Right now, there is one economic indicator that is really making the rounds: Citi’s US Economic Surprise index.
This index gauges how US economic data performs relative to expectations on a rolling three-month basis. A reading of 0 means that the last three months worth of data were on balance in-line with Wall Street estimates. The index climbs into positive territory when economic data is better than expected, and it goes negative when data disappoints.
Well, Pantheon Macroeconomics’ Ian Shepherdson fired out a tweet on Tuesday taking a big shot at the obsession over this reading.
The Citi surprise index predicts nothing, tells you nothing you didn’t already know, and takes no account of exogenous factors like weather.
— Ian Shepherdson (@IanShepherdson) March 17, 2015
Shepherdson, who was declared by Wall Street Journal as the most accurate forecaster on Wall Street in 2014, said that ADP’s number is not a leading indicator, meaning that it serves to value in looking towards the government’s official payroll report, typically released two days after ADP’s number.
And in February, he was right.
The problem with Shepherdson’s latest target of criticism is that Citi’s Economic Surprise Index is based on the US economy’s performance relative to expectations.
People see things like “since 2011″ or ‘in four years” and immediately think about where the economy was at that point: coming out of a massive recession and sputtering. But what this index really indicates is that economic data hasn’t been as good as Wall Street economists thought, not that it has been bad outright.
Many economic data points that are released are annualized numbers, meaning that in a given month the pace of say auto or home sales is at a certain rate were it to be kept up over the course of the year. Other indicators, like manufacturing readings, show whether things are expanding or contracting using 50 as the midpoint: above 50 is expansion, below is contraction.
And so with these, and most other economic indicators, it isn’t any one month’s report that matters, but the overall trend.
So while many economic indicators have been disappointing relative to expectations, most are still signaling growth. You can get a full overview from Trading Economics here.
But let’s look at auto sales, as an example.
In February, US auto sales were a big disappointment, coming in at an annualized pace of 16.2 million, missing expectations for 16.6 million. So, that seems like a huge miss. And it was, relative to expectations. But look at the last ten years of auto sales, and the trend is still up, even if disappointing over a single month.
In a note to clients following that report, Shepherdson wrote:
“Given the appalling weather across much of the country for most of February — with the exception of the relatively mild payroll survey week — we were surprised that industry analysts thought sales would be flat to slightly better, and their optimism has duly turned out to be misplaced. The automakers themselves blamed the weather, not unreasonably, and presumably they now look for a catch-up in March.”
And so while the start of 2015 hasn’t been that great relative to itself, we need to consider where the economy is at overall.
The unemployment rate is at 5.5% and payroll gains have been solid.
And a look at the Citi economic surprise reading over the last 10 years, and forecasters are not infrequently getting too excited about the economy.
Or maybe it just means that no one knows anything about the future. Which might be more reasonable.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.