A Stocks, Bonds, Consumers Leading Indicator

Abstract

Real, total consumption growth deviations from normal stock market wealth effects lead economic growth in advanced economies in the Americas, in Europe and in AustralAsia, as shown by Breeden (2013). Consumers’ expenditures reflect their information about employment opportunities and future real wage growth, as well as information about the volatility of future investment returns. Previous research has shown that stock prices and the slope of the term structure of interest rates reflect forecasted economic growth and profits. In this applied article, we put together the readings of stock market investors, bond market investors and issuers, and consumers (each rated by their Z-scores measuring standardized movements) in a simple, economically intuitive and powerful leading index of economic growth. It is shown that consumption deviations improve upon the signals given by the term structure and stock returns, and the combined readings of the “Stocks, Bonds and Consumers Leading Index” (SBCLI) developed here are quite competitive with more complex widely used indexes of leading economic indicators published by the Conference Board and the OECD.