Today, however, my favorite among the motley crew was released: The Index of Leading Economic Indicators, the LEI, a synthesis of forward-looking pointers that supposedly forecasts the future direction of the economy.
The January numbers, released this morning, show the index up 0.3%. In face the index has risen every month beginning in May 2009, raising the question, if good times have been forecast for nine months running, when will the good times roll?
Could it be (gasp!) that the LEI isn't in fact the forward-looking policy tool that it's cracked up to be?
Just as with baking a cake, what counts in the art of indicator construction is the ingredients that go into mixing bowl.
The LEI is an agglomeration of 10 indicators. For January, those that made a positive contribution to the index were interest rate spreads, supplier deliveries index, average weekly manufacturing hours, stock prices and the consumer expectations index. Negative contributions came from real money supply, average weekly initial jobless claims, building permits and manufacturers new orders for non-defense capital goods. A neutral contribution cam efrom manufacturers new orders for consumer goods and materials. Clearly, the LEI's underpinnings are all over the economy: Capital goods, manufacturing, finance, consumers, jobs, building, even stocks, which I consider to be a psychological indicator covering the minds of a select group of money managers. It's like baking a cake out of sugar, flour, Tabasco Sauce, chopped broccoli and a pinch of chewing tobacco for a bit of kick. A fascinating cake will emerge from the oven, but I'm not sure I would want a slice for desert. An alternative approach is illustrated by the indexes built by the Consumer Metrics Institute out of Lakewood, Colorado. | A former Time Magazine economics reporter digs into what lies behind the economic indicators, and how they impact the markets. |
Their indexes buy heavily into the "consumer is king" view of the American economy. That is, if consumers aren't willing to get into the game, then the economy will falter. If consumers will spend, the economy will prosper.
It's the ultimate "shop our way to prosperity" argument, in index form.
And I've got say, the CMI's indexes match my gut feeling more closely than the LEI does. I mean, if things are so good, then why do I feel so bad?
The CMI's growth index shows a sharp decline from the Summer of '09, right through the supposed recovery that kicked in late last year. There's no sense of returning economic activity in that index. The most recent number, issued Feb. 12, shows a 1.24% contraction (annualized) from 91 days previously.
Their weighted composite index has shown a sharp decline from August 2009, a period in which the LEI showed continual growth.
CMI's charts show their composite index leading the S&P 500 and the LEI trailing it. Also, CMI releases data every few days. The LEI comes out once a month.
The Institute also breaks things down by subsectors, but maintains through a strong focus on consumer activity as the motive force of the economy.
CMI is one of several sources of numbers that challenge the official ecnomic reports issued by the government.
Another is John Williams' Shadow Government Statistics, which puts the actual unemployment rate at just below 22% (a full dozen percentage points below the official figure).
As a short-term trader, I'm interested in how the markets react to indicators, and that means I must focus on the government reports. For short-term plays, the truth means nothing. Only perceptions count.
However, for those positions that focus on fundamentals -- covered calls, which can leave me stuck with zombie positions of shares, interest-rate plays, and frankly planning for my future in a very uncertain world -- the alternative numbers are important counterweights to what the government says.
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