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By New_Deal_democrat January 4, 2018 10:48 am
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My K.I.S.S. forecast for the first half of 2018

At the outset of every year I lay out a forecast for each half.  My method of forecasting is pretty simple -- in fact so simple, I call it the K.I.S.S. method.  Even though the Index of Leading Indicators is the statistic most denigrated by Wall Street forecasters, it has the inconvenient habit of being right more often than the highly-paid punditocracy, especially at turning points.  Since I'm not a highly paid Wall Street pundit, I simply rely upon the LEI for the short term, and several methods of looking at long leading indicators for the second half of the year. 

I am only discussing the first half of this year in this post.

The K.I.S.S. approach is in contrast to most of what you will read.  Unfortunately the link is now dead, but research has shown that what most forecasters do is simply extrapolate current trends into the future.  Thus they completely miss turning points.  This is why you can be months into a recession with most commentators still unaware of the turn.

Meanwhile, while there are a few Pollyanna's, the internet is infested with Doomers -- who see bad news as portending worse news and good news as evidence of a bubble that is the imminent harbinger of bad news. Since we are always on the cusp of Doom, they are no help either.

My approach is to examine a bunch of data points with established track records of turning in advance of production, spending, employment, and income. If most of them have turned, we have trouble. If not, we should be OK. 

Turning to the first half forecast, let's look at the Conference Board's Index of Leading indicators, which forecasts growth about 6 to 8 months out:

This year the call is pretty easy.  With the exception of a hurricane-induced whipsaw in September and October, for the last year the L.E.I. has improved by about .4% a month. This strongly suggests clear sailing in the first half of 2018.

By the way, if you wanted an even easier, quick and dirty approach to a short term forecast, you can simply chart weekly initial jobless claims and the S&P 500 (both of which are components of the LEI).  If both of those are still making new lows/highs respectively (and they have been), then the economy should be in good shape for the next few months. 

Here's what they look like now (jobless claims inverted, right scale):

They're good and so is the near term economy.


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