How We Can Predict When the Economy will Turn Up

In my previous blog entry I discussed how the unemployment rate is considered a lagging market indicator basically meaning it can not tell the future. However there are other indicators called "Leading Indicators" that predict the future of the economy. While the leading indicators are not a tell all predictor of the economy, they have infact predicted the past 7 recessions. Also noteworthy, the fact that these leading indicators have also predicted 5 recessions that have not occurred.

So what are these indicators? Here are the 10 that make up the Index of Leading Indicators:
- The Average number of hours worked by workers in the manufacturing sector.
- The Average number of people initially applying for collection of unemployment.
- Consumer sentiment
- The difference between the short term and long term interest rates
- The amount of new orders of consumer goods and materials in the manufacturing sector
- The Money Supply (inflation adjusted)
- The S&P 500 stocks
- That amount of new permits for the building of residential property.
- The Speed in the delivery of new merchandise from the suppliers to the vendors
- The amount of new orders for capital goods that are not related to defense.

There you have it. The 10 leading economic indicators that are used to predict the direction the economy is going in. In the last update on February 19, 2009 the Leading Indicator Index has actually increased as it did in January. Does this mean that the economy will rebound immediately? Absolutely not. However it does mean that things should begin to look up.

What The Unemployment Rate Means for the Stock Market: Nothing

Well the unemployment rate in the United States has been released. It is currently at 8.1% which is the highest since 1983. What exactly does this mean for the future of the stock market? Absolutely nothing. (To see some more specific unemployment stats, check out http://www.talkgold.com/forum/r251143-.html)

Unemployment is considered a "lagging indicator" which means it follows the economic trends. If the economy is doing bad, unemployment will usually go down. It is an indicator of the economy that lags behind. So in reality, the unemployment rate could be going up as the economy becomes bullish.

The latest news that the unemployment rate is over 8% nationwide should have no influence whatsoever on whether you buy or sell your stocks. In my next entry I will discuss leading and lagging indicators, to see if we can predict when the economy is about to turn up.