Leading Indicators
The most reliable leading indicator is the slope of the Treasury yield curve. The slope is typically measured by the spread between the 10-year Treasury bond yield and the 3-month Treasury bill yield. An inverted yield curve (long-term rates lower than short-term rates) suggests a recession within the next year. Meanwhile, an upward sloping yield curve (long-term rates perhaps 1.0% or more higher than short-term rates) suggests a growing economy within the next year. I don't have a graph of the yield curve, but the spread is currently 3.33%, which suggests we are headed for a recovery.
New capital goods orders are a sign of a near-term recovery or decline. Here is the year-over-year percentage change.
New building permits are another leading indicator. Due to the fact that we still have a housing bubble, I don't expect permits to turn around before the recession ends. Expecting housing to lead us out of this recession is like expecting technology to lead us out of the 2001 recession.
Coincident Indicators
While leading indicators forecast the future of the economy and thus tick up before a recovery, coincident indicators reflect the current state and thus should not tick up until the economy is actually recovering.
Year-over-year non-farm payrolls are still dropping like flies.
Year-over-year industrial production is still plunging.
Yet the year-over-year change in consumer sentiment is surprisingly strong, probably caused by the recently rising stock market (or vice-versa).
Posts
"Expecting housing to lead us out of this recession is like expecting technology to lead us out of the 2001 recession."
ReplyDeleteI think a better way to look at it is if it bottoms first it will no longer be a drag on the overall economy. I agree though something else will lead us out, meaning housing prices are (I think) likely to be flat for a long time.
Regarding consumer sentiment, isnt it more properly considered a leading versus a conincident indicator?
I've been looking at these "dead cat" bounces for months and wondering what kind of fools would be stupid enough to invest now. I guess the economists are finally getting an inkling of common sense ( or are getting really tired of being ridiculed daily )and are finally starting to look past "this months numbers" .This "economic problem" did'nt just occur overnight.Over the past 25 years Washington has legalized corruption (read Lobbyists),allowed entire industries to be shipped overseas (free trade deals), allowed tens of millions of poor illegal aliens to roam the country at will and increased taxes on everyone except their crony corporations. Oh, and lets not forget about the black holes called Iraq and Afghanistan.I see no effort whatsoever in Washington to clean up this disaster. If you imagine things are getting better than you are ignorant or worse.The ONLY thing keeping the US afloat right now is the strength of its currency. When that finally collapses - watch out.
ReplyDeleteI liked this blog better when it was about housing. Its getting boring hearing everyone pretend they are Robert Shiller.
ReplyDelete"I liked this blog better when it was about housing. Its getting boring hearing everyone pretend they are Robert Shiller."
ReplyDeleteNo kidding. Did you see that screed right above you. Illegal aliens??? Iraq & Afghanistan??? Im surprised there wasnt a mention of Haliburton thrown in those ramblings.
Sondis said...
ReplyDelete"Regarding consumer sentiment, isnt it more properly considered a leading versus a conincident indicator?"
There are two different things that get measured by the U. Michigan survey, consumer sentiment and consumer expectations. Consumer expectations are a subset of the consumer sentiment survey. From what I have read, consumer expectations are a leading indicator and consumer sentiment is a coincident indicator.
Nice write-up. But you've actually described a yield spread. The most commonly quoted spread is, in fact, 10Yr minus 3M; but yield spread and yield curve shouldn't be used interchangebly.
ReplyDeleteAnonymous said...
ReplyDelete"Nice write-up. But you've actually described a yield spread. The most commonly quoted spread is, in fact, 10Yr minus 3M; but yield spread and yield curve shouldn't be used interchangebly."
Thanks for the correction. I was thrown off by the fact that the typical way of judging the slope of the yield curve is to look at the spread between the 3-month and 10-year rates.
David, keep the focus on housing.
ReplyDeleteDOW JONES NEWSWIRES
PMI Group Inc.'s (PMI) PMI Mortgage Insurance Co.'s second-quarter risk index showed U.S. housing prices will likely be lower in two years.
The report said as many as 85% of the country's 381 metropolitan areas are facing an increased risk of lower home prices in 2011, with Florida, California and Nevada continuing to be at the highest risk.
Among the country's 50 most populated metro areas, the PMI study showed 28 to be in the highest risk category, signaling the greatest probability for lower house prices by the first quarter of 2011.
The credit crisis was set off after the housing bubble deflated and popped - and that crisis only reinforced an extremely difficult dynamic in the housing market.
"Rapidly rising foreclosures and unemployment rates, continuing declines in house prices and weakening consumer demand all worked to increase risk in the general economy, and the housing market specifically," said PMI chief economist and strategist David Berson.
The report said home affordability increased across the country because of lower home prices and mortgage rates, as well as the still-rising unemployment rate, which put downward pressure on prices.
Anonymous said...
ReplyDelete"David, keep the focus on housing."
Since the decline in housing prices has been hastened by foreclosures, and foreclosures are driven by unemployment, an economic recovery would likely have a direct effect on housing prices. I'm sorry you fail to see the connection.
"economic recovery would likely have a direct effect on housing prices"
ReplyDeleteYeah except if everybody at the old Ford plant kept their jobs, they STILL wouldnt be getting any loans on houses 25 times their annual income anymore.
I dont think its as simple as if cocacola sells more pop, housing prices will go back up to unicorn and toothfairy levels.
"I dont think its as simple as if cocacola sells more pop, housing prices will go back up to unicorn and toothfairy levels."
ReplyDeleteYeah but maybe, just maybe, they may go up by reasonable levels of 0.5% 1% or 2% a year. Sorry you dont see the connection.
If you invested through the top of the bubble(s), then staying the course and investing through the bottom is necessary just to break even. Perhaps cheering the new lows and INCREASING investments over the next 10-15 years is the path to success....
ReplyDeleteAnonymous said...
ReplyDelete"Yeah except if everybody at the old Ford plant kept their jobs, they STILL wouldnt be getting any loans on houses 25 times their annual income anymore."
For the record, if there's any city in America that didn't have a housing bubble over the past decade, it's Detroit. The specifics of Ford aside, your general point is correct.
"Since the decline in housing prices has been hastened by foreclosures, and foreclosures are driven by unemployment, an economic recovery would likely have a direct effect on housing prices. I'm sorry you fail to see the connection."
ReplyDeleteJust don't talk about the price of oil in conjuction with the viability of exurban communities. That topic is verboten; especially since our censor lives a completely car-dependant lifestyle.
Hey nonpartisan - did you see the latest case shiller where DC prices went UP? Whats that about bell curves being completed again???
ReplyDeleteYawn...
ReplyDeletethe D.C C-S index rose from 100 in Jan 2000 to a peak of 251 in June 2006....and now sits at 168. And you tout a one month gain of 0.8%???!!! This is a bell-shaped curve buster?? BWAHAHAHAHAHAHA!
As I have mentioned over and over and over. Check back in one year - and yearly therafter. It took 6-8 years for the bubble to inflate, and it will likely take about the same to deflate. Price bottoms coming in 2012-14 timeframe...with another 30-40% to go. On that note - hope some flippers bought in May and sold in June for that big 0.8% gain. HA!
"Yeah but maybe, just maybe, they may go up by reasonable levels of 0.5% 1% or 2% a year. Sorry you dont see the connection."
ReplyDeleteyeah and Im sorry you dont see the CORRECTION.
Prices aint gunna go up 1% or 2% a year until they drop something like 50% today.
James - thanks for clearing up the leading conincident issue.
ReplyDeleteRegarding case shiller - it should be a bit troubling for the bell curvers in that the trend was down month after month for 34 months straight. Now that trend has been broken.
I dont think this is bottom - yet. Likely this is seasonal and well head back down (slightly) in the fall, probably bottoming at say 155 or so. Much to the dismay of the "bottom callers" and to the "bell curve/50% more to go" crowds, neither of which will be happy.
"Much to the dismay of the "bottom callers" and to the "bell curve/50% more to go" crowds, neither of which will be happy."
ReplyDeleteQuit predicting, you are no better than anyone else.
I got an idea, lets change the subject about high school drop outs that work in factories losing jobs!!!!