(Mis) Leading Indicators

This most recent example from Statistics Canada is telling. Here is a summary of a “Leading Indicator” Report of April 22, 2010 (Earth Day!):

     "Leading indicators

     Economic Accounts: The composite leading index rose 1.0% in March, matching its average monthly increase since July 2009. However, the sources of growth continued to shift away from housing to other sectors of consumer demand and manufacturing.

The housing index rose by 0.2%, its smallest increase since its current upturn began in the spring of 2009. At its peak last summer, the housing index was rising over 5% a month. The recent slowdown originated in a retreat of existing home sales from their record posted late in 2009. Housing starts continued to increase.

     Elsewhere, consumer spending was mixed. Furniture and appliance sale rose 1.3%, their largest advance since June 2006. Spending on other durable goods declined 0.5% after eight months of strong growth. Services employment increased 0.6% with strength evident in both the personal and business sectors.

     Manufacturing demand continued to recover. New orders rose 3.2%, their third increase in four months. The increased ratio of shipments to inventories was driven mostly by higher sales. Export industries have led the rebound in sales, as demand for capital goods continued to languish. Factories remained restrained in hiring, and the average workweek fell again. The outlook for export demand was buoyed by further gains in the leading indicator for the United States."

“Consumer demand,” “manufacturing,” “housing index” (the cost of houses), “home sales,” “furniture and appliance sales,” “spending on durable goods,” “hiring” are all mentioned in the summary of “leading indicators” above. A few questions suggest the limits of these as adequate measures of the wealth of a society. What if consumer demand was for head ache medicine? What if manufacturing was for sandbags to hold back a flood? Why are more expensive houses considered a positive thing? Could more home sales indicate that people are moving to get away from something less desirable to them? Would it not be better for individual families and society overall if we spent less on “durable goods” so that money can go elsewhere (e.g. to education, skill development etc.)? What if hiring is in sectors that are associated with health risk, low income, or generally unsatisfying positions? It does not take much thought to realize that these “leading indicators” do not indicate very much except increases and decreases in transactions in the market. However, given the positive glow that usually surrounds news of increases in virtually any form of economic activity, these indicators might well be renamed: Mis-leading indicators.