The most overrated economic indicators

A GDP report came out that revised third quarter economic growth down to a 2.2% annual pace—from the 3.8% originally reported in October. And then a bunch of lesser data releases contradicted each other and didn't really shed much light at all. As Ian Shepherdson of High Frequency Economics remarked in reference to an existing home sales release:

"this number tells us nothing at all about the future."

What was their "least favorite economic indicator?" "

It's got to be a number that comes out regularly and gets a reasonable amount of attention from the media and from markets, but that you think isn't all that informative and/or reliable."

Mark Zandi, Moody's Economy.com:

I cherish all economic indicators, although it is fair to say some indicators are more useful than others. It is also important to point out the indicators I value most vary according to where we are in the business cycle and what is driving the cycle. Having said this, the indicators that I generally pay less attention to include: FHFA house prices; weekly chain store sales; Challenger layoff announcements; and the producer price index. These indicators are either often misleading or the signal to noise ratio is very high and thus hard to interpret.

Jan Hatzius, Goldman Sachs:

My entry is the index of leading indicators, because it consists entirely of already-released information and the Conference Board's forecasts, without adding new hard information. Another one is factory orders, which is largely a re-hash of the durable goods release.

Bernard Baumohl, The Economic Outlook Group:

I would nominate the Index of Leading Economic Indicators by the Conference Board as one that most induces narcolepsy when it is released. This measure is merely a composite of other hi-frequency indicators that have already been published weeks earlier. So there's nothing inherently new in the LEI—and thus the least useful in my opinion.

Andrew Busch, BMO Capital Markets:

I would say the ABC consumer confidence. It's a weekly number that doesn't seem to make much impact on the markets....ever.

Harm Bandholz, UniCredit Markets and Investment Banking:

My least favorite economic indicator is by a wide margin the ADP employment index (hope that is prominent enough). The guys at ADP have repeatedly revised the calculation methodology so that their index has some ability to explain payroll changes ex ante. But the out of sample forecasting ability is just awful. I do not understand, why anybody should follow the index.

Kurt Karl, Swiss Re: The ADP report—too inaccurate and not early enough to be helpful.

Robert Barbera, ITG:

The consumer sentiment index. It lags changes in spending momentum. First they increase their spending. Then they read that spending is up and the economy is better. Then they tell pollsters they feel better.

Lakshman Achuthan, Economic Cycle Research Institute:

I'd nominate two for different reasons: GDP growth and the Conference Board's LEI. The former is misused and the latter is misleading.

GDP because it is falsely held up as the sole arbiter of recession, which can be hugely misleading, as in 2008, when, even in early September (pre-Lehman), when the economy had been in recession for nine months, most forecasters were still in “what recession?”

Just because GDP growth had been positive in Q1 and Q2, the latter due to the transient effects of the first stimulus package.

In fact, around June/July 2008, with the recession in full swing, the Fed was making hawkish noises about hiking rates (in the middle of a recession!) that the markets interpreted to amount to a one-percentage-point rate hike (from 2% to 3%) by year-end. The excessive fixation of economic forecasters on recent GDP data also led to major policy mistakes in Japan in the late 1990s, leading directly to sustained deflation.

Conference Board LEI because, even though its whole purpose is to predict recessions and recoveries, it has consistently failed to do so in real time. Case in point was April 2009, when its latest release showed a big drop—and without a single monthly uptick since June 2008, the Conference Board spokesman declared,

“There's no reason to think that this recession is going to end any time this spring or this summer”—when ECRI was predicting that the recession would indeed end by last summer.