Tuesday, April 20, 2010

What Economic Indicators?

On Monday, 4/19/2010, the Conference Board Leading Indicators Index came out reporting a new high of monthly one year improvement.  On the 12th of April, the NBER committee of economists announced it could not yet determine an end to the current recession citing government revision of statistics since they were initially released and the duration and severity of the downturn combined with continuing unemployment.  While no committee member would discuss specifics, it is generally reported many felt the recovery had begun but there was significant concern that risk remained in the economy running out of steam in late 2010.

The Leading Indicators Index like the Consumer Sentiment Index and other media followed soft indicators, whether leading or lagging, are not well liked by me.  They are to soft and prone to psychological misuse and interpretation.  I do pay some attention to coincident indicators, but I do not consider them primary indicators.  The coincident indicators are more informational of the economic trend.  The Chicago Fed National Activity Index is a coincident indicator.  Also, coincident indicators have direct impact on sales tax revenue.  The Philadelphia Fed has a coincident index for the fifty states.

Karl Denninger had a good post on indicators back in January in which he identified what he considered the most important macro level indicators as sales tax receipts, consumer credit, and civilian employment ratio.

Sales tax receipts directly reflect the importance of personal consumption accounting for 70% of the US economy and are crucial for local government and states, unlike national governments with their own currency, which are constrained in their spending.  While there is some slow improvement in sales tax revenue from Q3 2009 to Q4 2009, it is not very encouraging.  This is one of the reasons a national VAT (value added tax or national sales tax) is being discussed, although many think it would help with the national deficit, it's real purpose would be to provide more spending power by the national government to local and state governments.  The VAT issue as opposed to a progressive consumption tax is one which should be addressed in a separate post.  Denninger makes the accurate mathematical observation that a sales tax is proportional and not progressive, but I disagree with his claim it is not regressive, because it is not entirely based on discretionary spending.  The spending constraints for shelter, clothing, food, medical care, education, and work expenses are not equal or proportional to income and disposable income.  While he lives in a state which does not tax food purchases, I live in one of the 18-19 states which either do and/or allow local government to do so.  He is correct in sales tax receipts being a accurate picture of consumer spending.  I find it a very useful indicator.

Consumer credit, as Denninger notes, is additive to GDP when it expands and subtractive when it contracts.  In fact, there are some economists who consider credit more important than money.  In my opinion, it is important to look at total leverage and its sources as it gives a better indicator of economic bubbles, such as housing, and as an indicator requiring monetary and/or fiscal policy action.

The civilian employment ratio, of all working age (16-65) people determine by a household survey, because it provides a smoothing contrast to other employment/unemployment figures, not because it is predictive of government revenue as Denninger maintains, and impacts GDP and is a function of aggregate demand.

I have not commented on Denninger's good post since reading it in January, because he makes the deficit hawk erroneous statement that the US deficit would have to be cut in half to bring employment back into balance.  Federal spending to target unemployment and get the economy growing is essential.  The debatable question is are the programs designed for this purpose efficient and strong enough.  Secondly, he also asserts the need to establish benevolent (not his word but my assumption) detention facilities to provide emergency food, clothing, and shelter to the unemployed at formerly closed military facilities ("work is good" camps?), because "... a hungry and homeless population is a dangerous population, and "discontent" when married to an empty belly can easily turn to armed rebellion, especially if and when the "rabble" discern (and they eventually will) that they have been systematically robbed for decades by Wall Street, K Street and 1600 Pennsylvania Avenue."  I could find no facetiousness in his comments, which may actually be based on a concern for the unemployed, but they are not appropriate phrased if benevolently meant as I would hope they were meant.

With the civilian employment ratio I also like to look at the weekly jobless claims, monthly unemployment figures, and monthly inflation figures, which are subject to substantive revisions and methodological changes. The change in how shelter has been defined and applied with respect to inflation calculations has had a noticeable effect in deflating core inflation. Consequently, I also like to look at alternative unemployment and inflation figures based on prior period calculations.  For how inflation and discouraged unemployed (as opposed to the official U6) where calculated in the middle 1990's, I go to Shadow Government.  I also look at how inflation would look if it were still calculated as it was in the 1980's.

I like to see the weekly EIA oil, gas, and distillate supply figures and compare with current gasoline prices.  While these will show disjunctions more than trend, they have to be viewed in relation to vehicle miles driven.

These can by no means be all inclusive, but I do wish to distinguish from the many "indicators" which the media and the market seize upon in almost desperate attempts to find hope.  Even the above can become prey to the need by the media and the market to depict hope if phrases are taken out of context or misinterpreted.  It is necessary to dig down into the figures of the inflation and employment reports and compare all f this inflation together.  And it is always changing and leading and lagging.  Nothing is perfect or in equilibrium.

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