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August 21, 2003

Numbers Up, Real Economy Down

The Index of Leading Indicators seems to be pointing to a modest recovery, growing 0.4% in July for the fourth straight month. But amidst all the conflicting economic numbers, what's interesting is breaking the index into its component parts. And there is a pattern of what's up and what's down:

Half of the ten indicators that make up the leading index increased in July. The positive contributors -- beginning with the largest positive contributor -- were interest rate spread, real money supply, average weekly initial claims for unemployment insurance (inverted), vendor performance, and stock prices. The negative contributors -- beginning with the largest negative contributor -- were average weekly manufacturing hours, index of consumer expectations, building permits, manufacturers' new orders for nondefense capital goods, and manufacturers' new orders for consumer goods and materials.
Aside from the claims for unemployment insurance, little of the positive signals have to do with jobs and production (vendor performance relates slightly to production since it involves delivery of supplies that can go to producers). But the negative indicators are all in the realm of production-- what's being produced and whether consumers expect to buy them.

So we have an economy where the "money numbers" keep looking good, giving a false promise of jobs and recovery, even as the "production numbers" keep tanking. The reason people take seriously the "money numbers" is that they traditionally correlated with real job growth. But that correlation seems to have broken down, which makes all the numbers we're seeing pretty suspect.

Posted by Nathan at August 21, 2003 10:47 AM