As with all these things, it helps to read below the headlines for the meat.
What are the LEI and CEI?
Well, they’re indexes made of weighted contributory economic stats.
For the LEI:
- interest rate spread
- stock prices
- building permits
- inverted average weekly claims for unemployment
- mfr orders for consumer goods
- “real money supply”
- mfr’s new orders for non-defense cap-ex goods
- consumer expectations
- average weekly mfr’ing hours
- index of supplier deliveries
OK, when you lay this LEI chart against some other charts, what do you notice?
It basically mirrors the SP500.
When you look at the CEI (coincident indicators), you see where the economy is, right now. And the CEI shows what people see around them.
The reason why I believe that the LEI is now misleading is their weighting of the yield curve, which is absurdly steep, and for one reason: Bernanke is using the steepness of the yield curve to penalize those who want to save (ie, “hoard cash” in the lingo of economists) and reward banks (ie, give them an ideal operating environment in which to recover their losses).
Post WWII, the steepness of the yield curve has been very predictive of future economic growth. However, we have not had a wholesale debt deflation post-WWII, and the yield curve is not steep for only reasons of stimulus to the economy. In fact, the typical result of a steep yield curve (increased lending by banks) is not appearing at this time.
Do you really think banks “are lending” again? I see no evidence of that.
Sometime last summer a few economists pointed out the failures of the CEI during Zero Interest Rate POlicy (ZIRP) periods, using Japan post-1991 through the two failed recoveries in the 1990’s as an example.
Richard Koo:
Powerpoint for presentation:
http://ineteconomics.org/sites/inet.civicactions.net/files/INETOS-KooPresentation.pdf
Video of presentation:
http://www.youtube.com/watch?v=YuoFMwydQFs&feature=player_embedded
Put them side by side in the screen and you can follow along, and see why the CEI is going to fail to properly model the US economy for the coming years.
Thank you for your analysis. I was waiting for one of the more knowledgeanble Freepers to provide it.
I can’t tell if we are recovering or not. I see terrible fundamentals due to a still massive debt overhang, with an unwillingness to lend/borrow. I realize the Fed government can grow new bubble and put off the collapse for far longer than I ever expect and maybe we are back in one of those periods. I don’t know.
I don’t believe in any real recovery because I just look at the fundamentals. Debt is our problem and Obama is squandering money on ever increasing debt, pushing it to higher and higher levels. Are European nations out of debt? No, Greece, Italy, Portugal, Spain, on and on... they are becoming worse off, not better.
Are states like California reducing spending and seeing increased tax revenues? No, clearly the opposite. California (my state) is functionally bankrupt and will remain so until they slash spending, which may take years and year to occur, even as California’s credit rating goes further into the toilet. The socialist dems in the legislature have proved they don’t care about the economic health of California. They don’t care that we are bankrupt.
Are Obama, Pelosi and Reed passing laws that are business friendly? No, they just passed Obamacare which will crush the US business climate, affecting all of us. California is still pushing for global warming laws like the attack on diesel, that will crush the economy and increase unemployment.
Now we have a volcano spewing in Iceland that may bankrupt a few airlines in short order.
The leading economic indicators look like a new headfake to me. Remember that Obama, Pelosi and Reed only have a few short months to convince the wishy washy brain-dead casual middle uncommitted part of the electorate that they saved the economy and all is well.
November’s election will be very much about “It’s the economy again, Stupid!” and they need to convince this middle 20-30% to re-elect as many Dems as possible to try to hold the House and Senate. It looks to be a Republican bloodbath this fall, and they need to stem that tide. This kind of reporting is fundamental to get that middle portion. We have the 35% on the left committed to socialism and the 35% on the right committed to freedom, so the 30% in the middle who don’t know what they want, will swing the vote once again.
I appreciate your analysis as it is always sound. Thanks.