Economists pretty much agree, there are three types of indicators with regard to the state of our economy:
1.)
leading
2.)
coincidental
3.)
lagging
Economists, thinktanks and a myriad of other entities may have differing opinions as to what, exactly, constitutes a "leading," "coincidental" or "lagging" indicator of our economy.
Most economists, however, agree that lagging indicators are the least important of the three, since they provide evidence of some economic occurrence, benchmark or milestone more after the fact than either leading or coincidental indicators.
Tonight I'd like to focus upon what is widely considered to be one of the most important economic indicators of all:
unemployment.
All over the blogosphere, including some of the most widely rec'd, self-styled pundits on the economy here (I'm not naming names, so there'll be no links, but you know who they are), we've been hearing the false meme that unemployment is a lagging indicator with regard to the state of our economy.
As you'll see in a moment, that's completely untrue. As John Williams tells us a few paragraphs down: 'It's Wall Street hype.' Unemployment is a coincident indicator of our economy. If unemployment's getting worse (or not improving), our economy's getting worse (or, it's not getting better).
When folks tell you 'the economy will recover either later in 2009 or in the first half of 2010, but unemployment may continue rising until 2011, or beyond,' remember this!
Again, please correct someone the next time they parrot this MSM bogusness with the line: "We'll have a recovery very soon, but unemployment will continue to rise for quite awhile thereafter." If unemployment's still on an upward trend or remaining static at it's highest point, we're not in a recovery.
And, yes, "jobless recovery" is, by definition, an oxymoron.
Here's what the Federal Reserve has to say about the matter, from their "Economic Indicators" webpage (which I've posted in its entirety, with a link, down below):
EXAMPLES OF COINCIDENT INDICATORS
1. Employees on nonagricultural payrolls: It includes full-time and part-time workers and does not distinguish between permanent and temporary employees. Because the changes in this series reflect the actual net hiring and firing of all but agricultural establishments and the smallest businesses in the nation, it is one of the most closely watched series for gauging the health of the economy.
As John Williams over at Shadow Stats also keeps reminding us, the meme that unemployment is a lagging indicator is completely erroneous:
Employment/Unemployment for May: Due for release on Friday, June 5th, May payrolls are expected to fall by 550,000, following a 539,000 monthly decline in April, with May's U.3 unemployment rate rising to 9.2% from 8.9% in April, per Briefing.com. Such expectations are not unreasonable, although the better quality indicators below remain weak enough to support a monthly payroll contraction well in excess of 600,000, as well as a higher unemployment rate. From the standpoint of political/financial market needs, after revisions and other reporting gimmicks, the headline payroll number is more likely to come in on the sunny side of expectations, with the annual year-to-year contraction continuing to deepen.
Keep in mind that these data are coincident indicators of broad economic activity, not lagging indicators as hyped by Wall Street. The next month's June payroll data should show the worst annual contraction since the shutdown of production at the end of World War II.
Any sane person that puts forth the notion that unemployment statistics belong in the least important category of economic indicators (i.e.: the "lagging" indicators) might as well apply for a job spinning the news over at redstate.
IMHO, unemployment is, perhaps, the most important indicator of the current state of our economy, and our own Federal Reserve agrees!
For the record, here's the Federal Reserve's explanation of the entire deal (see blockquoted page, below). But, as far as I'm concerned, the next time someone tries to tell you that unemployment is a lagging indicator of our economy, and that "recovery" will occur while unemployment continues to increase, tell 'em they have no idea what they're talking about. Just point them in the direction of GOP'erville.
Here's the entire scoop on economic indicators, straight from the Federal Reserve: "ECONOMIC INDICATORS."
ECONOMIC INDICATORS
Economic indicators provide a snapshot of the economy's health. Just as a doctor checks the vital signs of a patient, an economist might check the vital signs of the economy by looking at gross domestic product (GDP), consumer price index (CPI) or the unemployment rate.
Economists categorize some economic indicators as leading, lagging or coincident. These categories help them see where the economy is in terms of the business cycle, which shows the rising and falling of economic conditions over time. The Federal Open Market Committee (FOMC) examines many economic indicators prior to determining monetary policy. The indicators listed in this section are examples of some of the factors the FOMC considers before issuing its directive on monetary policy.
Economic indicators (By the Numbers)
Leading indicators anticipate the direction in which the economy is headed.
EXAMPLES OF LEADING INDICATORS
1. Average weekly hours, manufacturing: The average hours worked per week by production workers in manufacturing industries tend to lead the business cycle because employers usually adjust work hours before increasing or decreasing their workforce.
2. Average weekly initial claims for unemployment insurance: The number of new claims filed for unemployment insurance are typically more sensitive than either total employment or unemployment to overall business conditions, and this series tends to lead the business cycle. Initial claims increase when conditions worsen (i.e., layoffs rise and new hirings fall).
3. Building permits, new private housing units: The number of residential building permits issued is an indication of construction activity, which typically leads most other types of economic production.
4. Stock prices, 500 common stocks: The Standard & Poor's 500 stock index reflects the price movements of a broad selection of common stocks traded on the New York Stock Exchange. Increases (decreases) of the stock index can reflect both the general sentiment of investors and the movement of interest rates, which is usually another good indicator for future economic activity.
5. Index of consumer expectations: This index reflects changes in consumer attitudes concerning future economic conditions and, therefore, is the only indicator in the leading index that is completely expectations-based. Data are collected in a monthly survey and responses to the questions concerning various economic conditions are classified as positive, negative or unchanged.
6. Manufacturers' new orders, consumer goods and materials: These goods are primarily used by consumers. The inflation-adjusted value of new orders leads actual production because new orders directly affect the level of both unfilled orders and inventories that firms monitor when making production decisions.
7. Manufacturers' new orders, nondefense capital goods: New orders received by manufacturers in nondefense capital goods industries (in inflation-adjusted dollars) are the producers' counterpart to manufacturers' new orders for consumer goods.
8. Vendor performance, slower deliveries diffusion index: This index measures the relative speed at which industrial companies receive deliveries from their suppliers. Slowdowns in deliveries increase this series and are most often associated with increases in demand for manufacturing supplies (as opposed to a negative shock to supplies) and, therefore, tend to lead the business cycle.
9. Money supply: In inflation-adjusted dollars, this is the M2 version of the money supply. When the money supply does not keep pace with inflation, bank lending may fall in real terms, making it more difficult for the economy to expand. M2 includes currency, demand deposits, other checkable deposits, traveler's checks, savings deposits, small-denomination time deposits and balances in money market mutual funds.
10. Interest rate spread, 10-year Treasury bonds less federal funds: The spread or difference between long and short rates is often called the yield curve. This series is constructed using the 10-year Treasury bond rate and the federal funds rate, an overnight interbank borrowing rate. It is felt to be an indicator of the stance of monetary policy and general financial conditions because it rises (falls) when short rates are relatively low (high). When it becomes negative (i.e., short rates are higher than long rates and the yield curve inverts), its record as an indicator of recessions is particularly strong.
Coincident indicators provide information about the current status of the economy.
EXAMPLES OF COINCIDENT INDICATORS
1. Employees on nonagricultural payrolls: It includes full-time and part-time workers and does not distinguish between permanent and temporary employees. Because the changes in this series reflect the actual net hiring and firing of all but agricultural establishments and the smallest businesses in the nation, it is one of the most closely watched series for gauging the health of the economy.
2. Personal income less transfer payments (in 1996 $): The value of the income received from all sources is stated in inflation-adjusted dollars to measure the real salaries and other earnings of all persons. Income levels are important because they help determine both aggregate spending and the general health of the economy.
3. Index of industrial production: This index covers the physical output of all stages of production in the manufacturing, mining, and gas and electric utility industries. It is constructed from numerous sources that measure physical product counts, values of shipments and employment levels.
4. Manufacturing and trade sales (in 1996 $): This index includes sales at the manufacturing, wholesale, and retail levels. It is inflation adjusted to reflect real total spending.
Lagging indicators change months after a downturn or upturn in the economy has begun. They help economists predict the duration of economic downturns or upturns.
EXAMPLES OF LAGGING INDICATORS
1. Average duration of unemployment: This series measures the average duration (in weeks) that individuals counted as unemployed have been out of work. Decreases in the average duration of unemployment occur after an expansion gains strength and the sharpest increases tend to occur after a recession has begun.
2. Average prime rate charged by banks: Although the prime rate is considered the benchmark that banks use to establish their interest rates for different types of loans, changes tend to lag behind the movements of general economic activity.
3. Ratio of manufacturing and trade inventories to sales: This is a popular gauge of business conditions for individual firms, entire industries and the whole economy. Because inventories tend to increase when the economy slows and sales fail to meet projections, the ratio typically reaches its cyclical peaks in the middle of a recession. It also tends to decline at the beginning of an expansion as firms meet their sales demand from excess inventories.
4. Consumer installment credit outstanding to personal income: This measures the relationship between consumer debt and income. Because consumers tend to hold off personal borrowing until months after a recession ends, this ratio typically shows a trough after personal income has risen for a year or longer.
5. Change in labor cost per unit of output, manufacturing: Measures the rate of change in an index that rises when labor costs for manufacturing firms rise faster than their production (and vice versa). The index is constructed from various components, including seasonally adjusted data on employee compensation in manufacturing (wages and salaries plus supplements) and seasonally adjusted data on industrial production in manufacturing. Because monthly percent changes in this series are extremely erratic, percent changes in labor costs are calculated over a six-month span. Cyclical peaks in the six-month annualized rate of change typically occur during recessions, as output declines faster than labor costs despite layoffs of production workers. Troughs in the series are much more difficult to determine and characterize.
6. Commercial and industrial loans outstanding (in 1996 $): This series measures the volume of business loans held by banks and commercial paper issued by nonfinancial companies. The underlying data are compiled by the Board of Governors of the Federal Reserve System. The Conference Board, a New York-based business research network, makes price level adjustments using the same deflator (based on Personal Consumption Expenditures data) used to deflate the money supply series in the leading index. The series tends to peak after an expansion peaks because declining profits usually increase the demand for loans. Troughs are typically seen more than a year after the recession ends.
7. Change in consumer price index for services: Compiled by the Bureau of Labor Statistics, it measures the rates of change in the services component of the consumer price index. It is probable that because of recognition lags and other market rigidities, service sector inflation tends to increase in the initial months of a recession and to decrease in the initial months of an expansion.
How Indicators Monitor the Four Phases of the Business Cycle
The four phases of the business cycle of rising and falling economic growth are: 1) expansion or recovery, 2) peak, 3) contraction or recession and 4) trough. The leading indicator system provides a basis for monitoring the tendency to move from one phase to the next. The system assesses the strengths and weaknesses in the economy as clues to a quickening or slowing of future rates of economic growth, as well as to cyclical turning points in moving from the upward expansion to the downward recession, and from the recession to the upward recovery.
The terms "leading," "coincident" and "lagging" refer to the timing of the turning points of the indexes relative to those of the business cycle. Leading indicators anticipate the direction in which the economy is headed. Coincident indicators provide information about the current status of the economy. These indicators change as the economy moves from one phase of the business cycle to the next and tell economists that an upturn or downturn in the economy has arrived. Lagging indicators change months after a downturn or upturn in the economy has begun and help economists predict the duration of economic downturns or upturns.
The system is based on the theory that expectation of future profits is the motivating force in the economy. When business executives believe that their sales and profits will rise, companies tend to expand production of goods and services and investment in new structures and equipment. When they believe profits will decline, they reduce production and investment. These actions generate the four phases of the business cycle.
Glossary of Selected Key Economic Indicators
Consumer Price Index - a measure of the average price level of a fixed basket of goods and services purchased by consumers as determined by the Bureau of Labor Statistics. Monthly changes in the CPI represent the rate of inflation. Core CPI excludes volatile components, i.e., food and energy prices.
Durable goods orders - reflect the new orders placed with domestic manufacturers for immediate and future delivery of factory hard goods.
Employment cost index - a measure of total employee compensation costs, including wages, salaries and benefits. This is the broadest measure of labor costs.
Gross domestic product - the broadest measure of aggregate economic activity encompassing every measure of the economy, measuring the total value of goods and services produced during a specific period.
Index of industrial production - a measure of the physical output of the nation's factories, mines and utilities.
Jobless claims - a weekly compilation of the number of individuals who filed for unemployment insurance for the first time. It predicts trends in the labor market.
Motor vehicle sales - unit sales of domestically-produced cars and light-duty trucks. Figures are good indicators of trends in consumer spending.
Personal income - the dollar value of income received from all sources by individuals.
Personal outlays - consumer purchases of durable goods, nondurable goods and services.
Producer price index - a measure of the average price level for a fixed basket of capital and consumer goods paid by producers.
Trade balance - measures the difference between exports and imports of both tangible goods and services. The level of the international trade balance, as well as changes in exports and imports, indicate trends in foreign trade.