Leading Indicators

As a Business Owner, you need to understand the context or climate of the market and economy. This is why, over time, there has developed list of data outputs from the Government that together form a list of leading economic indicators. Understanding that some are more important than others, that some are primary and others are secondary and still others are tertiary, and that these numbers affect the decisions of investors and customers alike, it behooves us to learn what they are and what they might mean for your business. Small business ownership is difficult enough in a good economy. Let’s not make it more difficult by ignoring available data that can help us.

Economic leading indicators are published on a regular basis.  The frequency of which is dependent on the measure in question.

Economic Calendars on the Web

Economic calendarThe Federal government and other private sources publish information on a regular basis to help us understand how the economy is functioning.  There are web sites that publish event information in the form of calendars that can help us know what to expect on a given week. Econoday’s calendar is used by Bloomberg, Nasdaq, Barrons, Wall Street Journal and Econoday (and perhaps others). MarketWatch has their own calendar as does Yahoo, Forex Market News, Investing.com, Briefing.com (MSN Money uses this one), New York Federal Reserve, RTTNews, Chicago Mercantile Exchange, Tradingfloor.com, Fox Business, Economic Times, and if you want the World Economic Calendar – well, here you go.

There are at least four types of relevant content to look for in each report: the key numbers from the announcement, analysis of the indicator, a consensus forecast before the announcement, and streaming headline news.

Consensus Forecast

The consensus forecast deserves our attention. It is generally the median number between the expected low and high ranges for the report. The consensus numbers for each report are derived each week by major news services covering the business sector. They will call or e-mail economists who forecast what they think the week’s upcoming indicators are going to be. A statistical analysis of these responses is performed and the median value is published.

consumer confidenceAs you can see in this illustration of the NFIB Small Business Optimism Index for August 12, 2014, the consensus information gives us the prior number, then a range that industry folks feel the next report’s median number should fall within and an abstract on what the industry is thinking. Now, here’s an important point to remember about why the markets react as they do when numbers are announced: Traders don’t wait on the actual news release to make their move. The median forecast is what moves the markets before the indicator comes out. Markets move on the news release only if the actual number in the news release differs from the consensus number.

Most business owners will want to pay attention to a set of economic indicators. Knowing the market you’re working within can be rather helpful in making spending, pricing, employment, investing and other core business decisions that will affect the future of your business. Indicators can also give you insight into business cycles.

Understanding business cycles

A business cycle is the recurring ups and downs in economic activity experienced by an economy over time. The National Bureau of Economic Research (NBER), the official business cycle dating committee in the United States, identifies four key points in the business cycle: peak, recession, trough, and expansion. A business cycle ends when economic activity reaches a high, or peak. When it reaches it’s low, that is said to be the trough –which is usually the last part of the recession. Usually, recessions are short last a year or less. Expansions can last multiple years, but are usually at least a year in length.

The group that says when a recession has started and ended is determined by a special committee of the NBER. For example, the Business Cycle Dating Committee of the NBER announced the start of the most recent recession on December 1, 2008, saying the previous expansion ended in December 2007 and recession started in January 2008.

How does this business cycle committee decide when recession starts? Many think it is a simple rule of two consecutive quarters of decline in overall economic growth in an indicator called gross domestic product (GDP). Actually, the NBER focuses on two key monthly indicators to set turning points in the economy: payroll employment and personal income, excluding government transfer payments such as unemployment benefits. For determining the start of the recession in 2008, the large loss of employees on company payrolls turned out to be a key factor in their decision. As you can see by the chart Job Slump, Then Recession from the Wall Street Journal, each of the recessions was preceded by a drop in payroll numbers.

For more information on how the NBER thinks about business cycles, go to www.nber.org .

There is a composite report that specifically focuses on forecasting business cycles: the Conference Board Leading Economic Index report. The ten components of The Conference Board Leading Economic Index include:

  • Average weekly hours, manufacturing
  • Average weekly initial claims for unemployment insurance
  • Manufacturers’ new orders, consumer goods and materials
  • ISM® Index of New Orders
  • Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
  • Building permits, new private housing units
  • Stock prices, 500 common stocks
  • Leading Credit Index™
  • Interest rate spread, 10-year Treasury bonds less federal funds
  • Average consumer expectations for business conditions
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