Economic Indicators

The health of an economy especially one as large and complex as that of the United States is hard to quantify. There are many relevant factors and elements in such an economy and randomly picking any element as a gauge for the condition of the economy will not be reliable. Additionally, many different sectors of society may be concerned with specific aspects of the economy. Unemployment rates have more relevance for job  hunters compared to the Dow Jones Industrial Average. Farmers will be keeping an eye more on the trends for the prices of wheat and grain compared to the prices of gold and copper.

Some economic indicators like GDP may measure an economy’s income. Some other indicators like the inflation rate may paint a picture regarding the cost of living. Indeed, there are a lot of economic indicators. Almost everyday, newspapers carry some form of news regarding the performance of one economic indicator. However, all of these indicators fall under three categories depending on their changes in relation to the changes in the economy specifically in relation to the prevailing business cycle (“Business Cycle Indicators Handbook”).

Leading indicators are indicators whose change precedes economic change. One example of a leading indicator is the stock price. Movements of the stock market generally reflect investor sentiment and will thus foreshadow future economic activity. Total manufacturing hours is also a leading indicator. Manufacturers will generally increase  (decrease) their working hours before taking in more people (laying off from their workforce). The money supply is another example of leading indicator. If the money supply does not keep up with inflation, bank lending will fall which in turn slows down the expansion of the economy (“Components of the U.S. Business Cycle Indicators”).

Coincident indicators give an indication of the current state of the economy. Examples of coincident indicators are the number of employees on nonagricultural payrolls, industrial production and manufacturing and trade sales. The number of employees on nonagricultural payrolls or “payroll employment” reflect the size trends of the nation’s workforce and as such makes it a closely watched statistic. Industrial production tells of how much wealth the nation’s businesses are producing. Sales on the other hand reflect the spending attitudes of the economy’s businesses and consumers. We can see that these coincident indicators tell us what the economy is doing right now (“Components of the U.S. Business Cycle Indicators”).

The third type of indicator is the lagging indicator. A lagging indicator changes value after a change in the economy has happened. While lagging indicators may seem trivial, their value lies in warning of structural imbalances which may be brewing in the economy. Lagging indicators also help us confirm if changes in leading and coincidental indicators reflect an actual change in the economy instead of being just idiosyncratic movements. An example of a lagging indicator is the average duration of unemployment as the unemployment will tend to dip only after the economy has taken off and will spike when recessions have begun. The prime rate charged by banks is also a lagging indicator as banks use economic data to come up with the basis for their interest rates. The ratio between consumer debt and income is also a lagging indicator as consumers will generally start borrowing months after a recession has started (“Components of the U.S. Business Cycle Indicators”).

According to the latest economic indicator data from The Conference Board, the leading index (an aggregate of leading indicators) declined sharply in October. The coincident index was also unchanged in October following months of continuous increase. The GDP grew a little bit faster at a 3.9% growth rate for the third quarter compared to 2.2% from January to June 2007. Industrial production has also been lower in October, a drop that followed four consecutive monthly increases. On a longer time scale, the coincident index and leading index for the US has been increasing steadily since 2001. However, the leading index has been seen to plateau in the past couple of years. If we are to look at the leading index as an indicator of what the future holds for the US economy, we can say that while growth may still be expected in the future the growth rate will tend to slow down. There is no exuberance in this growth and there is no excitement with it. The plateauing of the leading index may even lead to a decline which may indicate the possibility of a recession (“US Leading Economic Indicators and Related Composite Indexes for October 2007”).

With these economic indicators in mind, let us examine an industry which is important to all Americans – Housing. The typical American household spends the largest chunk of its income – 40% – on housing costs. The housing boom of the past few years has led to an exceptionally exciting and dangerous housing market. With most experts agreeing that the housing bubble has burst, the construction of new houses is expected to go down. This is reflected in the indicators. New building permits – a statistic that is positively correlated with new home construction – has been declining steadily over the past 6 months (“US Leading Economic Indicators and Related Composite Indexes for October 2007”). This leading indicator tells us that we can expect the construction of new homes to decline further in the next few quarters.

While the housing construction is in a slowdown, interpreting this as a supply side contraction may not be too accurate. With the housing boom it preceded, this slowdown in construction means that the market could mean that the market is already saturated with products (homes) and that there is now a surplus situation. With this in mind, the housing industry becomes a buyers market instead of a sellers market which characterized the housing boom. We should also mention that the interest rate spread has been steadily declining over the past 6 months (“US Leading Economic Indicators and Related Composite Indexes for October 2007”). All these data means that it really is a buyers market. Buyers have more housing options and can also expect easier financing options from banks. Therefore we can say that in the Housing market, it is going to be a good time for potential homeowners to purchase a home, but it will be a bad idea for people to buy homes as an investment with hopes of selling it off for a profit down the road.

Bibliography

Mankiw, Gregory. Principles of Economics. 12th . Mason, OH: Thomson Higher Education, 2007.

The Conference Board, “Business Cycle Indicators Handbook.” TCB-Indicators. 2001. The Conference Board. 9 Dec 2007 <http://www.conference-board.org/pdf_free/economics/bci/BCI-Handbook.pdf>.

The Conference Board, “US Leading Economic Indicators and Related Composite Indexes for October 2007.” The Conference Board. 2007. The Conference Board. 9 Dec 2007 <http://www.conference-board.org/pdf_free/economics/bci/LEI1107.pdf>

The Conference Board, “Components of the U.S. Business Cycle Indicators” The Conference Board. 2007. The Conference Board. 9 Dec 2007 <http://www.conference-board.org/economics/bci/pressRelease_output.cfm?cid=1>