Wednesday, January 28, 2009

Say What?

OK, now let's see here, some economist by the name of Harm Bandholz have discovered that real M2 growth does not correlate with current economic activity, as measured by the index of coincident indicators. From that he concludes that it should not be included in the index of leading indicators. Huh? Since when is the index of leading indicators supposed to correlate with current activity? Isn't the whole point of having a distinction between coincident and leading indicators that the former should correlate with current activity, while the latter shouldn't necessarily do so? If the leading indicators are supposed to correlate with current activity, what's the point of distinguishing between coincident and leading indicators?

If he had shown that it was not a good leading indicator, much worse than the other leading indicators, then he would have had an argument for excluding it. But from the fact that it is not a coincident indicator it doesn't follow that it's not a leading indicator.


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