NEW INDICATOR IS POINTING TO RENEWED ECONOMIC WEAKNESS
8 March 2010 by Cullen Roche
6 Comments
Interesting stuff here from Econbrowser and Professor James Hamilton on a new indicator created by Goldman’s Jan Hatzius and several others. The indicator is deteriorating substantially in recent months and could be pointing to further economic weakness. This indicator appears to have a fairly good track record in leading past downturns:
Read more about this interesting new indicator at EconBrowser and at the Chicago School’s website.
caviat from the working paper, see first and last sentence:
http://research.chicagobooth.edu/igm/events/docs/2010usmpfreport.pdf
“…In forecasting tests, the new FCI outperformed a variety of alternative measures in recent years, but not so during earlier periods. In analyzing this performance, we found that both purging the FCI of macroeconomic influences and expanding coverage to a wide number and variety of variables contributed to its relatively better performance in recent years. The exclusion of macroeconomic influences contributed to this improvement somewhat more than the expansion
of coverage. The overall index performed noticeably better in recent years than any of its major subcomponents (rates/spreads, asset prices, surveys, quantities, and so on).
Our finding that the relative predictive performance of our new FCI was unstable over time reconfirmed earlier findings of instability for an array of financial indicators. Our index seemed to work especially well in times of unusual financial stress emanating from within asset markets…”
You tell us it is “new”, then you say it has a good “track record”. Which is it ?
can a new indicator not be backtested?
Why only one comment? The topic seems to be a huge one. Coments must be being edited? How can I use this indicator on me trading platform?
“For example, a big gap between yields on long-term relative to short-term bonds often signals that faster real economic growth is coming, while an increase in the spread between risky and safer yields is often observed prior to an economic downturn.”
these are two important indicators for me. as things stand now, the 2yr/10yr treasury yield spread is at an all time high (close to 300bps) and the spread between freddie and treasury debt is at an all time low (63bp). again, if you keep things simple you will have a hard time not being constructive re equities. imo
big yield spreads represent inflationary fear which usually correlates to economic expansion, low unemployment and rising equity values.
and they can signal coming stagflation…….the road i believe we are headed to.