Predicting Economic Performance
Now that 2016 is well under way, you have probably come across a number of economic predictions for the year. Economists use a wide variety of data to make these predictions, which often vary widely depending on how a particular economist views the available data.
Serious economic forecasting is best left to the experts, but you might find it interesting to consider some of the economic measures, or indicators, that are typically used to predict the future, measure the present, and verify the past.
Conference Board Indexes
The most commonly studied indicators are tracked and published by The Conference Board, an independent research organization. Composite indexes of each type of indicator are designed to more clearly summarize and reveal economic patterns and turning points by smoothing out the volatility of individual components.1
Leading indicators garner the most attention because they may forecast the future direction of the economy. The Conference Board Leading Economic Index® includes 10 components: weekly hours for manufacturing workers, initial unemployment insurance claims, consumer expectations for business conditions, stock prices, credit activity, interest-rate spread, building permits, and three separate measures of manufacturers’ new orders.2 These all tend to signal potential shifts in the broader economy. For example, when unemployment claims drop or building permits increase, better times may lie ahead.
Coincident indicators generally move in step with the broader economy and may offer confirmation that the economy is moving in a particular direction. The Conference Board Coincident Economic Index® tracks employment (employees on nonagricultural payrolls), personal income, industrial production, and manufacturing and trade sales.3 These factors not only tend to move with broad economic trends but also help to define the current state of the economy.
Lagging indicators can help confirm that an economic trend has occurred in the past or is already in progress. The Conference Board Lagging Economic Index® includes seven components: length of employment, labor costs in relation to manufacturing output, the ratio of inventories to sales, the prime interest rate, commercial and industrial loans, consumer installment credit, and the consumer price index for services.4 These measures tend to move more slowly than the broader economy. For example, despite the fact that the economy improved dramatically from 2009 through 2015, wages and interest rates remained relatively flat.
Leading, coincident, and lagging indicators measure broad economic activity, but some economists — and many noneconomists — may look at more anecdotal evidence. For example, a drop in men’s underwear sales and a rise in lipstick sales were once thought to signal a downturn, because men are quick to stop spending on underwear and women turn to lipstick rather than more expensive cosmetics. Other signs range from garbage produced to zoo visits to sales of cemetery plots.5
It’s generally not wise to place too much emphasis on economic indicators when making investment decisions. Following a sound investment strategy may help you reach your long-term goals regardless of economic conditions.