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The Complete Idiot’s Guide to Economic Indicators RogersEconomics.com |
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The
Complete Idiot’s Guide to Economic Indicators
Web Links and Updates
by Chapter
Chapter 2
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
National Bureau of Economic Research (NBER)
- The NBER’s announcement
that the latest U.S. business cycle expansion ended December 2007
- How the NBER dates the
business cycle
- U.S. business cycle recession and
expansion dates
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:
- The index of leading indicators is used
to indicate turning points in the economy ahead of the events.
- The index of coincident indicators is
used to time the actual dates of turning points (such as the start or end
of recession) in the economy and also to measure the strength of the
current economy.
Both
indicators are produced by The Conference Board.
Here’s the link to
the index of leading indicators report:
Bonus
Material
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.
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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:
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What’s
New?
According
to the National Bureau of Economic Research, the most recent recession ended in
June 2009. Check here for more details
on the decision:
Return
to Chapter List for Web Pages, The Complete Idiot’s
Guide to Economic Indicators
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Indicators Site Map
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