Today's leading economic indicators (LEI)
point to a recovery. The bond market, however, shows a flattening yield curve (see chart). Usually it steepens as a recovery gets underway. Maybe the curve is anticipating a
W-Shaped recovery? Since the LEI looks out around one quarter, and the bond market much farther, this could explain the discrepancy. The LEI started up five months ago, indicating a recovery began two months ago and will continue at least a quarter; but the bond market is looking out several quarters, and is skeptical.
I would urge caution with the flattening yield curve. The learning from the Yield Curve really comes post WWII, in a period after the Great Depression when the propensity to save was giving way to an avarice for consuming. This has wholly flipped. Consumers are saving, not spending, and private business is still not borrowing to invest. The propensity to save lowers yields and flattens the curve.
UPDATE 9/22: Good discussion in The Big Picture over the
usefulness of the LEI. As the chart shows, it has not predicted well during recent bubbles. It went down during the 1997-2000 tech bubble, and went down again during the 2004-2007 Greenspan bubble. This may reflect a theme I have posted on, that debt-fueled growth is losing effectiveness.
See chart here. During the Greenspan Bubble, as an example, we borrowed (private and public) $24T and only got $10T of cumulative GDP growth. In general a lot of metrics developed in the post-war period (after the Depression) may no longer work.
Stock prices are a considerable factor in the LEI so this major bear market rally could be throwing off the reality of the numbers.
Posted by: psycho_puppies | Monday, September 21, 2009 at 07:07 PM
What did the LEI look like two years ago? Just how much predictive power does it have?
Posted by: Ed Ryan | Monday, September 21, 2009 at 08:07 PM
Zero.
Government stats are massaged to a greater or lesser extent and to a different degree depending on the agenda du jour.
One of the reasons I think over analyzing gets people in trouble.
Posted by: min | Tuesday, September 22, 2009 at 02:50 AM
Association of American Railroads reported that rail traffic declined in August.
Posted by: Mamma Boom Boom | Tuesday, September 22, 2009 at 08:54 AM
Well looks like the Railroads are getting Railroaded along with everyone else outside the Big Banks, financial institution and Washington elite.
Posted by: min | Thursday, September 24, 2009 at 05:32 AM