In the “Futures Interview,” economist John Williams describes how popular economic reports put out by the government have been skewed over time to present a rosy economy picture. However, he says there are some private numbers that are worth looking at.
“One of the best indicators that you have over time is from the purchasing managers’ survey; manufacturing, forget the services sector,” Williams says. “If you look at the new orders index, that is probably the best single indicator of what is happening in the broad economy in terms of a privately published measure that has a lead of time three months for broad economic activity.”
One problem is that the broad ISM measure has just been reweighted to track GDP better. “It wasn’t that their series was wrong, just that GDP has been altered over time. I think that was a mistake. But the components are still being reported as given to them by the participants,” Williams says.
Another indicator that has historically been accurate is the Conference Board’s help wanted advertising. “That does not include help wanted ads on the Internet, but even allowing for that you see that number plunging and historically it has been one of the best indicators of what is happening in the employment markets,” Williams says.
He also likes to look at new claims for unemployment insurance. “That jumps all over the place on a weekly basis. They have a tough time seasonally adjusting that, but if you smooth that over 17 weeks, it is a very good indicator of what is happening in the employment sector and of the economic activity.”
The consumer confidence measures also have value, says Williams. “They are more of a coincident indicator than a leading indicator. I would look at the year-to-year change in that measure more than the month-to-month change.”
What Williams has found is that although many reports are being skewed, you can still mine them for valuable information. “If you take M2 and adjust it for inflation using the government CPI, historically that has been a pretty good signal for a downturn in economic activity. Retail sales as reported by the Census Bureau and as adjusted for inflation using the CPI year-to-year change on a three-month moving average basis tend to give you a fair indication. When that drops below 1.8% that is usually a recession signal. Right now we are negative and you don’t see that outside of recessions.”
