If You Like Indicators, Keep Your Laggards and Leaders Separate

So much of the casual conversation I hear about the direction of the economy is downright confused — not only because the economy is legitimately confusing, but because people don’t know what metrics to keep their eye on, and especially because they jumble their leading and lagging indicators.

This Associated Press article on the state of the stock market reminds us of a key distinction we would all do well to remember:

The stock market could still recover as unemployment remains high. Wall Street will just want some signs that the prospects for the labor market aren’t getting far worse. In downturns during the past 60 years, the S&P 500 index has hit bottom an average of four months before a recession ended and about nine months before unemployment hit its peak.

So say it to yourself three times over — and say it especially to your confused friends: the stock market is a leading indicator; unemployment is a lagging indicator.

In other words: markets move fast and assimilate lots of information and are therefore somewhat predictive; layoffs are messy, unappealing, and above all take some time to unfold — as does the hiring that eventually replaces them.

This doesn’t mean that the recent market uptick means the recession is easing up, nor does it mean that recent high unemployment numbers aren’t relevant. It does mean, however, that the two metrics lie in different columns when assessing where things are heading.


I think it looks like employment is going to lag less as an indicator in this recession- layoffs started as soon as sales started falling. I bet that unemployment now is coming from businesses closing rather than downsizing. From what I've seen in the print equipment business they had shed 10% of the workforce, probably had a couple more weeks of fulough, and lo and behold Oce managed to return a profit with YOY contraction in revenue and still turned a profit. They had the advantage of benefiting from the now falling Euro, but I expect similar results from other manufacturers. Auto makers are probably an exception, with all of the stories about accumulating inventory piling up on piers and design center test tracks, but other manufacturing hopefully doesn't have too much inventory and will be able to push production back up to 6-7 days a week whenever demand recovers.


And yet, while unemployment is a lagging indicator, the Conference Board includes it as a component of the Leading Economic Index.


The unemployemnt measure used in the Leading Indicator Index is the Weekly Initial Jobless Claims which is a real time indicator of joblessness, were as the monthly unemployment report is more of an estimation based on surveys and somewhat dubious models.


Just as important is the concept of marginal change: if the economy loses jobs at x rate one month and then loses 1 job less the next, that's an improvement. The same applies for all indicators.

The importance is that if you find the margin, then you know things have at least hit bottom for now and the worst case - the end of the world, the Great Depression - is not as likely to happen.


unemployment is a lagging indicator, the Conference Board includes it as a component of the Leading Economic Index.
— Ray

During September '87 market sectors evolved separately; but during October all equities collapsed in lock-step. People say that the correlations all reduce to 1^1/2, +1 or -1 at the moment of collapse. Next morning someone pulled out the charts to superimpose '29 Dow curve onto '87 curve. The spikes and domes of the tracing fit like jig-saw puzzle in most uncanny manner.

In November '87 sectors started to separate again. Precious metals, biotechnology, and computer software recovered first as I remember it. Todays economy will have different front-runners for sure. In those days government personnel were worried less about global pollution and more about unemployment. It will not be the same this time around with overpopulation looming large.

Take in a deep breath! It will not smell quite so pure tomorrow.




Jamie Anderson

If you wait for the official figures then you're bound to be left behind. Down here in Australia many politicians are still refusing to use the R word until it is officially announced by the reserve bank.
In this current crisis I think things moved pretty fast. Last September the job ads in my local paper went from two pages to a half page over a couple of weeks. In January it was announced that job ads accross the board fell by about 12%, if they didn't count Government, healthcare and education jobs it would be more like 70%.

I was told that the first people to know hard times were coming were taxi drivers, as one of the first things companies cut back on is employee expenses.


ok, if you'll say to yourself three times over: the stock market indicates the status of rich people; the unemployment rate indicates the status of poor people


What do fudged figures for CPI, inflation (as distinct from CPI), employment, etc, and endless deficits in the budget (military & bailouts - trillion dollar employment benefits for incompetent bankers?!), current account and balance of payments indicate? I do agree with the Aussie above though...if you are looking at the stats now you are waay behind the curve. Just remember folks, the Great Depression never ended; it just became World War II. Good luck to all.


Also, Wall Street applauds when companies lay off employees because it interprets that move as eliminating costs.

The problem, of course, is that consumption is a major driver of our economy. So while fewer workers may mean lower corporate costs -- some studies, however, have suggested the contrary -- fewer workers also mean lower consumption.