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The Misleading Leading Economic Indicators

This story is unpublished. It was written for a class while Molly was attending Northwestern’s Medill School of Journalism.

Business reporters like to talk about things called leading economic indicators. That’s because they allow us to write flashy headlines like this one from MarketWatch on May 1: “US weekly initial jobless claims surge 35000 to 380000.”

There are 345,000 more Americans unemployed than last week? Batten down the hatches! The whole nation’s going to be unemployed by mid-summer. Exciting stuff. Big news.

But is it really?

The leading economic indicators, such as initial jobless claims, show the country’s economic activity. They serve two purposes – tracking the history of the economy and allowing that data to be analyzed for trends. They’re released by the government on a regular basis and are ideal for scholars, economists and headline writers. Essentially, they take the economy’s temperature and tell experts if it’s healthy. They can also serve as a kind of alarm: If the index numbers swing downward, a recession may be around the corner.

“What the index of leading economic indicators is designed to do is predict what’s going to happen to the economy six to nine months out, but that’s mainly for policy purposes,” said Allen Sanderson, senior lecturer in the economics department of the University of Chicago.

The problem is that indicator figures are often more volatile than the economy itself because they revolve around quickly changing numbers like interest rates or retail sales.

So should typical Americans really base their economic decisions on these reports? Does up-to-date economic information make things seem worse than they actually are?

Are the leading economic indicators… misleading?

“I’ve been somewhat amused, bemused or bewildered by all the stories about foreclosures and defaults. One would get the impression from the headlines that half the people in the U.S. have lost their homes, but it’s just not true,” Sanderson said. “We say, ‘Well, gee home ownership rates dropped.’ Yes, it dropped from 69 percent to 68 percent, but it didn’t drop from 69 percent to 29 percent. These are really very small kinds of movements.”

Why are the indicators so fickle? They’re tied up with elements of the economy that move rapidly which lends a kind of amorphous quality to the reports. The same figure can be used to support differing opinions of the economy. One’s philosophy and scope of view (short-term or long-term) determines one’s resulting analysis.

If you’re looking for something negative, you can probably find it, no matter what state the economy’s in.

“There’s a lot of noise, but there’s also a lot of built-in stability” in the economy Sanderson said. “We’re not talking about some minor little fiefdom somewhere, we’re talking about a $13 or $14 trillion economy, and a lot of things in that economy are going to be very sluggish.”

Just as many investment experts warn people away from trading based on intraday stock fluctuations, Sanderson suggests zooming out. Historical trends and digging into real numbers – instead of percent change – can help keep things in perspective.

“I think the best thing to do in these types of situations is to take the Christian Science approach,” Sanderson said. “If the body is reasonably healthy, take two aspirin and go to bed.”

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