Mis-Leading Economic Indicators
Surprise! The revised Leading Economic Indicators increased.
As we previously mentioned (Juiced Data), this fantasy-based indicator is now less than worthless -- it is actively misleading.
Whoop de doo. Had the Conference Board cheerleaders (the people behind the shift) not changed the model, LEIs would have come in negative again, for something like 9 of the past 12 months.
On the strange and bizarre planet Conference Board, a flattening yield curve is somehow economically stimulative. For this crowd of absurdists, it takes a full yield curve inversion to start raising concerns about any potential slowing. To paraphrase Woody Allen: "I have to - I have to go now, because I, I'm due back on the planet Earth."
I'd like to remind everyone who is writing about the LEIs that if you fail to note the recent changes to the indicators, you are doing your readers a disservice. You don't have to call them (as I do) absurd -- -- but at least inform your readers as to what actually has happened with these. THE LEIs were negative, and the changes made the past negative readings positive after the fact.
>
UPDATE: August 20, 2005 7:04 am
"The yield curve slope is down to 20 basis points as measured by the difference in 10- and 2-year Treasury yields."
Dan Gross points out that the present curve is so flattened that "the premium you get for tying up cash in government bonds for an additional eight years is measly 20 cents on every $100."
Question for the Conference Board brain trust: And thats stimululative how . . . ?
>
UPDATE II: August 21, 2005 6:24 am
A picture is worth a 1000 words:
click for larger chart
The chart, via Bronson Capital Markets Research, provides a graphic depiction of what the unadulterated LEIs suggest . . .
>
Sources:
U.S. leading economic indicators rise in July
Thu Aug 18, 2005 12:14 PM ET
Lisa Lambert
http://today.reuters.com/investing/financeArticle.aspx?type=economicNews&storyID=
2005-08-18T161346Z_01_N18316222_RTRIDST_0_ECONOMY-INDEX-UPDATE-1.XML
U.S. July Leading Indicators Index Increases 0.1%
Bloomberg
http://www.bloomberg.com/apps/news?pid=10000087
&sid=aCxyYHjfCLMM&refer=top_world_news
U.S. leading indicators up 0.1% in July
By Rex Nutting, MarketWatch
Last Update: 10:14 AM ET Aug. 18, 2005
http://www.marketwatch.com/news/story.asp?guid=
%7BD584BF52-F82E-475C-B0B5-F9BA0ACD3A3D%7D&siteid=google
Friday, August 19, 2005 | 12:33 PM | Permalink
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» (Mis) leading indicators, data surprises and Keynes' beauty contest from New Economist
This is a very long and somewhat belated post, inspired by a 17 August blog by Mark Thoma on The Use of Leading Economic Indicators in Economic Forecasting. Mark cites a paper by Stock and Watson and a Bloomberg column by Caroline Baum, which asked wh... [Read More]
Tracked on Sep 8, 2005 11:21:32 PM
Comments
Hope to see you post some more about this including some charts comparing the unrevised LEI trend with the new, "improved" LEI trend
Posted by: Steve | Aug 19, 2005 2:50:43 PM
Its just like the Wizard of Oz with these guys: "pay no attention to the man behind the curtain".
...or maybe Orwell:
"And if all others accepted the lie which the Party imposed—if all records told the same tale—then the lie passed into history and became truth. 'Who controls the past' ran the Party slogan, 'controls the future: who controls the present controls the past.'" —pg 32, 1984
Posted by: dude | Aug 19, 2005 2:58:59 PM
If the yield curve is inverted because Asian central bankers &/or foreign investors are buying lots of 10-yr Tres. bonds, then the inverted yield curve could be stimulative, in contrast to the norm.
Posted by: wdf | Aug 19, 2005 8:55:27 PM
WDF: That's a totally incorrect statement, on many levels.
There are three reasons: Cyclical, Liquidity, and Predictive:
Cyclical: At the end of a recession, the Fed will have already been cutting short rates. So the curve will be steep, at the point in the cycle where an expansion is likely to occur. (Its the opposite for an inverse curve).
Liquidity:
A steep yield curve is stimulative, because there's so little return for investors at low rates -- Essentially, by cutting rates, the Fed encourages alternate investment to bonds. So investors look to put their capital to work elsewhere; That capital investment is stimulative.
Bond Market Predictive:
Why would investors take a LOWER INTEREST RATE ON LONGER TERM LOANS THAN SHORTER TERM? You tie cash up for longer, so there is lengthened risk and the loss of the use of that capital for other potential investments (opportunity costs).
Regardless of what factors contribute to the yield curve inverting, it is essentially a collective expectation by the Bond Market that even LOWER RATES ARE IMMINENT -- in other words, lock inrates NOW while you can.
Why might it get worse? Its the expectation of a WORSENING ECONOMY, and all that entails. Its essentially an economic bet -- by very smart money -- that this is the last chance to lock in mediocre rates before they get much worse.
Someone else described (cant remember who) as "A chance to lock in rates before the bottom falls out."
Posted by: Barry Ritholtz | Aug 20, 2005 6:42:13 AM
Barry, what you write is true as a generality. I'm suggesting that possibly the lower long-term rates in this particular case may be the Asians supplying liquidity via long-term Treasury bonds--in effect countering what the Fed is doing...Supplying us stimulus with freshly created Yen & Yuan. Uniquely, the point of entry is the long-term bond. If so, the economy may contimue to thrive for another 6-9 months inspite of a relatively flat yield curve. (Tho' if oil goes a lot higher, well...)
Posted by: wdf | Aug 21, 2005 11:48:12 PM
Hello I have a question.Is there any website that can help pull data (economic indicators )since 1960.For example an excel sheet that would provide a comparison of 10 year treasury fund rate and federal reserve rate.The data has to be monthly .
If you could suggest the website that would be very helpful and also how to pull the data.
Posted by: Raghu | Mar 8, 2007 2:22:52 PM
