last recovery (1980-81) was so unusually short and mild that the current recession has seen many economic indicators fall below their lows in the previous recession. Such a phenomenon has never occurred before in the post-World War II years. It means an unusually strong recovery will be necessary to resume long-term economic growth in the United States.