Monday, August 22, 2011

Leading Indicators

Leading and coincident indicators have recently been pointing in the negative direction for the US and global economies.

Stock prices are leading indicators, and they are falling around the world. The MSCI World Stock Price Index is down 14.5% ytd and 19.2% from this year’s peak on February 18. The S&P 500 is down 10.7% ytd and 17.6% from its 2011 peak on April 29. The S&P 500 found some support above last year’s range of lows on August 8 and again last Friday. (If it breaks below 1119, the next support is likely to be at last year’s low of 1022.58 on July 2.)

Industrial commodity prices are coincident indicators, and they are also falling. The CRB raw industrials spot price index hasn’t dropped by as much as stock prices around the world, but it is heading in the same direction and could catch up fast if recession fears turn into reality. The index is down 11.2% from its record high on April 11 through August 19. It does not include crude oil, which has declined 15.9% from the most recent peak of $126.47 a barrel on April 8 to $106.35 this morning, using the Brent benchmark.

The Philadelphia Fed’s survey tends to be volatile, but it was especially so on the ugly side during August. The survey’s indicators for activity, shipments, and new orders all declined sharply from their readings in July. The diffusion index of current activity decreased to -30.7 in August from 3.2 in July. That was the lowest reading since March 2009. Given its volatility, we put more weight on its three-month average, which is also down sharply to the lowest reading since June 2009. The current employment index fell 14 points to -5.2, recording its first negative reading in 12 months

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