The Real Indicator to Watch
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.