Tuesday, December 21, 2004

After strutting around here in my most contrary manner, highlighting the terrible recent leading economic indicators figures for the US from the OECD and the Conference Board, I would be remiss if I did not admit that in November a record six-month decline in the latter's LEI index did not come to pass.
A gauge of future economic activity that had declined for five-straight months reversed course in November, signaling that the nation's financial engine is still gaining power even though the growth rate has slowed.

The Conference Board, a private research group, said Monday that its Index of Leading Economic Indicators rose 0.2 percent in November � slightly better than economists had been expecting � following revised declines of 0.4 percent in October and 0.2 percent in September.

The indicator, which is intended to predict economic activity over the next three to six months, now stands at 115.2 versus its all-time high of 116.5 in May. It stood at 100 in 1996. . . .

John Silvia, chief economist at Wachovia Securities in Charlotte, N.C., said the Conference Board data indicate that "the economy will be slower in mid-2005 than it is today." However, the recent strength of the stock market suggests that "overall, economic growth is still very positive."
Silva points out the most important reason behind the recovery of the Conference Board's LEI. Even though the stock price component makes up a mere 3% of the overall index, it was the number one net contributor to the index's November rise.

Is this simply rational and eminently justifable exuberance on the part of stock traders? As of 2:25pm EST today, the price-to-earnings ratio of the S&P 500 stands at 21.43. Granted this is down considerably from the frothy 44.2 of December 1999, the cusp of the popping stock market bubble. Nonetheless, it is still significantly above the long-run mean of about 15.

Now George W. wants you to think that stocks are magical money machines, and I grant you since 1995 they have been, bubble bursting and all. However, high stock prices don't say much of anything anymore about real economic activity -- jobs, wages, investment, etc. All a rising stock market tells us is that capital is feeling its oats again. We'll have to wait and see what crumbs -- if any -- fall out of the feedbag.

And don't forget that one month does not a trend make.

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