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Wednesday, February 27, 2013

EOCI economic indicator

This is an interesting composite economic indicator.  There are a lot of pieces of data that look like we are in a recession, but a few that would seem to indicate we are not.  Here is a pretty broad based composite indicator that shows the prolonged weakness that seems to be present in the economy.  Here is the chart.


Here is a snippet talking about the construction of this index.

This morning's release of the Dallas Fed Manufacturing Survey, which dipped from 5.5 in January to 2.2, and the Chicago Fed National Activity Index, which declined from .02 in December to -.32 in January, further supports the previous discussion as to why the economy currently lacks escape velocity.  However, the problem with viewing these reports on a monthly basis is twofold:  1) we are looking at specific data points rather than the longer term trend of the data; and 2) we are trying to extrapolate disparate data points into the entirety of the domestic economy. 
This conundrum led me, about two years ago, to create a composite index of economic indicators that would provide a much broader view of the domestic economy.  The result was the Economic Output Composite Index (EOCI) which is comprised of the:
  • Chicago Federal Reserve National Activity Index - a broad index comprised of 85 subcomponents of the national economy.
  • Several Federal Reserve Regional Manufacturing Index (Richmond, Dallas, Kansas, etc.)
  • ISM Composite Index - a composite index of the ISM manufacturing and non-manufacturing index.
  • Chicago Purchasing Managers Index
  • NFIB Small Business Survey
  • Leading Economic Indicator index

It has a pretty good mix of different kinds of data.  The chart shows that this index has spent quit a bit of time below a critical threshold.  This kind of pervasive weakness is normally associated with a recession.  While the pundits keep telling me on TV that the economy is getting better, I just can't see it in the data.  There is no consistent strength apparent.  Even though I can't say for 100% sure we are in a recession, we have to be right on the edge.  Anybody that says we are absolutely not in a recession (and there are a lot of them) is cherry picking the data and/or smoking something.  With global weakness, tax hikes, spending cuts, and high gasoline prices it will take a miracle to keep us out of recession this year.  Stock prices may be starting to reflect that reality so be careful.


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