UsableMarkets

Of course everyone reads this blog, which is why since I published a modest piece on the inverted yield curve as a recession predictor, everyone seems to be talking about predicting recessions.

Two recent articles caught my eye. One by the SF Fed on the Conference Board’s Leading Economic Index (LEI) prediction record, and how to improve it. And the other in the WSJ concerning the weekly claims for unemployment published weekly by the Labor department.

Starting with the SF Fed, they helpfully describe what is the Conference Board’s LEI:

The Leading Economic Index (LEI) prepared by the Conference Board (www.conference-board.org/data/bci.cfm) every month is an indicator of future economic activity designed to signal peaks and troughs in the business cycle. It comprises ten variables that can be loosely grouped into measures of labor market conditions (initial claims for unemployment insurance and average weekly hours worked in manufacturing); asset prices (the monetary aggregate M2, the S&P 500 stock market index, and the interest rate spread between 10-year Treasury bonds and the federal funds rate); production (new orders of consumer and capital goods, new housing units, and vendor performance); and consumer confidence.

They go on to say why its predictive ability is limited.

At least two reasons explain why the LEI’s predictive efficacy is limited. The first is that the index is a one-size-fits-all weighted average of indicators. By this we mean that weights are designed to distill the information contained in 10 variables into a single variable, rather than by selecting weights that would produce the most accurate turning-point predictions. Second, we find that no single combination of indicators is likely to predict well at every time horizon.

The WSJ seems to have better hopes for the unemployment claims.

The Labor Department’s weekly tally of new claims for unemployment benefits—released every Thursday—has a remarkable track record of foreshadowing economic turning points. Its recovery in spring 2009, for example, coincided with the stock market’s bottom and foretold what turned into an economic rebound.

I have yet to see any research to back this up, but the article does include some circumstantial evidence.

Still, claims haven’t risen enough yet to spark worries of a “double-dip.” They behaved similarly after the 2001 recession, improving pretty steadily until September 2002, then began to deteriorate again. That augured a 13% drop in the stock market over the next month, a widening in high-yield bond spreads and higher market volatility, notes Moody’s Investor Service. But it didn’t derail the turnaround.

The Fed’s article contains some charts. I have yet to see any on the unemployment stats, but perhaps that’s something I can create in the future, if the WSJ doesn’t beat me to it.

~alex

Spot the arbitrage opportunities here. Don’t worry, though, you already missed them.

HT to Econbrowser for the link.

~alex

For those of you who follow such things, it has certainly been interesting to note the decline in the Baltic Dry Index (or BDI). I have, for the moment anyway, a chart of the BDI in the right column of this blog. A quick glance will show you its direction. Namely: down.

I wasn’t the only one who was wondering at the decline of the BDI, and stories from The Economist and FT’s Lex discuss the meaning behind it.

The Economist says:

There are growing doubts, however, about what the Baltic Dry is actually signalling. The confusion is whether the index is saying more about the supply of ships than the demand for their cargoes. The index spiked dramatically in 2008 as China’s imports of commodities soared at a time when the supply of ships was constrained and port congestion added to demand for capacity (see chart). The financial crisis soon caused the index to fall back but not before this period of dramatic growth in demand from China had prompted a surge of orders for bulk carriers, especially the very largest ones that are used on the China trade routes.

These ships take around three years to come on-stream. Despite the cancellation of some orders the new ships are now flowing in: in the first half of this year the global fleet increased by 23% as new vessels came into service at the rate of 16 a month. There are now 23 such vessels arriving each month, adding to oversupply.

So, oversupply of ships? The FT’s Lex concurs:

Several analysts have poured cold water on the BDI’s prescience though, given some obvious distortions. It takes about three years to build new capacity and, as the peak of the commodities bubble was two to three years ago, new ships are now depressing charter rates. The global fleet has expanded by about a quarter this year alone. For now, other indicators of commodities demand trump the BDI.

Cross-checking with ostensibly similar global measures such as air freight sheds little light on the matter, but rail traffic compares more reliably. Trains carry the same types of materials as shipping and volumes rather than tariffs are reported while capacity changes only slowly. American carriers provide the most detailed and timely data and they continue to report outstanding year-on-year gains for tonnage of key industrial commodities such as metallic ores, coke and lumber, up 93 per cent, 28 per cent and 11 per cent for the first 27 weeks of the year, respectively.

However, both articles hedge their bets. With the threat of a double dip recession, that’s probably smart. And if it comes to pass, the BDI may not be so misleading after all.

~alex