The Author's Page for
The Complete Idiot’s Guide to
The Complete Idiot’s Guide to Economic Indicators
Web Links and Updates by Chapter
Basics about Indicators and Business Cycles
Introduction from Chapter 2
You’re ready to learn the basics about what causes recession and how indicators might give you warning. For you to really appreciate the information content of economic indicators, you need to understand that the economy goes through cycles of expansion and recession. And guess what? Some indicators have more forecasting ability than others and a key one is the index of leading indicators.
By the time you finish this chapter, you’ll know about business cycles and how number formats for indicators differ (and there are some subtle differences!). You’ll also get the scoop on why seasonally adjusted data is important. So let’s get started! Get comfortable and let’s dive right into business cycles.
Web Links for Chapter 2
This chapter focuses on general technical facets about economic indicators. Indicators come in a variety of formats—what does each mean? What is the difference between a simple percent change and an annualized percent change? And how do seasonal patterns fit in? Retail sales jump in December but how do we know how strong or weak the numbers really are? And what is a business cycle and who decides when a recession starts and ends and how? Chapter 2 answers these questions but the web link focus is on more detail on business cycles. Check out the Excel file download further below for more on understanding formats that economic indicators come in. And the Bonus Material goes into more about how to interpret the leading indicators report.
Picking the Start and End of Recession
The start and end of a recession is officially determined in the U.S. by the National Bureau of Economic Research (NBER). Their web site has news releases on the latest thinking on the business cycle by the NBER.
The Longest Recession
The recession that started at the end of 2007 and appears to have ended in mid-2009 was quite different from recent, prior recessions. But history can give us many insights into what makes the economy tick. The Great Depression that started in 1929 and ended in 1933 was the “deepest” recession for the U.S.—but it was not the longest! The longest recession started in November 1873 and ended in March 1879—a 65 month downturn! Many economists thank President Ulysses S. Grant and the Panic of 1873 for causing this economic calamity. There are many sites discussing the Panic of 1873 but Wikipedia.com is a good place to start. And there are lessons to be learned from even the immediate post-Civil War economy that are applicable today.
Index of Leading Indicators
Two key points from the book on the leading indicators report are:
Both indicators are produced by The Conference Board.
Here’s the link to the index of leading indicators report:
As discussed in the Complete Idiot’s Guide to Economic Indicators, the headline number for the index of leading indicators is a monthly percent change. That is, how much did the index rise or fall in the latest month—and, of course, for the markets the big issue is whether the latest number met, beat, or fell short of expectations. Check your favorite economic calendar for this as discussed in Chapter 1.
Components for the Leading Index
But many analysts like to dig deeper than the headline number and go into the components. The index of leading indicators (and the composite and lagging indexes) have components with a special name—component contributions. These are basically component percent changes with component weights. The weighting methodology for the components is more complex than for most indicators because the components are so diverse. Notably, the weighting methodology takes into account trends for each component.
Anyway, the Conference Board web site has a link to a monthly technical report showing the component contributions. You can see which components added or subtracted to the latest month’s move in the overall index and think about whether there were special factors affecting a major component move.
Here’s the link to the monthly technical paper on component contributions—“technical notes for underlying detail, diffusion indexes, components, contributions and graphs”:
Here’s an example from the technical report showing the major index levels and monthly percent change:
Source: The Conference Board
Here’s an example from the Conference Board’s technical report showing the component levels and net contribution to the overall index percent change:
Source: The Conference Board
In this example, the biggest contributor to the O.1 percent gain in July 2010 initial estimate was the interest rate spread with a 0.30 percentage point contribution. The biggest negative was a negative 0.22 percentage point contribution by the index of consumer expectations. Markets sometimes have a second thought reaction to this report if the detail suggests a different direction than the headline number. For this report, the headline was mildly positive. But it relied heavily on the interest rate spread, meaning it was less positive than the headline implied.
Examples of Data Formats
Although this chapter gives written formulas for what various data formats mean, a helpful illustration is actually seeing the data in Excel and then the formatted data (percent change, difference, etc.) in Excel formulas—at least for those of you comfortable with Excel.
Click here to download an Excel file with examples of common formatting for economic indicators.
You will see economic indicator examples with Excel formulas for:
According to the National Bureau of Economic Research, the most recent recession ended in June 2009. Check here for more details on the decision:
Email comments or suggestions to RMRogers@mindspring.com