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Your Money > Investing Comment Articles > Maybe. Just maybe
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By Richard Hunter, Hargreaves Lansdown
For economists, these two lines of sight are known as lagging and leading indicators. Gross Domestic Product (GDP), for example, is a procyclical economic indicator, that is, if an economy is healthy and growing, so the figure for this will be rising. An economy in recession will therefore show shrinkage. Unemployment figures are known as a countercyclical economic indicator – as the economy worsens, so the figure rises. Unemployment figures are also a lagging indicator, one not changing direction until after the economy does. As a general rule, unemployment tends to continue rising for two or three quarters after the economy starts to improve, as industry begins to pick up apace. This leaves the other important economic gauge – the leading indicator. This changes ahead of the economy and can therefore prove extremely useful in an environment such as the one in which we find ourselves. Leading indicators may take the form of business confidence or an increase in manufacturing orders (both of which could positively affect today's markets), or indeed the stock market itself, which at any given time is trying to predict economic and company trends several months down the line . Staying with the motoring analogy, we are currently in a traffic jam. We can see the problems which are behind us, but the difficulty is what is in front of us. Even when the jam starts to clear and in the distance we can see that the traffic is moving, it will still be some time until we can start moving ourselves. This is probably where we are in terms of the global economy at present. What has given the market a positive jolt in the last few days have been a couple of leading indicators which have given investors fresh hope. In the US , confidence amongst institutional investors has just risen for the fifth month in a row in May, according to a report by financial services firm State Street . Earlier in May, the US Institute for Supply Management's index of non-manufacturing businesses (accounting for 90% of the US economy) showed that the numbers were contracting at the slowest pace for six months. It added that the improvement was due to increases in consumer spending, rising confidence and stable home sales. Meanwhile, in the UK, the latest quarterly survey by the Institute of Chartered Accountants in England and Wales showed that business confidence improved for the first time in two years in May. In particular, the results showed increasing confidence amongst the banking, finance and property markets. Although there is some way to go before the index reaches a positive number, the rate of decline has decelerated sharply. These indicators all go towards the bigger picture. There are still problems to be resolved, not least of which is rising unemployment either side of the pond. And the economic news will continue to come thick and fast – just next week there will be several pieces of news in both the UK and the US around manufacturing, mortgage activity and employment levels. But for the first time in quite a long time it seems that the bad news – although still there in certain pockets of the economy – is beginning to dwindle. The optimists are still calling for an end of the recession in the US before the end of 2009. On the basis that stock markets will be attempting to anticipate any such recovery, the year is not wasted just yet in investment terms and may even turn out to be brighter than many had thought. Richard Hunter is Head of UK Equities at Hargreaves Lansdown Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The use of economic indicators has been likened to driving a car. The rear view mirror is important, but so of course is looking ahead. Both need to be used in conjunction for the full picture.
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