Recently, an impressive set of economic indicators began signaling the transition to global recovery. In this column, I will focus on the leading economic indicators, which change before the economy changes, helping us to anticipate its direction. Examples of leading economic indicators are stock market prices, consumer expectations, building permits and money supply. They differ from coincident economic indicators, which move with the economy and tell us about its current state, and lagging economic indicators, which change months or quarters after the start of the economy's downturn or upturn and help us predict the duration of the downturn or upturn. Examples of coincident economic indicators are gross domestic product (GDP), non-farm employment and industrial production.
Examples of lagging economic indicators are the average duration of unemployment, the change in labor cost per unit of output and the ratio of manufacturing and trade inventories to sales.
The Organization for Economic Cooperation and Development's (OECD) latest monthly composite leading indicators (CLI) for June 2009, reported on Friday, show stronger signs of improvement in the economic outlook for both 30 OECD member countries, including Turkey, and major non-OECD members, such as China, India, Brazil and Russia, compared with those for the previous month. The OECD CLI are aimed at providing early signals (with an average lead of six months) of turning points (peaks and troughs) between upswings and downswings in the growth cycle of aggregate economic activity, using the deviation-from-trend approach.
They are constructed to predict cycles in a proxy reference series (monthly index of industrial production) that represent economic activity. The variation in aggregate output (real GDP) relative to its long-term potential is measured as the deviation of observed output from potential output, called the output gap.
The fluctuation in the output gap, as a recurrent sequence of alternating phases of expansion and contraction between the peak and the trough in economic activity, is called the business cycle. The OECD CLI are constructed from a wide range of financial and non-financial indicators whose cyclical fluctuations are similar to but precede those of the business cycle to signal turning points in the reference series. The figure below shows four cyclical phases for the OECD area and Turkey in terms of (1) expansion -- CLI increasing and above 100; (2) downturn -- CLI decreasing and above 100; (3) slowdown -- CLI decreasing and below 100; (4) recovery -- CLI increasing and below 100. Turkey, whose trough was lower with a worse contraction than that of the OECD area, entered the recovery phase in December, earlier than the OECD area, whose recovery phase started in February. Turkey is also much closer, with a speedier recovery, than the OECD area to entering the expansion phase. According to the Central Bank of Turkey's latest business tendency survey, published on July 27, the monthly Real Sector Confidence Index (RSCI), which has been rising from 52.3 in December, 59.4 in January, 62.6 in February, 67.8 in March, 85.1 in April, 96.9 in May and 99.4 in June, jumped to 100.1 last month, beginning to indicate an optimistic outlook for the first time since May 2008.
The latest leading economic indicators (LEI) data from two other sources support the encouraging signals from the OECD CLI. The LEI for the Conference Board, a nonprofit US business research firm with a global network, increased for the third consecutive month in June, after having dropped steadily since reaching a peak in July 2007. Its six-month growth has risen to the highest rate since the first quarter of 2006. The Conference Board LEI for the euro area increased sharply for the third consecutive month in June. Between December 2008 and June 2009, the LEI for the euro area increased sharply after a steep decline between June and December 2008. Its six-month growth reached its highest rate since the beginning of 2004.
The consumer leading indicator, called the weighted composite index, constructed by the Consumer Metrics Institute, based in Lakewood, Colo., focuses on the daily changes in major discretionary US consumer spending. The consumer leading indicator is the weighted composite of the sub-indices for the automotive, entertainment, financial, health, household, housing, recreation, retail, technology and travel discretionary consumption spending. The consumer leading indicator differs in its focus from the LEI of the OECD and the Conference Board, which focus on industrial output-oriented indicators. On Aug. 4, the consumer leading indicator closed above 108 for the first time in 2009, showing broadly based increases in all the 10 consumption categories it covers. The consumer growth index, measuring the aggregate growth of consumer interest in terms of trailing quarters, registered impressive annualized net growth rates since the end of last March, which could be interpreted as the start of the recovery from the consumer interest recession.
Even some of the latest coincident and lagging indicators have signaled relatively good news about the US economy. The US real GDP decreased at an annual rate of 1.0 percent in the second quarter after shrinking by 6.4 percent in the first quarter. Both the narrowly and broadly defined US unemployment rates dropped for the first time since April 2008, and the US average workweek hours rose slightly last month. Although the nonfarm payroll employment continued to decline in July, the number of jobs lost was the smallest since August 2008. The average monthly job loss for May through July was about half the average decline for November through April.
No more scary talk of another depression. There is now speculation that the US recession might have already ended in June. Let's hope so.
