Understanding Economic Indicators
Traders and investors alike are in a constant search for any information that will help predict the markets or the economy.
The rewards are so great that we can easily push too hard and reach too far for an answer. In this article I will show how one of the most commonly cited recession arguments is mistaken.
To illustrate, please consider the "Mystery Chart" below.
In the data series depicted by this chart there are two events–a sharp decline in the series and then a very specific result. For this reason, the sharp decline is a "trigger." At the end of the series we have the largest decline ever seen.
If you looked at this series, using only the information provided, your conlcusion would be obvious:
A new event has been triggered!
I shall return to the mystery series. But first, let us turn from mystery to reality.
Forecasting Economic Growth
Everyone wants to predict economic growth. There is a continuing search for leading indicators that really lead.
The focal point of a current debate is the work of the Economic Cycle Research Institute (ECRI). The ECRI is a favorite source for many, including us. Each week there is an update on the Weekly Leading Indicators (WLI). This includes both a report of the level and the growth in the index.
The developers of the index have made a major financial investment. They need to show the power of their methodology, without giving away the results. This provides an open invitation for others to use the WLI, despite the "black box" character of the methods. I will highlight the two prominent voices analyzing the data.
David Rosenberg has noted that this level of the ECRI Growth Index has led to a recession 100% of the time. In June, quoted in The Business Insider, he had this conclusion: