With all the indicators and indexes and chatter out there, it's extremely helpful to have one indicator that can help guide your investment decisions reliably, and this one does just that, explains Elliott Gue of Energy and Income Advisor.
Released on the third Thursday of each month, the Conference Board’s Index of Leading Economic Indicators (LEI) comprises ten components that tend to predict the direction of the economy.
1. Average Weekly Hours, Manufacturing (Index Weight: 0.2781)
Manufacturers hesitate to lay off workers at the first sign that demand has weakened, preferring to limit overtime or reduce the number of shifts that employees work. Not only does such a move entail significant costs and hit employee morale, but this drastic measure could also be for naught if the slowdown in demand proves temporary. For similar reasons, manufacturers usually increase employees’ weekly hours at the first sign of a pick-up in demand.
This leading indicator weakened in early 2008, presaging the economic collapse that occurred later that year. Average weekly hours in the manufacturing sector also started to recover in early 2009, months before the US exited recession.
With employees in the US manufacturing sector working longer hours than before the Great Recession, companies appear to be squeezing as much productivity out of their existing workforce because of uncertainty surrounding future growth.
2. Average Weekly Initial Claims for Unemployment (Index Weight: 0.0334)
Commentators often discuss the unemployment rate, or the percentage of the labor force that’s seeking work but has yet to find employment. Though important, trends in this data series historically have lagged the economy by several months.
For example, the US entered recession in December 2007, but unemployment didn’t breach 6% until the end of 2008 and didn’t hit 8% until the economy started to show signs of improvement. Furthermore, the unemployment rate didn’t peak until October 2009—four months after the economy exited recession and seven months after the S&P 500 bottomed.
In contrast, the number of Americans seeking unemployment benefits for the first time has more value as a leading indicator for the US economy. One of the first indicators to signal a recession in 2007, a spike in initial jobless claims tends to precede weakness in employment statistics by a few months.
Although initial jobless claims have slowly and steadily declined since mid-2010, this figure has yet to recede to pre-crisis levels more than three years into the recovery—a testament to the anemic nature of this economic rebound.
The effects of Hurricane Sandy will limit the utility of this indicator for at least a few more weeks. Weekly initial jobless claims had hovered in the mid-300,000s in recent months, but spiked to more than 450,000 per week in the immediate aftermath of the storm. Digging into the data from the Dept of Labor reveals that the majority of this upsurge in first-time unemployment claims originated in New York and New Jersey, the two states that were hit the hardest by the hurricane.
3. Manufacturers’ New Orders, Consumer Goods, and Materials (Index Weight: 0.0811)
This data series tracks new orders for goods destined for sale to consumers and serves as a leading indicator of manufacturing activity and trends in consumer spending.