According to the Group’s own commentary, current economic activity (CEI) remains on a downtrend, but (get ready for it) the pace of its decline had moderated somewhat in recent months, i.e., less bad is good.
Finally, in June the Lagging Economic Index (LEI) for the U.S. fell more than the CEI. As a result, the coincident- to-lagging ratio (C/L) increased. This is important. A strong economy has a high coincidental index (rising employment, production and so forth) relative to the lag i.e. a high C/L ratio.
Historically speaking, the ratio holds well. For example, it dipped twice in the early 1980’s along with the double dip recession and began rising as the economy recovered. Eventually, as the junk bond market crashed and M&A activity slowed, the ratio started dropping again, bottoming out to a value of 0.9505 at the end of 1990. It started recovering sharply in early 1991 and eventually surged to 1.03 by the start of 1993, all along as the economy recovered.
Both the 1980/82 and 1990/91 recessions were due mainly to high lagging indicators while coincidental indicators held steady—people were unemployed, but those with jobs were still getting paid increasingly well.
But as wages kept increasing, people spent more money which led to a drop in unemployment and soon the ratio recovered. In fact, an equally useful indicator for proof of a sustained recovery would be that the economy begins to weaken at the point at which the lagging indicator is higher than the value of the coincidental, as seen in the Chart of the Day of today’s issue of The Schork Report.
This distinction would have helped foresee the downturn of the early 90’s, but more importantly it would have better foreseen the effects of the dot com bubble on the economy. For instance, the C/L ratio actually bottomed out in December 2000, which may have been a signal of strength for the NASDAQ, but it was three months before the economy as a whole would feel the weakness of the collapse.
This error may have been caused by a sharp uptick of lagging indicators. The LEI shot up to 102.2 in December of 2000, but fell back down to 100.6 in January 2001. Meanwhile, the coincident indicators remained relatively flat. This caused a sharp drop in the ratio (as the denominator increased) and then a seeming recovery. However, the CEI was still weak and thus the economy continued to suffer.
The question we’re facing now is whether the current situation is like 2001 or 1981, i.e. are we headed for a recovery or a double dip.
Looking the Chart of the Day of today’s issue of The Schork Report,the disparity between the LEI and CEI has never been greater. But, as the graph shows, the LEI again peaked at 114.5 in January of 2009 and fell down to 112.1, while the CEI kept falling. This is what has caused the sharp drop and recovery in the C/L ratio. But unless the coincident indicators begin to increase, like they did in the 80’s, the economy as a whole will fail to bounce back.
The bottom line is the ratio is very useful when indicating normal recessions but it may falter due to the severity and depth of the current situation. Look for the coincidental and lagging indicators to start trending towards each other; this will be a sign of both statistical and fundamental strength.
Bottom line, analysts at The Schork Reportremain skeptical the ratio is recovering. That drop in January might be the bottom (due solely to extremely high LEI) but the upward movement from then onwards is not an indication of continuing recovery. It’ll probably remain around its current value for months, like it did in 2001.
Strength in the coincidental index would be a much stronger indication of recovery… and we are just not seeing that yet.
Stephen Schork is the Editor of, "The Schork Report"and has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.