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When Leading Indicators Don’t Really Lead

By Brian Beaulieu on June, 15 2022

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Brian Beaulieu

Brian Beaulieu has served as CEO and Chief Economist of ITR Economics™ since 1987, where he researches the use of business cycle analysis and economic forecasting as tools for improving profitability.

The following are key aspects of our leading indicator analysis at ITR Economics:

    1. Context
    2. Reliability
    3. Looking Beyond Conventional Wisdom

There are so many data points floating by, pundits pontificating, and cross currents swirling every day that it can be difficult to separate the noise from the worthy. What seems to be a popular conventional leading indicator is the Consumer Expectations Index (the series could just as easily be confidence/sentiment). The chart below presents the Consumer Expectations trend from January 2020 forward (we charted the three-month moving average (3MMA) of the monthly index to smooth some of the volatility).

consumer expectations

 

The chart shows that with the outbreak of COVID in the US, the Index fell relatively sharply, and we all clearly remember how hurt the economy was during that period. The Index rose from a July 2020 low (2Q20 was the GDP low) through to a June 2021 high. With all the stimulus, those were a fairly robust four quarters for many businesses. However, note that the Index has been declining since June 2021. No wonder there is all the concern about recession! This is an example of not having the right context for using this conventional leading indicator.

[ Read more: Which Leading Indicator Applies to My Business Most? ]

The chart below presents a much longer history of the Consumer Expectations Index and compares the Index’s trend to US GDP (adjusted for inflation). The longer-term perspective illustrates three points very clearly:

  • The correlation of the last two years is not statistically important when weighed against the longer experience.
  • Rise or decline in Consumer Expectations is not a reliable indicator of GDP’s trend probabilities.
  • Just because there was some surface logic to the recent correlation doesn’t make it a useful leading indicator.
GDP

Look Beyond the Conventional Wisdom and Conventional Indicators

Using faulty leading indicator input can lead to erroneous conclusions and either a failure to act or acting in an ill-advised way. Either could cost you time and money.

Follow the leading indicators put out by ITR Economics. Head to our website and check out the Insider™ membership. We want you to follow the right leading indicators, in the right way, and in the proper context. Membership is an affordable, straightforward means to gaining enhanced abilities to see the future first.

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