The track record of economists in predicting events is monstrously bad. It is beyond simplification; it is like medieval medicine. ~ Nassim Nicholas Taleb
In last week’s post, I mentioned economic conditions and a reader asked if I track any macroeconomic indicators to inform my business decisions. Regrettably, while there are plenty of indicators that do an excellent job of telling us which direction the economic winds are blowing, the fact of the matter is, they are not very good at predicting when those conditions will change.
Some might argue predicting economic changes (or market changes for that matter) is a mug’s game. Instead, I’d argue economists have such a bad track record of predicting events due partially to the fact they spend most of their time thinking about what people ought to do rather than what they actually do. Knowing this, there is value in creating your own set of leading economic indicators. By paying attention to what people/businesses around you are actually doing I contend one can develop a “spidey sense” for whether a change to business conditions is on the horizon.
Here are three of my own leading indicators which I share with you in the hopes of inspiring you to create yours. When considered alongside macroeconomic data, these can provide some clues about the direction of the economy.
The Beyoncé index
Because most of us need haircuts, a hair salon is a great place to watch how changes in economic conditions alter personal behavior in real time. Consider, for example, the product sold in salons. An economist will likely tell you the decision to purchase most products in a hair salon is not rational. In addition to costing significantly more than a comparable product at a store like Walmart or online at Amazon, it’s not clear that one product is functionally different from another. My sense is, deep down inside we all know this but, when times are good and irrational exuberance takes over our wallets, what’re a few extra bucks for a chance to have hair like Beyoncé?
Another piece of data worth paying attention to is how long it takes to schedule a color/straighten, hair treatments that, seems to me, would serve as excellent replacements to waterboarding. Due to the time required, costs involved, and do-it-yourself alternatives, unlike haircuts, hair treatments are not recession proof and when times are good will see increased demand. So, the next time someone in your life (or the CIA) books a color/straighten treatment, ask them if it’s taking longer than normal to get an appointment time.
The parking lot index
Much in the way people talking about stocks at a cocktail party can serve as an indicator the market is due for a correction, if our company parking lot fills up with new vehicles and the contractors on our street are suddenly driving new trucks, I have learned to expect an economic correction on the horizon.
With the average transaction price for new vehicles now at $36,270 (KBB), and the fact that reliable cars can easily stay on the road for over 200K miles (CR) at a reasonable cost (Your Mechanic), it’s clear many auto purchases are not rational. Instead, what I have noticed is as economic conditions yield above-average earnings, there is a tipping point when businesses and individuals suddenly find it increasingly difficult to avoid the siren call to spend money and rationalize unnecessary purchases.
The EX-CAP index
Whether your business relies on machine tools, tractors, or trucks, the salespeople who sell you that equipment are an absolutely invaluable source of leading information regarding the economy. Not only will they be able to tell you about asset sales before those numbers get wrapped up into macroeconomic data, but they’ll also be able to tell you about deals in the works and the lengths companies are going to, to bring new capacity online. Now, some might contend it’s impossible to know whether these purchases are a natural outcome of an expanding economy or government policy, but if you pay attention long enough, you’ll recognize when asset purchases are being driven by hope and optimism rather than business fundamentals.
So what do I do with all of these data?
As someone responsible for a business (and a household) that depends on cash flow to pay the bills, my interest is not in predicting exactly when an economic correction will occur, rather in knowing when I need to start shoring up my balance sheet to make it through the next downturn. As Warren Buffett once said, “Predicting rain doesn’t count. Building arks does.” If making payroll or a mortgage payment depends on a steady paycheck, consider paying attention to the world around you to see if the party is about to end.
On that note, how about some music for our Spotify playlist? Going to opt to go old school and leave you with a cut from Destiny’s Child called “Bills, Bills, Bills.” For those of you who were hoping I’d add that timeless classic “Bootylicious” to our playlist, kindly read my article titled Balancing Authenticity against Risk: How Much is too Much and consider that my wife would likely have considered that particular song/video to be too much.
Video not displaying properly? Click here.