Doc’s Economic Clock – Periodic Update

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  • The Conference Board’s Leading Economic Index (LEI) reported monthly jumped a full 1.2% from October to November
  • Oil prices bear watching, particularly if they exceed $100/barrel
  • Housing starts and unemployment are still in the red zone

 

Many producers and lenders who have attended my seminars and schools in the past six months are familiar with my Dashboard Economic Indicators and Assessment chart. Here is an update on the lead and lag economic indicators. I will use the image of a clock, where 12:00 to 3:00 is the green zone; 3:00 to 6:00 is the red zone; 6:00 to 9:00 is the orange zone; and 9:00 to 12:00 is the yellow zone to denote the status of each economic indicator.

 

Green Zone

The green zone from 12:00 to 3:00 contains three forward-looking measures of the economy. The Conference Board’s Leading Economic Index (LEI) reported monthly jumped a full 1.2% from October to November. Overall for 2010 this measure is up nearly 5 points denoting forward looking strength in the economy.

The diffusion of the LEI, which indicates the portion of the LEI’s 10 variables that have moved in a positive direction, was reported at 90% for November. Since July, this diffusion index has been reported at or above 50%, illustrating more than one-half of the components are measuring positive. December’s LEI and diffusion level will be released on Jan. 20.

The Purchasing Manager Index (PMI) also falls in the green light category, still well above 50 for the whole year, representing growth in the manufacturing sector. The PMI for December is 57.

 

Yellow Zone

In the yellow zone, from 9:00 to 12:00 on the economic clock, is factory capacity utilization at 76%, which is still four to five points below optimum range.

Also, core and headline inflation are below the targets of 1% and 2% respectively. December’s core inflation reading is 0.8%, while headline inflation, which includes food and energy, is 1.5%.

 

Orange Zone

All by itself in the orange zone from 6:00 to 9:00 on the economic clock is oil prices. The year-end oil price was $90.22/barrel. These prices bear watching, particularly if they exceed $100/barrel. Oil prices in excess of $100/barrel could slow the U.S. economy and place many agricultural producers in a negative margin very quickly.

 

Red Zone

Finally, housing starts and unemployment are still in the red zone, from 3:00 to 6:00 on the clock. With higher interest rates and large home inventories in many regions of the country, long term economic growth is doubtful. November’s housing starts were 555,000 annually, well below optimal. December’s figure will be released Jan. 19.

Unemployment is dragging down the economy, moving to the record 20th consecutive month above 9%. With baby boomers postponing retirement, increased use of automation, and deplorable job skill sets of some in the younger generation, these high rates will continue.

For those interested in these lead and lag indicators, make sure you attend some of the seminars and schools where these measures are discussed in depth.

 

Editor’s note: Dave Kohl, Corn & Soybean Digest trends editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at sullylab@vt.edu.

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