Is the Stock Market a Leading Economic Indicator?

Paul A. Samuelson wrote in 1966: “The stock market has predicted nine of the last five recessions”. But the eminent economist sarcasm was not sufficient to end that indicator reliability as a leading indicator of business cycles turning points.

 

To be retained as a leading indicator, a variable must have a significant importance in the economy. It must also pass the test of time: having historically demonstrated that it precedes by a few months the economic cycle peaks and troughs. Stock prices, even if they fluctuate for many reasons, seem to satisfy those conditions for many economies.

 

At the OECD, stock market indexes are recognized as one of the leading indicators for 27 of the 39 countries for which this organization calculates monthly composite leading indicators. The Conference Board publishes monthly leading economic indexes for 12 countries and the euro area; only the index for China does not include the stock market as a leading indicator. The Japan Cabinet Office, the Conference Board of Canada and Desjardins also retain stock prices as a leading indicator respectively for Japan, Canada and Quebec economies.

 

Moreover, the authors of box 1.3 of the IMF September 2011 World Economic Outlook ask the following question: “Are Equity Price Drops Harbingers of Recession?” To answer it, they looked at the G7 countries. Their methodology and their analysis showed that for the United States, the United Kingdom, France and Japan, “… from the first quarter of 1970 through the first half of 2011, …real equity prices in these economies are useful predictors of recessions.” They add: “For Canada and Germany, there is no evidence that equity prices aid in predicting recessions, whereas for Italy, their predictive power is consistently superseded by the inclusion of additional financial market variables.” The authors conclude that: “These findings suggest that policymakers should be mindful of sharp drops in equity prices because they are associated with an increased risk of a new recession.” 

 

Then, even if they are not infallible, stock prices indexes are legitimate leading indicators for many economies.

 

Link to the OECD list of leading indicators by country: http://www.oecd.org/std/leading-indicators/CLI-components-and-turning-points.pdf

 

Link to the Conference Board Internet section on leading economic indicators:

http://www.conference-board.org/data/bci.cfm

 

Link to the September 2011 IMF World Economic Outlook:

http://www.imf.org/external/pubs/ft/weo/2011/02/

  

 

Euro Area : the recovery gets traction

The recovery is well engaged in the euro area. Eurostat indicated May 13 that the economy continued to grow during the first quarter of 2015. Its real GDP increased by 0.4%, an heighth consecutive quarter of growth. Moreover, the Purchasing Manager Index (PMI) for the area shows that the economy continued to expand last April. Leading indicators from the Conference Board and the OECD point to the continuation of the recovery in the coming months.

OECD leading indicators: moderate growth for the world economy in the coming months

The OECD composite leading indicators, published May 12, point to a "positive change in growth momentum" for the euro area and stable growth for Japan, the United Kingdom and India. However, for China, the United States and Canada they show an "easing growth" scenario. Globally, like the Purchasing Managers' Indexes, they let believe that the world economy grows at a moderate pace these days and that this trend will continue in the coming months.


Link to the OECD May 12 press release:
http://www.oecd.org/std/leading-indicators/composite-leading-indicators-cli-oecd-may-2015.htm

World Economy : Moderate Growth

The J.P. Morgan Global Manufacturing & Services PMI recent evolution lets believe that the world economy is expanding at a moderate pace these days.

Link to Markit Economics May 6 press release:

http://www.markiteconomics.com/Survey/PressRelease.mvc/8554b240eda74a019242005c06c2b843

Quebec economy: modest growth in the coming months

Desjardins Leading Index (DLI) showed little progress during last year fourth quarter. It points, at best, to a modest growth for Quebec's economy in the first half of this year.

Link to DLI analysis published February 12:

http://www.desjardins.com/ressources/pdf/ipd0215e.pdf?resVer=1423749038000

World economy: is growth too comfortable at just over 3%?

The world economy seems comfortable at just over 3% of real growth. It is not a robust growth, but it is what we get in these years even if the monetary policies are still very accommodatives around the world. It grew by 3.3% in 2013 and 2014. In their respective economic outlook, published last January, the IMF and the World Bank forecast a world GDP (at PPP) growth of around 3.5% this year. It would be just slightly better than in previous years, although leading indicators of the evolution of the economy let believe, for the moment, that growth in the coming months could be less than that.

The OECD monthly leading indicators, published February 9, let anticipate a stable but modest pace of growth in the coming months. The Purchasing Manager Indexes, published by Markit Economics earlier this month, point towards a world growth that goes from modest to moderate early in this year.

The G-20 Finance Ministers and Central Bank Governors, at their meeting in Istanbul on February 9 and 10, insist on their preference for a much stronger growth, but they have few concrete solutions, except their usual reform agenda, to offer in a context where risks and uncertainties are still quite high.

To be optimistic: nothing lets believe that the world economy could contract or show a sharp decline of its growth rate in the near future. Even the euro area could avoid such a scenario, although deflation is still at its door with its potential for economic turbulence.


Link to the OECD February 9 press release:

http://www.oecd.org/fr/std/indicateurs-avances/indicateurscompositesavancesdelocde-miseajourfevrier2015.htm

Link to Markit Economics February 4 press release:

http://www.markiteconomics.com/Survey/PressRelease.mvc/aa9e75bbcfac4fea8622b22632b5d42c

OECD leading indicators : no major change

The monthly leading indicators from the OECD, published January 12, do not show any major change of trend in the short term economic outlook for most of the countries.


Link to the OECD press release:
http://www.oecd.org/std/leading-indicators/CLI-Jan15.pdf