Lagging Indicators

Don't look to jobs and spending

The unemployment rate is down to 4.8%, businesses have added 640,000 jobs in the last three months, and consumer spending, adjusted for inflation, is rising at almost a 4% rate this year. And with strong labor markets continuing to pour money into the pockets of consumers, it seems only reasonable that the economy is guaranteed good growth over the next few months.

But when it comes to foretelling the immediate prospects of the economy, the consumer is not king. Employment and consumption are not what economists call "leading" indicators, meaning they do not give early warning of changes in the economic climate.

Consider: Consumer spending and employment typically rise right up to the moment a recession starts--and sometimes after. Consumption growth has averaged 2.4% in the three months before the beginning of the last five downturns, while employment growth has averaged 1.9% (table). That's about the same as the long-term growth rate of jobs over the last 30 years.

In fact, in four out of the last five recessions, either employment growth or consumer spending continued rising even after the rest of the economy went south. For example, the economy added more than 250,000 jobs in February and March of 1980, though the recession of 1980 commenced in January, according to the National Bureau of Economic Research, the official arbiter of such things.

Why are employment and consumption such poor predictors? Personal consumption accounts for about two-thirds of gross domestic product, and most personal income comes from wages and salaries. Yet most downturns are driven by swings in residential, business, and inventory investment, not changes in consumer spending. For example, falling consumer spending accounted for virtually none of the deep recession of 1981-82. That's why the index of leading indicators, now compiled by the Conference Board, does not include either consumption or employment but focuses on measures such as building permits, orders for capital goods, and the money supply.

True, the employment report is eagerly awaited each month, in large part because it appears before any other economic data. But economists, investors, and policymakers have to remember that timeliness is not the only virtue.