Leading indicators have gained more prominence in the post-crisis period, if only because the on-again, off-again economy has intensified scrutiny of shifts in momentum. However, the unusual circumstances that gave rise to delayed recovery and the extraordinary stimulative measures taken to rebuff weakness have distorted certain indicators, forcing analysts to pick and choose their favourites. Which ones can we rely on, and are they telling us anything helpful at this point in time?
Composite indicators -- the ones that combine a group of time-tested leading signals -- are still relied on as economic barometers. There's a lot of excitement about their recent direction. Take for example the OECD leading indicator -- it has now risen for 12 consecutive quarters, a rare moment that we have not seen since the gush of stimulus that hit the economy in 2009-10. But is this venerated indicator been tainted by any recent distortions?
Unfortunately, yes. Composite indexes usually include a selected stock market index, a money supply measure and a yield curve calculation (long versus short-term interest rates). Each of these has been influenced significantly by fiscal and monetary policy moves, not only in recent years, but in recent weeks. The mere mention of tapering last May had stock markets retreating and longer-term yields rising -- not to mention altered expectations of growth in monetary aggregates.
If we are going to be months, or more realistically, years in unwinding extraordinary policy measures, which leading indicators can we rely on to point the way for the economy? The housing market is a favourite, and at least in the U.S., it is showing vibrant growth. Although strong pent-up demand is driving the market upward, this reliable indicator may see its own ups and downs, as current activity is occurring in a context of very easy access to financing, which is quickly coming to an end.
Average weekly hours will be an interesting one to watch. Uncertainty has made corporations unusually reticent to hire. When global growth begins to ramp up, we can expect average hours worked to ramp up sharply before companies get the signal that we are in a new hiring cycle. Many economies dealing with ageing populations may see a stronger spike than in past recovery periods.
Sentiment is not normally a go-to harbinger of recovery, but for the moment, this one might be prescient. We have been so gloomy for so long, that it may take recovery in confidence to jolt the world into a sense that things are not so "new-normal-drab" as we have been led to believe.
Business orders for goods and services of all descriptions remain one of the most reliable leading indicators. Thankfully, survey activity has been enhanced over the years to the point that even key emerging markets have solid data to work with. Recent readings also show that orders have been moving upward, convincingly -- that is, the upward movement spans multiple regions of the world and a large variety of industries. Sustained growth going forward will tell the tale for global growth.
This brings me to a lesser-known index. If orders are a strong signal, then freight shipments shouldn't be far behind. After all, inputs have to be shipped before stuff can be made and delivered. Down at the bottom of a pile of other cyclical indicators is the US freight services index, and I'm happy to say that but for a one-off interruption last October, steady growth in this index has now taken it beyond its previous peak level in early 2005. If it's right, it is saying good things about the world's growth engine.
The bottom line? Unprecedented developments in the world economy have had many effects; one of them is a tainting of leading indicators. Thankfully, the untainted ones are projecting solid growth.