It has been almost 235 years since the signing of the Declaration of Independence. And, since then the United States of America has developed the largest economy on the planet. However, when one considers our long and proud history, the measurement of its economic performance is a relatively recent phenomenon. We didn’t have regularly published Coincident Economic Indicators until the mid-1990s.
While as early as the 1830’s when social reformers began using statistical indicators to relate alcohol production as a cause of crime. The US Bureau of Labor was created in 1884 to become the official compiler of “social” statistics. It wasn’t until the Great Depression of the 1930’s that economists began a focus on the need to have detailed knowledge about the state of our economy. Before this, the only data compiled on a regular basis related to labor.
According to the Gale Encyclopedia of US History: “As a result of the [Great] Depression, business and government alike clamored for a more accurate measurement of economic performance.
Rutgers University Responded
A group of economists at Rutgers University in New Jersey developed the first official national economic indicators in 1948. Since then, these indicators have evolved into the composite index of economic indicators in use as of the early 2000s. The list of economic indicators was first published by the U.S. Department of Commerce, Bureau of Economic Analysis (BEA). Due to changes in the American economy, the list of economic indicators has undergone many revisions.
Within a few years of its inception, reporters began regularly citing information from the index in their writing about the American economy. In an effort to improve the accuracy of reporting on the economy, the BEA began issuing explanatory press releases during the 1970s. When compared to the more complicated econometric models that have since been developed, the press releases provide crude gauges. However, economists and others interested in economic conditions in the United States still use the indexes of the BEA today.
Confused By the Media
How many times have you come away confused by how the media disseminates economic reports? When we hear well articulated opinions representing opposing views, confusion is a very probable outcome for most listeners. Especially when those views may contain an incorrect assumption or two.
For example, you may have constantly heard that employment data is among the most lagging of economic indicators. Is this an accurate statement? Can we really be sure that what we’ve heard is completely true? If we hear something said enough and the assumption goes unchallenged, it must be true – right? Not always…
Each month, various governmental agencies and research associations compile and release a wide variety of information about the economy. Much of this data is “after the fact” information or relates to measures of confidence. In addition, statistical sampling methods which carry a margin of error derive much of the data. Usually, the smaller the sample, the greater the potential for sampling error. Yet despite the potential for error, these “economic indicators” can help guide our ability to make more confident business decisions. That is, if you take the time to understand them.
Helping you Understand the Economy
At Kaelber, Billmyer & Kaelber, LLC, we are committed to providing our clients and readers with every advantage when trying to preserve and grow their human, intellectual and financial wealth. This article is the second in a series that discusses some of the more widely followed economic indicators. And, I’ll seek to bring context to their usefulness as: leading economic indicators, coincident economic indicators and lagging economic indicators. My prior article discussed “leading indicators” and this one will review “coincident indicators”.
Kaelber, Billmyer & Kaelber, LLC is a Charlottesville, Virginia CPA firm providing quality tax accounting, tax preparation & tax planning services for individuals, business, trusts & estates. We also offer business consulting services and private equity structuring support.
The Three Groups of Economic Indicators
As the categories indicate, leading indicators help to predict what the economy will do in the future; coincident indicators help us understand the current state of the economy; and lagging indicators help to confirm or deny the validity of the other two.
For the sake of efficiency and debate, I will describe these indicators in groupings used by The Conference Board. The Conference Board is a global, independent research association who compiles data and publishes the indices of leading, coincident and lagging indicators each month.
The Coincident Indicator Index Components
Four economic measures comprise the Conference Board’s coincident indicator index model. Tthe belief is that these are indicative of current economic trends. The coincident index also serves to confirm or refute earlier observed trends in the leading index three to six months ago.
Consumer Health Measures
Employees on non-agricultural payroll. It is also known as the “non-farm payroll employment” numbers. The Bureau of Labor Statistics compiles and publishes this measure. It reflects actual hiring and firing within the nation except for agricultural (farm) jobs and jobs at the smallest of businesses. The measure includes both temporary and full time workers. The Conference Board promotes this as one of the most closely watched measures for gauging the health of the US economy.
In my last article, we saw that employment data played a role in the leading indicator index. And it is also in the coincident index. This seems to refute the assertion that employment data is the most lagging of economic indicators. It is all too easy to generalize about employment measures and forget that these statistics can provide information about the future, the current and be backward looking as well.
Personal income less transfer payments. This is another employment related measure that reflects upon the level of real salaries and other income of all persons in the nation adjusted for a handful of items. The measure is presented as a percentage increase or decrease, as the case may be, versus prior periods. The US Bureau of Economic Analysis compiles and publishes this measure. The adjustments made involve excluding government transfer payments (i.e., Social Security payments) and the effects of inflation in the numbers.
In addition to being part of the coincident index, this information is also a key component of the “per capita income” and “median income” data. These other measures offer a “common-sized” way of measuring the country’s prosperity. By expressing data in proportion to some size-related measure, the result can reveal trends in the data that might otherwise go unnoticed.
Business Health Measures
Index of industrial production. The Federal Reserve Board compiles and releases monthly the Industrial Production, along with Capacity Utilization data. The IP index measures all of the physical output in the US’s manufacturing, mining, gas and utility industries. Industrial Production, along with other monthly industrial statistics, allows for analyzing short-term and long-term changes of production activities. This is helpful for estimating Gross Domestic Product and for gauging labor productivity. And while the industrial sector is only a fraction of the US’s total economy, the index has historically captured a majority of the fluctuations in the nation’s total output.
Manufacturing and trade sales. Manufacturing and trade sales are an indicator that generally reflects the current phase of the business cycle. Measures of sales at the manufacturing, wholesale and retail levels are pro-cyclical. Procyclical and countercyclical variables are variables that fluctuate in a way that is positively or negatively correlated with business cycle fluctuations in Gross Domestic Product (GDP). Any quantity that tends to increase in expansion and tend to decrease in a recession is classified as procyclical.
Which Indicators are Important?
Coincident indicators are useful for helping us understand the current state of the economy. For example, these statistics can help us assess whether the US is entering or is emerging from a recession.
In the prior article, I reviewed that leading indicators are useful to help predict turning points in the economy. And, coincident indicators help us compare where we are versus where we’ve been. They also confirm our assumptions about the health of the economy. In either event, these measures assist us in making more informed decisions. They also afford us the ability to operate with greater confidence.
In constructing the coincident economic indicators index, the Conference Board assigns weightings and averages to the individual components. They do this to smooth out any volatility in the readings. The individual component weightings are revised from time to time. These are the most recents weightings:
- Nonfarm Payroll Employment is the single-most influential component, accounting for 48.8% of the index.
- The remaining measures comprise the balance: Personal Income 26.2%; Industrial Production 13.7%; and Manufacturing and Trade Sales 11.3%.
Isn’t it interesting that Non-farm Payroll Employment and Personal Income comprise more than 70% of the Coincident Economic Indicators Index. If anything should be clear from these weightings, it is the emphasis put on the health of consumers.
Is GDP A Better Indicator?
When I hear the words “70%” and “consumers” used together, I think of the common generalization. It is often generalized that Consumer Spending accounting for approximately 70% of GDP. GDP stands for Gross Domestic Product. This should come as no surprise. GDP, in theory, is probably the best suited measure to represent the current state of the economy. It is the broadest statistical measure of economic activity.
So, why not just use GDP as a current economic indicator instead of the Conference Board’s coincident indicator index?
The problem with using GDP, is that it is compiled and made available only on a quarterly basis. And, as in most countries, after a substantial period of time has lagged. In other words, this measure isn’t produced frequently enough or released timely enough to provide a “current” economic picture. Therefore, the Conference Board’s coincident economic indicators index provides us a more timely reference series for the state of the economy.
