The earth is round, but the economy is flat

Last week I wrote a blog titled "Recession over? Tell the bankrupt and unemployed". I took a lot of flack from readers saying that I picked a lagging economic indicator and was unfair in my criticism of the Fed's press release. For those of you who followed me in the 2008 Strategy Lab you might remember that I always looked forward to and commented on BoaThe Conference Board's US Business Cycle Indicators. Just like I look at BarChart every week to get a read on the short, mid and long term market movement, I look at the Conference Board to give me the Leading, Coincident and Lagging economic indicators.

The latest report is dated September 21, 2009 and has the Leading Economic Index (LEI) up 0.6%, the Coincident Economic Index (CEI) unchanged and the Lagging Economic Indicator (LAG) down 0.1%. How do we interpret this data? When I taught Graduate School I told the students to think of the economy as a roller coaster with 21 cars.

When the coaster gets to the top, the first cars go over and begin to go down while the last cars are still going up. When it gets to the bottom of the trough, the leading cars begin going up while the last cars are still going down. The LEI is like the lead cars, the CEI the middle cars and the LAG the last cars. Not really that hard to figure out.

Let's take a minute and list the components of the Indexes:


Leading (LEI) -- 10 indicators 5 were up for a 0.6% increase.

1. Average weekly hours, manufacturing
2. Average weekly initial claims for unemployment insurance
3. Manufacturer's new orders, consumer goods and materials
4. Index of supplier deliveries -- vendor performance
5. Manufacturer's new orders, nondefense capital goods
6. Building permits, new private housing units
7. Stock prices, 500 common stocks
8. Money supply, M2
9. Interest rate spread, 10-year Treasury bonds less federal funds
10. Index of consumer expectations

Coincident (CEI) -- 4 indicators 3 were up of an unchanged

1. Employees on nonagricultural payrolls
2. Personal income less transfer payments
3. Industrial production
4. Manufacturing and trade sales

Lagging (LAG) -- 7 indicators 3 were up for a 0.1% decrease

1. Average duration of unemployment
2. Inventories to sales ratio, manufacturing and trade
3. Labor cost per unit of output, manufacturing
4. Average prime rate
5. Commercial and industrial loans
6. Consumer installment credit to personal income ratio
7. Consumer price index for services.

Are all these indicators 100% right and do I understand each one? No, but I don't need to. I don't understand all the technical analysis indicators on BarChart but I can see where the short term, mid term and long term indicators seem to be going. I don't have to understand all of the Conference Board's economic indicators but I can tell if the leading, middle and last cars on the economic roller coaster are going up or down.

Please give me your comments below or email me at FinancialTides@gmail.com.

Jim Van Meerten is a full time investor and blogs on investing on Financial Tides.