If you want to know whether more businesses are going to be hiring, you should probably be looking to the Conference Board Consumer Confidence index, specifically its “present situation” component.
In a new Liberty Street Economics blog post, New York Fed researchers Jason Bram, Robert Rich and Joshua Abel show that the business research firm’s monthly survey has amazing predictive powers for the employment data that comes from the Bureau of Labour Statistics’ widely-followed, monthly jobs report.
Each month, the Conference Board sends out a survey to 3,000 participants asking five questions about their perception of current and expected business and employment conditions, plus one on their own family incomes. It comes out the last Tuesday of each month.
The New York Fed argues the index is so good that it can basically predict the future.
First, they take a look at the the survey against unemployment.
According to the researchers, the index frequently knows what will happen to the unemployment rate a couple months in advance:
It’s hard to tell from inspecting the chart, but the highest correlation (0.89) occurs at a two-month lead; that is, the Present Situation Index is even more strongly correlated with the unemployment rate two months into the future than it is with the concurrent rate.
Next they look at the payroll growth:
Here again, they write, the index shows the same predictive power:
Once again, it’s very apparent that the two measures move closely together, and again formal analysis reveals that the Present Situation Index tends to foreshadow movements in employment by a couple of months. In particular, twelve-month changes in the index are most highly correlated with twelve-month job growth four months into the future — the correlation is 0.83.
It also does sustained downturns:
Whenever the year-over-year change in this index has turned negative by more than 15 points, the economy has entered into a recession. The only time it was a bit late in doing so was going into the 1982 recession, which is often considered the second part of a “double-dip” after the 1980 recession. But in all four of the other post-1980 recessions, this signal turned negative just before the recession began.
So is there anything it can’t do? Yes. The researchers note the index basically asks yes or no questions, and can’t capture magnitude, and they note there appears to be a natural floor to how low the reading can go.
But rare is the occurrence when the index begins to drift. Much more often are the instances it has outmaneuvered pundits, having successfully predicted the economy would hold up in the face of the 1987 stock market crash, as well as the 1997 Asia crisis.
Unfortunately, the Present Situation Index decreased to 70.7 from 73.6.
So things may soon get bumpy.
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