Thursday, November 19, 2009

Coincident Indicators Drop Again

While this is near universally ignored by the financial media who only look at the leading indicator index, the coincident indicator index dropped again, albeit only slightly, for the second month in a row.

The coincident index is made up of nonfarm payrolls, real disposable income excluding transfer payments, real business sales and industrial production. When determining how the economy doing right now, the coincident index is the one to look at. And with the coincident indicator index dropping, the strength of the so-called recovery can again be called into question.

Note however that the Conference Board who compiled the index probably understimated the declie. Only nonfarm payrolls and industrial production are yet known, so they have to impute the values for real disposable income excluding transfer payments and real business sales, something they do with an "autoregressive" model. That model has however severe limitations as it doesn't uses common sense analysis of data which can indicate that value (such as CPI and the employment report), but instead analyses past values to estimate current values. As such it often fails, like it did last month when the model predicted an increase in real disposable income excluding transfer payments, while in reality it decreased. Now it again predicts an increase (even with that estimate the overall index still dropped because of the big decrease in nonfarm payrolls), even though labor market data indicates another decrease.