What better time than the start of a new year to make some changes to your business planning strategy that will pay dividends in 2023 and beyond? Here are some simple steps that will make a big impact:
Look at the Data, Not the Media
Data doesn’t have biases. It doesn’t get paid by the word or by the click. It is dispassionate and disinterested. It’s simply information. The news media, by contrast, is frequently not a reliable source for economic insights. Rely exclusively on the media and you may get wrong information, misleading perceptions, or slanted perspectives. You may get correct information, but you will have to distill it yourself by taking the time to actually to find the original data and draw unbiased conclusions. Why take the time?
Judiciously Interpret the Data
This is the difficult part and the likely reason why so many turn to an unreliable filter (i.e., the media). Economic data is, at the most basic level, numbers. You can look up the data for the US Total Industrial Production Index and see that the Index came in at 104.05 in November. But is that a big number? Does it represent an increase or a decrease? What is the trend? What does it mean for managing your business?
Don’t Sweat the Small Stuff – Look at the Trends
At ITR Economics, we have been interpreting data for over 60 years. We look at trends. There is too much noise in the monthly numbers, so we use (in most cases) a 12-month moving total (12MMT) or average (12MMA). This metric both provides a means of looking at the underlying trend without seasonality swaying the perspective and smooths the volatility inherent to monthly numbers.
Once you have the 12-month metric, you can identify trends. The Industrial Production 12MMA came in at 103.7 in November. That’s up 4.0% from the November 2021 12MMA level. Industrial activity is rising relative to the year-ago level, but we can also see that the rate of rise waning – it was at 4.3% in October and 4.4% in September. These percentages represent the 12/12 rate-of-change, and it is an invaluable metric for assessing the business cycle state of not only the macroeconomy but also the individual market or business. All business leaders should put their data in a spreadsheet and calculate their rate-of-change, and then chart it through time. A good look at the undulations of that sine wave would disabuse most anyone of a misguided affinity for linear projection.
A macroeconomic data series such as the US Total Industrial Production Index will give you an excellent gauge of the overall US economy, but it may not be specifically applicable to your business. If you are more heavily involved in single-family housing construction, for example, then you may be already experiencing some of the pain today that we are anticipating for the industrial sector come year-end 2023. That is because the economic trends of the industrial sector typically lag those of the residential construction sector; the latter is closer to the “tip of the spear.”
Understanding such lead times and where your business fits into the picture will help you understand where your business is headed. If trends in Industrial Production typically occur two quarters before commensurate trends hit your business, then you can leverage Industrial Production data as a two-quarter leading indicator for your business. US Single-Unit Housing Starts, then, may be usable as a five-quarter leading indicator. If you have reliable forecasts for Industrial Production and Housing Starts, you can look even further out for longer-term planning.
The data is out there. Accessing it, sifting through it, identifying what is useful, collating it, and, finally, leveraging it can be a heavy lift. Help is available for any and all of the steps of that process. If you want to run your own analysis but would like a platform that includes all the data in one place, we can help with that. If you need further assistance and guidance, we can help with that, too, all the way up to essentially serving as an extension of your own staff.
Wherever you turn, we recommend choosing someone with a proven track record and the transparency to publicize it.