Index of Leading Economic Indicators

The last blog covered the current status of the United States Business Cycle based upon the most recent Gross Domestic Product, GDP, report. In the news, we hear doom and gloom and the discussion of the r word, recession. Based upon the GDP report, our economy is still expanding and not in a recession.

Previous blogs looked at three categories of economic indicators: leading, coincident and lagging indicators. Each category contain a grouping of individual indicators. These individual indicators within a category rarely if ever all are going in the same direction, up or down. Some very smart people figured out that you could give each individual indicator within a category a weight and a score. Once the score was tallied it could be called an index.

The end result is today we have an index of leading economic indicators, index of coincident indicators, and index of lagging indicators. Smart people figure this out every month and report it on a monthly basis.

What is the value of a monthly index of leading economic indicators? To Warren Buffet, it means very little as he stated during his annual meeting last weekend. Warren has a very long term view that goes beyond the timeframe of a single business cycle. To me, it gives me a sense of direction. It would mean a great deal if I was investing in options, which I do not.

It feels like things were better the middle of last year. Then things got worse last year until early this year, Not it feels like things are getting better again. This is what the stock market told me. The GDP numbers do not indicate this as the number has always been positive. Something else must be a better indicator than GDP.

If you look at the index of leading economic indicators, from September 2007 through March 2008, we see where the economy went down and in March is now positive once again. This makes me feel good about the direction of our economy and the US stock markets.

If you could choose between watching news reports or the index of leading economic indicators for investment advice which one is best? The answer is the index of leading economic indicators.