It’s also because we can put most
economic indicators into two groups – lagging or leading.
Lagging indicators are backward-looking, and confirm what has already happened.
Many of the highest profile releases (and the ones that tend to make headlines) fit into this camp.
The unemployment rate is a classic.
At 5.2%, it’s the highest in almost five years.
The Reserve Bank sees it pushing even higher (although only marginally) in the next release, before starting to decline.
Gross domestic product, or GDP, is another.
Changes in GDP are the official measure of economic growth.
The next set of GDT figures are due in the coming week, and they’re expected to look disappointing.
Many are forecasting a contraction, which would be the first negative print since the middle of last year.
Inflation is also a lagging indicator, and that’s not so great either right now.
At an annual rate of 2.7%, the headline Consumers Price Index (CPI) is pushing back up towards the top of the 1-3% target band, and it’s expected to rise further in the next release.
With all of that in mind, you’ve got to wonder why there’s any optimism around.
As important and reliable as they are, these lagging indicators tell us what’s behind us, rather than what’s ahead.
Some can also be quite dated by the time they’re released, such as GDP.
The economic malaise we’ll hear about next week will be for the second quarter of this year, so April, May and June.
We’re well into September now, and what was happening back in Easter isn’t hugely relevant to the outlook.
To help build an accurate picture of what’s ahead of us, we need to keep a close eye on the leading indicators.
Leading indicators are forward-looking.
They tend to change before the wider economy does, which means they can offer early signs of what’s next.
This group includes business and consumer confidence surveys, building consents or PMIs (which are activity indicators).
ANZ’s truckometer, which tracks the flow of traffic and heavy vehicles using NZ Transport Agency Waka Kotahi (NZTA) data, is another interesting one.
There are plenty more, and every market-watcher or economist will have their favourites.
Many of these are released in a very timely manner, in part because some are survey-based.
The downside of leading indicators is that they can be a little more hit and miss.
They can sometimes give false signals – predicting downturns that never arrive, or capturing temporary sentiment shifts that fizzle out.
Unemployment, GDP and inflation figures aren’t perfect either, but they’re based on actual data so can be more accurate.
The sharemarket itself is a leading indicator, and it’s one of the best.
In every US recession since 1950 (and there have been 11) the sharemarket has bottomed before the recession ended, by an average of four months.
Shares are small slices of companies, and the success of those companies reflects what’s happening in the economy.
At the first sign of those businesses starting to see better times ahead, the collective wisdom of the investment community picks up on it, and prices move.
The market has a habit of being able to sniff out a recovery.
The NZX 50 index has posted four consecutive monthly gains, which is the longest winning streak in almost five years.
It’s up 10% since the end of April, in part due to some more upbeat outlook statements during the August reporting season.
Those comments are some of the most insightful leading indicators around, even when accompanied by subdued profit reports.
We should expect more downbeat headlines in the months ahead, starting with the upcoming GDP report.
However, keep in mind that some indicators tell us more about what’s in the rear-view mirror than what’s ahead.
For a better steer on what’s around the corner, we need to pay attention to the indicators that are more timely and more forward-looking.
This will be where evidence of a genuine turning point first emerges.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.
