Q&A WITH MARK SPRAGUE
Mark Sprague is a noted and respected expert on the real estate industry and the Austin market, in particular. He is also the Director of Business Development for Mission Mortgage and we are fortunate to have access to his expertise and opinions. Previously, Mark provided some insight into Leading Economic Indicators (click here to see part 1) and Coincident Economic Indicators (click here to see part 2). Today, Mark concludes his look at the most significant indicators by discussing Lagging Economic Indicators.
Every week there are a variety of economic indicators released to help gauge the health and direction of the market. With so many numbers and so much information, it is sometimes difficult to know what to watch and why. The media has a habit of reporting the figures without much explanation of the bigger picture, which would help their readers to understand the numbers they read.
Question: With so many economic indicators, what should we watch and what do they mean?
Answer: Generally, economic indicators fall into three categories – Leading Indicators, Coincident Indicators, and Lagging Indicators. Today, let’s take a look at Lagging Indicators.
Lagging indicators reflect past economic events. Examples:
The lagging indicators index is made up of:
Unemployment Rate – the percentage of the total labor force that is unemployed in a given month. Average duration of unemployment. Eventually as more economic evidence pours in, companies management gets a better picture of business conditions and where the economy is headed.
Inventories and sales ratio, manufacturing and trade – obtained from the business inventories report. Historically, the inventory sales ratio reaches it cyclical peak in the middle of a recession and than falls at the start of a recovery as sales pick up more than inventories.
Outstanding Commercial and Industrial Loans – the volume of business loans held by banks and “commercial paper” (unsecured obligations) issued by nonfinancial companies. Business debt is also considered a lagging indicator because it typically peaks after a recession has started, a time when profits are slowing and debt service remains high. Such bank loans bottom out about a year after the recession ends.
Avg. prime rate charged by the banks. The prime rate is what banks charge for loans to their best corporate clients. Changes in the avg. prime rate generally trail changes in the rest of the economy.
Ratio of consumer installment credit outstanding to personal income – This looks at the relationship between consumer debt and personal income. Whenever there is a prolonged drop in household income, the burden of servicing that debt becomes much greater. That’s because a larger portion of the income is going back to paying off credit loans. As a result, Americans proceed to cut back on shopping and turn more cautious about using credit. Once income growth resumes and the economy is more stable, consumer spending and borrowing increases to normal levels.
Market sensitivity: Low to medium
Release time: 10:00 AM ET the report is published three weeks after the end of the reporting month.
Source: the Conference Board
Why is it important? Suppose you want to know what’s ahead for the economy but you don’t want to go through reams of economic statistics. Is there a simpler way to find out how the economy might perform in the months ahead? Yes. The index of leading economic indicators (LEI) which is published each month is a composite of a select group of economic statistics that are know to swing up or down will in advance of the rest of the economy. Therefore by tracking the LEI you will hopefully know how the economy will perform in the coming months.