A Nehru jacket index is updated Two local economists try to correct index of leading indicators


The Conference Board's Index of Leading Economic Indicators came out this week, and the business world reacted in its usual manner. It paid no attention.

Economic omens come and go in fashion; reports on business purchases and factory-delivery speed are the current favorites. But the leading index is the Nehru jacket of indicators -- out of date and perpetually unpopular.

Economists at Towson State University have made some alterations. They've scrapped several components that they say have made the index incorrectly predict four recessions in the last 12 years. And they've added more than a dozen other pieces that not only make the index conform to history, they say, but boost its value as a prognosticating tool. And their first results -- on what to expect for the rest of 1996 -- are in.

Their system forecasts the direction of economic output six to nine months ahead, as the existing leading index does. But it also makes predictions about inflation and job growth, too.

"People think economic growth and inflation are intertwined inextricably, and they're not," said Michael Conte, director of the Regional Economic Studies Institute at Towson State. "You can have rapid growth without inflation. And, as we know from the 70s, you can have very slow growth with high inflation."

People have been trying to predict the financial future forever. But, despite its monthly announcement by the Conference Board and dutiful coverage by the business press, the index of leading indicators is often dismissed.

"The market virtually never reacts to it," said Brian Horrigan, senior economist with Loomis Sayles & Co. in Boston. "It tends to be old news, and that's one of the reasons people are discontented with it."

Last Monday's leading index seemed like a blockbuster report. At a time when securities markets have been acutely sensitive to economic overheating, the index hit a record high for June, said the Conference Board, a private business group that took over the index from the government last year.

In response, the Dow Jones industrial average moved -- hardly at all. And the yield on the 30-year Treasury bond barely budged, too.

FTC One of the index's problems is that, by the time it comes out, all 11 of its components, from factory orders to stock prices, have previously been available publicly. Anybody with patience and a spreadsheet program can figure out what it will say.

Conference Board officials, who are starting their own review of how to improve the index, were unavailable for comment.

Last year a sharp drop in the leading index helped convince many analysts that a recession would happen in 1996. It didn't. Instead, economic expansion has accelerated, passing a brisk 4 percent annual growth rate in the second quarter. The leading index has been incorrectly pessimistic several times previously, said Conte and other economists.

"I'm sure that the Conference Board's index can be improved," said Bill Cheney, chief economist for John Hancock Financial Services in Boston. "It has a lot of history to it, and some of what's in there doesn't necessarily belong. I think it makes sense to change it."

Conte and Towson State colleague Bruce Grindy already have. They've excised three indicators that recent history has shown to be misleading -- money supply changes, stock prices and prices of basic materials such as tallow, lumber and cattle hides. And they've added 22 others that, combined with the Conference Board's remaining eight, would have flagged recent recessions without making false alarms, Conte said.

They've also split their index in three, divining not only the direction of gross national product but also of inflation and employment. The three sometimes go in different directions.

"There are too many different types of decisions that people make based on this one number that's released each month," Conte said. "You can have the bottom of a business cycle in terms of output while not reaching the bottom in employment."

Towson State hopes to gain recognition from its indexes and perhaps some revenue as well. It plans to publish the figures monthly, post them on the Internet and add them to a menu of proprietary forecasting tools. Conte and Grindy also plan to submit a paper on the index to academic journals.

Their first report, published this week and based on May data, doesn't diverge too much from Conference Board's results. It suggests that output and employment will continue to grow through the end of 1996 -- but without inflation heating up.

The Towson State index rose by 0.6 percent in May, compared with 0.2 for the Conference Board, and a total of 1.6 percent in the four months ending in May.

But Towson State's "leading index of inflation has remained essentially flat since December 1993," Conte said. Despite steady growth and an expectation by Wall Street that inflation will get worse, he said, "There is no inflation in the U.S. economy that will be picking up in the near future."

Pub Date: 8/10/96

Copyright © 2019, The Baltimore Sun, a Baltimore Sun Media Group publication | Place an Ad