Last week I polled Kellogg School and Northwestern University economists on their favorite economic indicator, the premise being that the most widely watched number in the United States—the Dow Jones Industrial Average—paints a terribly inaccurate portrait of the economy.
Sergio Rebelo, a professor of finance, also responded with his own take on the matter along with a few more insights about the future of the economic recovery in the U.S.
“The best indicator of the overall health of the economy is still the level of per capita real Gross Domestic Product (GDP), which tries to measure the volume of production of goods and services,” he said.
“But it is an imperfect measure as President Kennedy stressed when he famously said that GDP ‘does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages; the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage; neither our wisdom nor our learning; neither our compassion nor our devotion to our country; it measures everything, in short, except that which makes life worthwhile.’ ”
While Rebelo considers GDP the best current indicator, that hasn’t stopped others from devising new ones. Rebelo points to Arthur Okun’s proposed misery index, which is the sum of inflation and the unemployment rate. “It is currently at 11.5, a relatively high value,” Rebelo said, a number that seems to jibe with current sentiment. There’s also been work on a happiness index, which is derived from survey data. “An interesting finding is that, above a certain income level, happiness increases slowly with income.”
Knowing the current state of the economy is important, but perhaps more valuable is where it’s going. That’s where leading indicators come in. Originally developed by Arthur Burns and Wesley Mitchell at the National Bureau of Economic Research in the early 20th century. Since then, they’ve been widely analyzed.
“Two popular leading indicators are new housing starts and new unemployment claims,” Rebelo said. He sent me graphs of the two indicators, with recessions highlighted in grey.
“The good news is that unemployment claims have come down quite a bit since their recent peak value in March 2009, suggesting that the labor market is adjusting,” he pointed out. “The bad news is that housing starts are still quite anemic. We are likely to continue to experience a recovery that is modest, as long as different indicators give different reads on the future of the U.S. economy.”