Consumer Leading Indicators

Consumer Leading Indicators are a specialized set of Leading Economic Indicators that focus exclusively on consumer interest in near term purchases of major durable goods. If such consumer interests are sampled, analyzed and published daily, these indicators can provide some of the earliest signs of consumer sentiment and spending trends. Consumer spending, in turn, can account for up to as much as 70% of all economic activity in developed countries.

History of Leading Indicators

The concept of an indicator that leads the performance of the economy has been around at least since Charles H. Dow published a series of editorials in The Wall Street Journal. After Dow's death in 1902 the principles outlined in the editorials were recast by his successors at The Wall Street Journal as the Dow Theory. Although Dow never referred to his IDeaS as 'the Dow Theory', he did propose that a bull market was likely to follow rallies in both his Industrial and Transportation Indexes. He further thought it likely that his Transportation Index would lead the Industrial Index, since the railroads would have to carry goods before they could reach their ultimate markets.

In 1937 the U.S. National Bureau of Economic Research under the direction of Wesley Clair Mitchell produced a list of leading indicators in response to a concern AbOUT the status of the recovery from the 1937–1938 recession. The 1937 list of indicators began a compilation of nearly 500 time series of economic data, but did not initially include the concept of a single index as was later developed by Henry Ludwell Moore.

Currently The Conference Board, a non-governmental organization, publishes the most closely watched set of indexes. Their Index of Leading Economic Indicators is composed of ten separate statistics: the U.S. economy's real money supply (M2), the interest rate spread between long term and short term government bonds (the yield curve), an index of consumer expectations, the number of building permits issued, stock prices (using the S&P 500 stock index), supplier deliveries, average weekly manufacturing hours, average weekly initial claims for unemployment insurance, manufacturers' new orders for nondefense capital goods, and manufacturers' new orders for consumer goods and materials. Most of these statistics are updated by their government sources on a monthly basis.

Issues with Traditional Leading Indices

Leading Indexes that rely on data published by governmental departments are generally updated monthly several weeks after the month's end. Often the governmental data includes some estimates and is necessarily preliminary, so a final set of numbers is published yet a month later. The resulting many week 'lag' in the most widely followed 'leading' index caused The Conference Board to revise in January 2001 the methodologies used in constructing their Index of Leading Indicators to make the index both more timely and more useful. Yet even with these revisions, the data used is (on average) still more than a month old at the time of publication, and the single monthly average value provided by each update results in only 12 measurements of any given index in any given year.

Most published 'Leading Indicators' use the value of stock market indexes as one of their key components. This presumes that the stock market itself is a predictor of the health of the economy, when arguably the relationship between the health of the equity markets and the health of the economy is both highly complex and subject to mutual feedback. The 2008–2009 recession provided some evidence of this connection, when the consequences of sub-prime mortgage problems significantly exacerbated the broader economic slowdown. And since most traditional 'Leading Indicators' already use recent historical stock market indexes as a component, they cannot have predictive value for those very same equity markets.

Consumer Leading Indicators

Recently other sources of leading indicators have been developed in attempts to provide even more timely data. One example which deals only with the consumer portion of the U.S. economy has been constructed by the Consumer Metrics Institute and includes daily indexes of consumer activities in several segments of that economy. The combination of daily updates and consumer focus result in a relatively high resolution index that reacts quickly to significant consumer spending changes in a number of different segments of economy. By utilizing electronic sampling technologies consumer interest can be recorded before or while the economic transactions themselves are being processed, certainly pushing Charles Dow's vision of 'leading' economic activity nearly as far upstream as possible.

The Consumer Leading Indicators published by the Consumer Metrics Institute differ in several key ways from the Index of Leading Economic Indicators published by The Conference Board:

• the exclusive focus on Consumer interest in major discretionary purchases of durable goods and services
• the sampling of Consumer interest at (or slightly prior to) the processing of a transaction
• the daily resolution of the index
• the exclusion of historical equity market data
• the publication of day-to-day results several times per week
• the separate indexing of ten different segments of the US Economy
• the use of index values that are relative to the same period in the prior year
• the inclusion of a Weighted Composite Index that weights the sector indexes according to the U.S. Department of Commerce's National Income and Product Accounts ('NIPA') Tables
• the publication of Trailing Percentiles that rank the most recent 91, 183 and 365 day periods against similar duration periods of Quarterly Change in GDP tracked by the U.S. Department of Commerce's Bureau of Economic Analysis since 1947

The Trailing Percentiles may assist investors assess the risks represented by the changes that are monitored in consumer interest and activities, giving a risk averse investor a perspective on the possible severity of approaching economic slowdowns.

Potential Biases in Consumer Leading Indicators

As currently constructed the Consumer Leading Indicators published by the Consumer Metrics Institute contain significant sampling biases. The electronic sampling techniques rely on the internet for communications. As a consequence the consumers whose interests are sampled may represent demographics that are tilted towards higher income and education levels than the entire consumer base, reflecting the same gender and age bias as internet users have relative to the entire population. Secondly, at this time the Consumer Metrics Institute only samples English speaking U.S. consumers. Thirdly, the sampling methodologies do not collect data on purchases that involve little or no discretion on the part of the consumer. These would include utility bills, monthly mortgage payments, essential medical expenses, gasoline and ordinary groceries. These kinds of purchases are core economic activities that involve little or no thought (or discretion) on the part of the consumer but represent significant portions of consumer spending.

Finally, the reference data used in calculating the 'Trailing Percentiles' is from a table of historical quarters of GDP growth and contraction data kept by the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce . The approximately 250 calendar quarters of data in the table start with the 2nd quarter of 1947 and have a mean annualized GDP growth of about 3.3%, with a standard deviation slightly above 4%. The 60 year time period covered by the table is certainly lengthly, but it may not be truly representative of the U.S. Economy of the past 10 or 20 years. Nor does it remotely represent the entire 20th century. The 60-plus years in the table may be a period of extraordinary prosperity that is not representative of the U.S. Economy over longer (or more current) time periods.

Consumer Leading Indicators vs The S&P 500

Most 'Leading Indicators' are designed to give an preview of the future health of the economy, not the equity markets. Since most of those indicators use the recent history of the S&P 500 Index as a key component, they are unlikely to provide significant information about future movements of that same index. Methodologies that take timely samples of consumer interests, however, may in principle respond to consumer economic trends before corporate earnings reports signal similar information to the equity markets. As an example of this possibility, the follow chart lists the last 6 major tops and bottoms in the Consumer Metrics Institute's Weighted Composite Index and the corresponding tops and bottoms in the S&P 500 Index:

The Consumer Metrics Institute's Weighted Composite Index led the S&P 500 by an average of about 140 days, with a standard deviation of about 25% of that average. This means that statistically one could expect the Weighted Composite Index to lead the S&P 500 by at least 107 days about 84% of the time, and lead the S&P 500 by at least 73 days for over 97% of similar cycles.

See also

• Economic Indicators
• Leading Indicators
• Coincident Indicators
• Lagging Indicators
• United States Department of Commerce
  • Bureau of Economic Analysis
  • National Income and Product Accounts
• United States Department of Labor
  • Bureau of Labor Statistics
• United States Census Bureau
• United Nations System of National Accounts
• Economic calendar
• Economic data
• The Conference Board
  • Conference Board Leading Economic Index
• Consumer Confidence Index
• The Misery Index
• Consumer Price Index
• Industrial Production
• Bankruptcies
• Gross Domestic Product
• Money Supply

External links

• Consumer Metrics Institute
• The Conference Board's Global Business Cycle Indicators
• OECD leading indicator statistics
• report by Robert H. McGuckin
• The United States Department of Labor Bureau of Labor Statistics
• The United States Department of Commerce Bureau of Economic Analysis
  • The United States Department of Commerce's Quarterly Change in GDP Tables
  • The United States Department of Commerce's National Income and Product Accounts Tables
• The United States Federal Reserve System
  • Index of Basic Statistics
  • Consumer Credit Tables
  • Monthly Industrial Capacity and Utilization Tables
• The New York Branch of the United States Federal Reserve Economic Indicators Index
  • New York Fed National Economic Indicators
• The United States Department of the Treasury
  • United States Department of the Treasury Public Debt Reports
• The United States Federal Budget Office
• The Congressional Budget Office of the United States Congress
• The United States Census Bureau
• The United States Department of Energy Forecasts and Analyses
• The United States Department of Commerce International Trade Administration
• The United States Central Intelligence Agency's World Factbook
• United States Federal Committee on Statistical Methodology