Once a month the Commerce Department releases the latest version of its report entitled Composite Indexes of Leading, Coincident and Lagging Indicators. And, every month it's the Index of Leading Economic Indicators [LEI] that gets all the attention. [See Today's Economy 10-4-95 for more on the LEI.] I guess it's just human nature to be fascinated with forecasting the future, particularly when there's money involved.
The LEI is a valuable tool. But, there's also valuable information to be gained from studying the present status of the economy. If you want to predict whether the Fed is going to lower interest rates at the next FOMC meeting then you should be paying attention to what's happening with the Composite Index of Coincident Economic Indicators [CEI].
A coincident indicator is one that has a strong tendency to peak and bottom at the same time as the business cycle. The CEI is created by combining four broadly based coincident measures of production, sales, income and employment. Combining the indicators into an index tends to cancel out erratic movements in individual indicators while, at the same time, reinforcing their common cyclical behavior. Each of the indicators is published monthly. But, probably because they are so all-encompassing, not all of the data is available for any of the indicators when they are first released. Consequently, the initially published monthly values for the indicators are apt to be revised in subsequent months.
Here's a brief description of the four indicators:
1. The Index of Industrial Production measures the output of all the nation's factories, utilities and mines. It is released by the Federal Reserve System. The 9-15-95 release reported the estimated value for August and revisions for the May, June, and July numbers.
2. Manufacturing and Trade Sales information is published by the Census Bureau of the Department of Commerce. The Manufacturing and Trade Sales figure represents the total of all shipments and sales by manufacturers, wholesalers, and retailers during the month being reported. The initial release of this data is somewhat slower than the release of data for the other three coincident indicators. The numbers released on 9-18-95 were for the month of July.
3. Personal Income Less Transfer Payments is reported by the Commerce Department's Bureau of Economic Analysis. This indicator measures the total of all income from wages, salaries, dividends, interest, and rents, plus the income realized by proprietors of businesses. A preliminary number for August was released in the 10-2-95 report. In this same report the numbers for April, May, June and July were all revised.
4. Employees on Nonagricultural Payrolls data is released by the Department of Labor as part of its monthly Employment Situation report. The 10-6-95 release reported preliminary numbers for August and September.
More information about these indicators can be found in the Today's Economy columns for the 15th and 18th of September and the 2nd and 6th of October.
What has the Coincindent Index been doing recently and what is it telling us about the present status of the economy? As might be expected, the Index began to rise at the end of the 1990-91 recession---first slowly, then picking up steam so that during 1993 and 1994 it rose at an average rate of nearly 3.3 percent per year. During 1995 the Index flattened out so that the annualized growth rate through August was 1.5 percent. So, once again, it seems that the soft landing desired by the Fed is in evidence. Whether the economic airplane will nose over, slow to a stop, or take off again remains to be seen. Whatever occurs, we should get a real-time reading on what is happening from the behavior of the Composite Index of Coincident Economic Indicators.
Byline: Lafferty (MF Merlin)