If You Like Indicators, Keep Your Laggards and Leaders Separate

So much of the casual conversation I hear about the direction of the economy is downright confused — not only because the economy is legitimately confusing, but because people don’t know what metrics to keep their eye on, and especially because they jumble their leading and lagging indicators. A leading indicator fortells of an approaching change and a lagging indicator confirms the change has begun. The stock market could still recover as unemployment remains high. Wall Street will just want some signs that the prospects for the labor market aren’t getting far worse. In downturns during the past 60 years, the S&P 500 index has hit bottom an average of four months before a recession ended and about nine months before unemployment hit its peak. So say it to yourself three times over — and say it especially to your confused friends: the stock market is a leading indicator; unemployment is a lagging indicator. In other words: markets move fast and assimilate lots of information and are therefore somewhat predictive; layoffs are messy, unappealing, and above all take some time to unfold — as does the hiring that eventually replaces them. This doesn’t mean that the recent market uptick means the recession is easing up, nor does it mean that recent high unemployment numbers aren’t relevant. It does mean, however, that the two metrics lie in different columns when assessing where things are heading.