As we start Part 2 of our 3-part series on metrics, focusing on lagging, coincident, and leading indicators, if you haven’t read Part 1, Lagging Indicators, click here to read to get caught up.
Near Real Time
Last week, we jumped into the deep end with historical data and indicators that ‘lag’ the market or show their full impact after the market changes. This week, we’re diving in and looking at coincident indicators. These indicators are measures that provide macroeconomic insight into the state of the economy in near real-time. The closest to real-time data, these indicators depict the business cycle’s activities in the recent past. Coincident indicators closely track various turning points in the business cycle. For this reason, they are commonly used as benchmarks while assessing the relativity of economic metrics to the business cycle. The reporting may have a long or short lag, depending on the metric. The coincident indicators, which combine to form the coincidence index, are the number of employees on non-agricultural payrolls, personal income less transfer payments, industrial production index, manufacturing and trade sales.
Keep in mind that the list of indicators may change in the future. Indicators have historically been replaced as the market changes to reflect appropriate reporting and needs.
Coincidence index: The coincident indicators
Number of employees on non-agricultural payrolls
The number of employees on non-agricultural payrolls is aggregated by a survey conducted by the Bureau of Labor Statistics (BLS) of ~140,000 businesses within the United States. This metric has consistently paralleled the gross domestic product (GDP). Considering that nearly 67% of the U.S. GDP is consumption-based, intuitively, as more citizens have jobs, they are more likely to spend on the economy.
Personal Income less transfer payments
This metric has two components: personal income and transfer payments.
Personal income consists of all household wages and salaries.
Transfer payments are governmental disbursements such as social security, food stamps, and veteran’s benefits. They generally cover rent, food, and basic necessities. Since they essentially net zero, transfer payments tend to have very little or negligible impact on macroeconomic activity. Excluding transfer payments from personal income appropriates this metric to align as an impactful economic indicator.
Industrial production index
This metric consists of over 300 components that represent mining, manufacturing, and utility industries. This is a weighted metric where weights are assigned based on the value each component adds during the production process. Due to the complexity of this calculation and aggregation lag, this metric is a more timely proxy for quarterly GDP (Gross Domestic Product).
Manufacturing and trade sales
The coincident index's last major component measures all domestic manufacturing and trade sales.
In the 2/3 end
In every one of my metrics posts, I always highlight that economic metrics should never be taken in isolation. The indicators we’ve discussed so far are no exception. Though these metrics provide good information on their own, the impact of the aggregate should not be overlooked. For example, combining these coincidence indicators as the coincidence index correlates with a GDP of 0.88 (88%). Look at the graph below from “The Investment Advisor Body of Knowledge,” P230.
Though this data doesn’t extend to the present day, it is apparent that the aggregation of these metrics correlates with the GDP. We see this trend play out in more recent metrics, which is why economists have used these metrics to understand the state of the economy.
Next week, we’ll explore leading metrics as we wrap up this three-part series. Of course, in the meantime, if you have any questions for our team at Whitaker-Myers Wealth Managers or one of our Financial Advisors, schedule a time with them to discuss these topics and more.
One metric to rule them all, or not. Part 2
April 4, 2024
Summit Puri
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