A Guide to Economic
Indicators
Chapter 5
Danielle Ko
Trent Musso
September 5, 2006
“Reliable” Indicators

Economic indicators are considered
reliable if:
1. They undergo minimal revision on average
2. They accurately signal turning points in the
economic life cycle

Consist of initial unemployment claims,
average manufacturing workweek, nonfarm 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


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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

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
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

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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



Durable Goods Orders


“Unreal Tale”
Initial report is extensively revised
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


Corporate Profits

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Problems with rate calculations and includes
such groups as teenagers
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

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Key indicators of Revival remain positive
Business spending takes off
Average manufacturing workweek drops
A Trip Through the Economic Life
Cycle

Maturation

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
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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
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Where to look


Watch your step
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The Wall Street Journal, Business
Conditions Digest
A matter of constant comparisons
Revisions
Understand terminology: real vs.
nominal, seasonally adjusted
Making your own adjustments
Making Final Investment Decisions

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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!