Leading Indicator Index Revised, but Critics Say It's Not Enough

From Reuters

Friday marks the first use of a revised Index of Leading Economic Indicators, but economists question whether it will be a much better forecaster than the old.

After a two-year process, the Commerce Department has slightly revised the set of components that make up the gauge that forecasts movements in the economy.

The new index for January, to be announced Friday, was expected to rise 0.6%.

The changes are intended to make the index more reliable and reduce the need for monthly revisions. While economists welcome the changes, some argue that more are needed.

Further, they say the service industry and international activity remain under-represented in the index, which long has been weighted in favor of manufacturing and construction.

"We don't know yet whether the new series will be much better than the old," said David Wyss of Data Resources Inc. "But a casual look suggests it won't be much better." The old index has a mixed record for predicting cyclical changes.

The index, first published regularly in the early 1960s, has 11 components, ranging from movements in stock prices to average weekly working hours. In the revised index, two components have been dropped, two altered and two added.

Those dropped are changes in the level of business and consumer credit outstanding, and business inventories "on hand." Data on both were not available at the time of the initial release of the index. Revisions were inevitable.

Alterations have been made to data on the delivery pace of goods and materials to companies--or vendor performance--and price changes of sensitive materials, such as lumber.

The two components added are changes in manufacturers' unfilled orders and a measure of consumer confidence.

Evelina Tainer, senior domestic economist at First Chicago Corp., gives the government's changes the benefit of the doubt. "They're trying to improve it," said Tainer, a past critic of the index. "I think we should see how well it does."

Officials at the department, for their part, say the changes are part of an ongoing process. "We're hoping that this won't merely be the end of it," one official said.

According to Commerce data, the new and old indexes gave similar signals about the economy's past cycles. As a rule of thumb, three consecutive drops forecast a recession.

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