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Former Federal Reserve Chairman Alan Greenspan, according to the Financial Times, paid attention to the cardboard box market. When the demand for cardboard boxes increased, the economy improved.
Former Federal Reserve Chairman Alan Greenspan, according to the Financial Times, paid attention to the cardboard box market. When the demand for cardboard boxes increased, the economy improved. Justin Sullivan/Getty Images
Here lies the economy: sick, ailing, bedridden. Every day there is more bad news. One sector is suffering; another is getting worse. The whole financial structure is like some kind of fading patient.
Eventually the question must be raised: How will we know when the economy is getting better?
Ask various advisers and you receive various answers. For example, David Wyss, chief economist at Standard & Poors, watches the jobless rate. "You look for the basic fundamentals of the economy to turn," says Wyss, "and the biggest fundamental for most people is employment."
Once employers stop bleeding jobs and people begin to go back to work, the unemployment rate will stabilize, says Wyss. "Payroll numbers will increase. That's the single most important indicator."
But not the only one, he adds. He also pays attention to the housing market, looking for "an uptick in home-sales numbers."
After all, Wyss says, this particular recession "started in the housing market."
Other experts watch for improvement in different telltale figures, such as retail sales or housing starts or the gross domestic product — the total value of goods and services produced within the country. Former Federal Reserve Chairman Alan Greenspan, according to the Financial Times, paid attention to the cardboard box market. When the demand for cardboard boxes increased, the economy improved.
Mercy! There are so many numbers and surveys and indicators flying around, which stats should we really pay attention to if we are looking for the silver lining? What robins do we look for to know that spring cannot be far behind? What road signs tell us we are going in the right direction?
Signs, Signs, Everywhere A Sign
Basically, there are two groups of indicators, says Lakshman Achuthan, managing director of the Economic Cycle Research Institute. The New York-based think tank was founded by Geoffrey H. Moore, once dubbed "the father of leading indicators" by The Wall Street Journal.
"Leading indicators" tell us about the future, Achuthan explains, and "coincident indicators" tell us about the here and now.
Examples of "coincident indicators" — that is, current activity — include manufacturing and trade sales, nonagricultural employees on payrolls, domestic production and personal income. "Most of these numbers are bad or getting worse," Achuthan says. "They represent objective measures of how we feel about the sickly economy."
In other words, coincident indicators corroborate what we already feel about the economy. Things don't look so good right now.
But there are other vital signs, long-term stats that point to the economy's future. These are the "leading indicators," Achuthan says, "that don't necessarily jibe with how you feel" about the state of the economy, the patient. But they do provide a prognosis.
Sort of. Looked at individually, the leading indicators, such as corporate profits growth, housing activities, jobless claims, investor confidence numbers, can be jumpy and unreliable.
So, the Economic Cycle Research Institute publishes a U.S. Weekly Leading Index, based on a compilation of those leading indicators —- and others — to try to gauge the future health of the economy. The index has been around since the early 1980s. Achuthan says, "The index is a way to keep it objective. It is immune to debate." He adds that the index correctly called the beginning of this recession and the past two recessions without false alarms in between.
There are scads of other indexes, including:
The Index of Leading Indicators, compiled by the not-for-profit Conference Board, which gathers discrete numbers and aggregates them to create a snapshot of where the economy is headed. It takes into account unemployment insurance claims, new orders from manufacturers for consumer goods and materials, building permits, stock prices and several other variables. The latest Conference Board figures indicate that for November, the Index of Leading Indicators — continuing a six-month slide — decreased 0.4 percent.
The Consumer Confidence Index, also compiled by The Conference Board, surveys 5,000 households about the present state of economic affairs and expectations for the near future. In December the CCI reached an all-time low.
The Index of Consumer Expectations, a joint project of Reuters and the University of Michigan, surveys consumer attitudes on a variety of matters. The latest index offers a slight ray of light amid all the gloom: It rose a bit, to 61.9, in January, up from 60.1 in December — its second month of modest gains. Still, it's down dramatically from January 2007, when the index stood at 96.9.
There are, in fact, so many indexes available that you could assemble your own index of indexes. Or you could just pay attention to one. In December, Achuthan's Weekly Leading Index, for instance, was the lowest it has been since its creation. "It was the worst we have seen," Achuthan says. In January the index has begun to be less disastrous.
According to Achuthan's index, the collective status of key drivers of the economy four weeks ago was at -30 percent. Now it's only at -27 percent. It's not a forecast of recovery, Achuthan says, "but if the upward trend were to continue for a couple of months, it would be. We have to watch it."
He adds, "We may have edged back from doom for the moment. But there's still plenty of gloom, so we are not out of the woods."