Which leading indicator provides the best signal of economic direction?
With 40 years of tracking data, Ellis found that real personal consumption expenditures i.e., consumer spending, always preceded most other indicators by one or two quarters. In every cycle momentum starts in consumer spending and then moves to manufacturing and capital spending. These three elements are the drivers of corporate profits. Once companies feel confident about the economy, they invest and finally add workers. The employment rate then is a lagging indicator. Thus Ellis believes that consumer spending drives employment, that workers get hired after business gets good and are fired after business turns poor. What then drives consumer spending? The consumer is affected by hundreds of factors such as the stock market and terrorism. However Ellis claims two drivers are primary – real average hourly wages and interest rates. Factors like energy prices impact inflation and thus are accounted for in wages and interest rates. What drives your business? According to Ellis every manag
