The composite index of coincident indicators provides information on what is happening now in the economic system, and is computed using four measures that reflect the current strengths and weaknesses of the economy.

The index of coincident indicators represents what is happening to the economy at the present moment, and its growth is a close approximation of the growth of business. Its trend reflects what is happening now to business activity The measures included in the computation of the index of coincident indicators are the following:

1. Employees on non-agricultural payrolls.
This indicator includes full-time and part-time workers and does not distinguish between permanent and temporary employees. Because the changes in this series reflect the actual hiring and firing of all but agricultural establishments, government agencies, and the smallest businesses in the nation, it is one of the most closely watched series for gauging the health of the economy.

2. Personal income less transfer of payments.
This indicator measures the real salaries and other earnings of all persons in inflation-adjusted dollars. This series excludes government transfers, such as social security payments, and includes an adjustment for wage accruals less disbursements. Income levels are important because they determine both aggregate spending and the general health of the economy.

3. Index of industrial production.
This index measures the physical output of all stages of production in the manufacturing, mining, and gas and electric utility industries. This index has historically captured a majority of the fluctuations in total output.

4. Manufacturing and trade sales.
Sales at the manufacturing, wholesale, and retail levels reflect trends in the economy and represent real total spending. That is, spending adjusted for inflation.

The economy is strong if employment, production, income, and sales are all growing rapidly. The business cycle is slowing down if the components of the coincident indicators are slowing down too.

Since the leading indicators have been chosen because they lead the economy, changes in the growth of the leading indicators also lead changes in the growth of the coincident indicators.

Investors should expect the economy to accelerate following a strong performance of several months in the index of leading indicators. On the other hand, the economy will slow down following a slowdown of several months in the index of leading indicators.

The relationship between the composite index of leading and coincident indicators is that a decline in the growth in the index of leading indicators is followed after several months in a decline in the growth of the coincident index. On the other hand, an increase in the growth of the leading index is followed after a few months by an increase in the growth of the coincident index.

(From Chapter 4 of my book Profiting in Bull or Bear Markets. Published also in Mandarin and on sale in China. The book is available at Amazon.com).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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