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June 25, 2007

What's Your Favorite Economic Indicator?

If you like to hear news about the economy, then the information age has been a boon.  Leave your television set on one of the financial networks, and you’ll see tickers, graphs, and animations whizzing by as talking heads digest and dissect every morsel of market and economic information.  Tell your computer to alert you to any news about a company, a country, or an industry and it will pop up with tidbits all day long.  And for a few bucks, you can subscribe to services that will not only tell you what economic information is going to be released on a given day, but how the experts think it will turn out.

When it comes time to bring all that information back home, and to put it to use in helping your household or business in Indiana prosper, there are at least two ways you can go.  We’ve all learned the hard way that what happens in China, or in bond markets, can impact those of us in the Midwest, so one strategy is to pay attention to all of it.  The economy is all interconnected, after all, so even markets and places that you don’t know how to pronounce can affect your bottom line.

But few of us really have time for that.  Even if we did, the signals sent by different pieces of the economy rarely blend together to tell a coherent story.  So we must sift and filter the torrent of data that heads our way, picking out the much smaller number of key indicators that have affected our fortunes in the past.  Bankers watch interest rates, exporters follow the strength of the dollar, and everyone, it seems, watches the price of gasoline.

It can make sense for communities, regions, or even the whole state to pay attention to some pieces of the economy more than others as well.  That’s nowhere more true than in the industrial Midwest, and especially Indiana, which remains less diversified in its economic base than other parts of the country.  The question is, what pieces of the economy should we be paying the most attention to?  And how are they doing?

Things were a little simpler in the past.  Before the mid-1980’s, the U.S. economy went into recession every 4 or 5 years on average, and the motor vehicle and housing industries went right down with it.  So, it seemed, did the fortunes of just about every Great Lakes state.  And so the big story was just that – the big picture.  Keep the national economy growing and everything else took care of itself around here.

But things have gotten a lot more complicated since then.  For one thing, expansions in the U.S. economy have stretched out considerably.  The last expansion that began in 1991 lived on for ten full years, preceded by another that was almost 8 years long.  And the fortunes of Indiana and some of its key industries – most notably, motor vehicles – have diverged remarkably.

2001 was a year that few of us in Indiana want to re-live, economically speaking.  Yet as the state suffered job losses that were among the worst in the nation, and the state treasury saw tax collections fall, the motor vehicle industry went on to post its second best sales year ever.  Housing also was reasonably strong.

But if the old adages about Indiana and the car and housing industries didn’t hold in the last recession, what can we use to take their place?  My candidate is business spending.  The amazing fact about the 2001 recession is that consumer spending never stopped growing.  But spending by businesses did – with a vengeance.  And as an industrially focused state that sells plenty of capital goods to businesses worldwide, we suffered mightily for it.

If you look at the growth profile of business spending on plant and equipment in the national economy – but not on housing – you see a rise and fall that looks remarkably like the changing fortunes of the Indiana economy.

And that continues, to my eye at least, to this very day.  The last two quarters have seen a marked cooling off of non-residential investment spending by businesses in the national economy, and the preliminary job tallies for the state also have proved disappointing.  As we plan for the balance of the year, it’s something to keep an eye on.

Link to this commentary: https://commentaries.cberdata.org/161/what-s-your-favorite-economic-indicator

Tags: economic recovery, economics, finance


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

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