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Indicators, Leading and Lagging

Dawn Rivers Small Business Trends

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July 8, 2009

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Business Forecasting 2012

Our special feature on forecasting sheds light on how to choose the right model, offers advice from Jack Stack and more.

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After months of job losses ranging from half a million to 700,00 per month, the economy only lost 350,000 in May. The recession is over!

After the pace of job losses slowed in May, economists’ hopes were dashed when the Labor Department announced last week that the economy shed almost another half a million jobs in June. The recession will eat us alive!

Being both a reporter and a news junkie, I am fond of encouraging my fellow small business owners to stay informed. Your business doesn’t operate in a vacuum and you do need to have a handle on what’s happening around you.

On the other hand, as I watch the media hyperventilate over the jobs numbers every chance they get, I can understand your current impatience with the business and financial press.

So, I’d like to clear something up for you.

Under normal circumstances, the National Bureau of Economic Research (NBER) declares a recession when there have been two consecutive calendar quarters of negative growth in the gross domestic product (GDP). Usually, that sort of contraction is accompanied by all sorts of widespread weaknesses in the economy but it is the GDP contraction that defines a recession.

But the NBER is not necessarily bound to that definition of a recession when making its calls of same. This time around, they used a different primary metric when making their dire declaration: the behavior of the labor market.

Here’s the problem with that.

As a business owner, you are probably well aware of the fact that a lot of other things have to be going right before you are in a position to start hiring staff. So, it will probably make perfect sense to you when I tell you that most economists consider payroll employment to be a lagging economic indicator.

That means the Unemployment Rate Media Watch is an exercise in uninformed futility. The unemployment rate is probably not going to start falling until after the GDP resumes positive growth and the rest of the economy is well on its way to vim and vigor.

In the meantime, if you want to do some crystal ball gazing, you would do better to take a look at leading economic indicators. That set of indicators is thought to predict the behavior of the economy about six months out. Leading indicators include metrics such as stock prices, building permits, average weekly initial unemployment claims, manufacturers’ new orders for nondefense capital goods and consumer confidence.

If you take a look at those items, it’s pretty easy to see that they each in some way predict likely near term behaviors among various economic players. Increases in building permits signal housing market activity. Increased consumer confidence means personal consumption will soon be on the rise. New orders for manufacturers means businesses are getting back into capital purchasing and that, maybe, new jobs to expand production capacity are coming, down the road.

Note, once again, that the new jobs are probably going to be “down the road.”

The Conference Board reported in June that its coincident indicators (which measure current economic conditions) have stopped their nosedive and are flattening out, while its leading indicators have registered increases for two consecutive months.

“The recession is losing steam,” says Ken Goldstein, economist for The Conference Board. “Confidence is rebuilding and financial market volatility is abating. Even the housing market appears to be stabilizing.”

So, even though the same national media that brought you Panic! is now offering Panic II: the Bipolar Sequel, I just want you to know that things aren’t looking quite so confusing and discouraging when you take a broader view.

Economic recovery will probably be slow and perhaps more painful than we’d like but the positive signs are there to be seen — just as long as you are not obsessing on the unemployment rate.

* * * * *

About the Author: Dawn Rivers Baker, an award-winning small business journalist, regularly reports and analyzes small business policy and research as the editor and publisher of The MicroEnterprise Journal. She also blogs at The Journal Blog.