Back in December, I posted a piece entitled “Great Googamooga”, in which I attempted to clear up some of the confusion the news media generates by focusing on a statistic that appears to show an impending recession, when in fact this particular statistic has had a very mixed record as a leading economic indicator. I contrasted these “Misleading Economic Indicators” like the Small Business Optimism Index with more reliable ones such as Real Yields. Here are a few more contrasting indicators.
In the past few months, some commentators have pointed to weakness in the ISM Purchasing Managers Index as a harbinger of bad things to come in the overall economy. In fact, this index is widely misunderstood:
This [the ISM Manufacturing Index] is a highly overrated index. It is merely a survey of purchasing managers. It is a diffusion index, which means that it reflects the number of people saying conditions are better compared to the number saying conditions are worse. It does not weight for size of the firm, or for the degree of better/worse. It can therefore underestimate conditions if there is a great deal of strength in a few firms. The data have thus not been either a good forecasting tool or a good read on current conditions during this business cycle. It must be recognized that the index is not hard data of any kind, but simply a survey that provides broad indications of trends (Briefing.com)
This index, like so many others, is notorious for false positives.
Source: Calculated Risk
A number below 50 indicates contraction. As you can see, since 1963, there have been 10 instances (yellow arrows) where the ISM PMI dipped below 50 but no recession followed. In addition, (orange arrows) there were 2 instances where manufacturing was expanding just as the economy was rolling over into a downturn. This is flip-a-coin prognostication.*
In contrast, though Initial Weekly Unemployment Claims (4 week moving average) have given a number of false positives, since 1971 we have never had a recession unless claims have been moving up for at least 6 months. At the moment, Unemployment Claims are still trending lower.
Source: Calculated Risk
The chart below, New York Stock Exchange Bullish Percent, has nothing to do with the economy, but it does have a pretty good track record calling major market bottoms over the past 20 years, flashing a buy signal near turning points during the Asian Contagion, the Tech Crash and the Financial Crisis. A move below the green line is a buy signal, and right now it’s flashing green. (A full explanation of how Dorsey Wright creates this is in the footnotes.** )
*Green arrows represent S&P 500 highs.
** “The bullish percent is a measure of the percent of stocks in any universe that are on a Point & Figure buy signal. This percentage is plotted on a grid from 0% to 100%. X’s represent that more stocks are going on buy signals and the offensive team is on the field for that market or sector. O’s represent that more stocks are going on sell signals and the defensive team is on the field for that market or sector. The two lines of demarcation on a bullish percent chart are 30% and 70%. The 30% level and below is the “Green Zone” or low risk area. The 70% level and above is the “Red Zone” or high risk area. Focus on your field position and column for an assessment of risk in that particular market. Bullish percents are a measure of risk in the market, not the direction an index should move.” Dorsey Wright
*** Graphs are sourced from calculatedriskblog.com
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