Leading Indicators

If you want to forecast the economic future, you can do so without knowing anything about how the economy works. Further, your forecasts may turn out to be as good as those of professional economists. The key to your success will be the Leading Indicators, an index of items that generally swing up or down before the economy as a whole does. Before 1996, the Commerce Department computed and published the Leading Indicators. Since 1996, the Conference Board, a private, not-for-profit organization, has computed the index.

If you do decide to become a prophet, be aware that one-month changes in this index (or any other economic statistic) may not mean much. There is a certain amount of randomness or "noise" in all of the numbers, so a one-month rise or fall may mean nothing. The rule of thumb for the leading indicators is that one should take seriously any rise or fall that continues for three months or more. Thus if the leading indicators drop three months in a row, there is a pretty good chance that a recession is on the way, and if they increase three months in a row after a fall, it is a pretty good bet that the economy will soon begin a recovery.

One final warning if you become a prophet: the government sometimes revises the numbers it publishes. It does this on all statistics as more data become available, so that sometimes GDP figures that are a decade old are changed. Occasionally the revisions will change a decline in the Leading Indicators into a rise, or a rise into a decline. Obviously, changes of these sorts rather dramatically alter expectations of what lies ahead for the economy.