These lagging economic indicators include:
- Average Duration of Unemployment
- Labor Costs
- Corporate Profits or Earnings
- Consumer Debt Levels
- Commercial & Industrial Loans
- Business Loans
As GDP increases, Unemployment goes down (more people working), labor costs go up (more people working), earnings go up (higher revenue), debt levels go down (more money available)and the amount of loans should go down (less loans are required).If GDP decreases these indicators should act in a reverse fashion. As you watch the performance of these indicators, do not believe that they predict future performance of GDP.
While this is good economic data, using it as an investor is like driving a car while looking in the rear view mirror. I follow the 4 leading economic indicators more closely for making investment decisions rather than any lagging indicator. Do not confuse a lagging indicator with a leading indicator.
Note that corporate earnings are a lagging indicator instead of a leading indicator. This the one indicator that gives investors the most problem. Why? A good earnings report leads people to believe that good things are going to happen in the future so that an increase in earnings will increase stock price because we have a Price to Earnings number for a stock.
The key learning point is to pay much more attention to future revenue & earnings rather than earnings for a previous quarter. This is why a stock has a great earning report for a quarter and the stock goes down because of a comment about future revenue or profits.
The next blog will review the GDP for the 1st Quarter 2008 and see what it tells us about our current business cycle.
No comments:
Post a Comment