Economic Indications Aren't So Bright

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Sep 13, 2010
There are many indicators which attempt to gauge the health of the economy. They are broadly divided into three categories: leading (e.g. building permits), coincident (e.g. retail sales) and lagging indicators (e.g. employment data). Focusing on a single indicator, or even a single category, does not give the analyst a good enough gauge of the future of the economy. For this reason, many (including value investor Ken Fisher) consider the ratio between the coincident and lagging indicators to be the single best measure of the direction of the economy.


A chart of this index over the last five years is below:


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Source: Bloomberg


Back in 1992, Fisher argued that "when this ratio is rising sharply, always be bullish" and "when it is falling, adopt your most bearish posture". Based on those assertions, it would appear that this indicator started to warn of the current recession in late 2006, well before the market recognized that there were any problems. Furthermore, this ratio started to tick up in early 2009, which was exactly the right time to buy stocks.


Unfortunately, the ratio appears to be on a downward slope once again, which isn't a good sign for the economy. At the same time, however, the downward slope is not steep, perhaps resulting in the "unusual uncertainty" language economists have been using to describe the near-term future.


Investors interested in determining the strength of the economy in the short-term should keep an eye on this ratio, and can do so here.


Saj Karsan

http://www.barelkarsan.com