Red Herrings: False Signs of an Economic Rebound

Because of the magnitude of the recent downturn, experts say some of the statistics that are widely used to track the economy are now red herrings—misleading, at best, when it comes to predicting a rebound. Here are three indicators that could lead investors astray.

Housing inventory measures the supply of unsold homes on the market. Right now it’s high—a 10-month supply of homes, up from the average of about five—and conventional wisdom says the housing market won’t recover until it declines. This time around, however, waiting for “normal” could cost you. In fact, an improving economy might mean more homes on the market, not fewer. Some banks are sitting on foreclosed properties, waiting for a friendlier economic climate before putting them on the market, and many homeowners are essentially doing the same thing. Stephen Kim, senior analyst at Alpine Global Real Estate fund, thinks home-building stocks “will rally while inventory levels are still high.”

It seems like a no-brainer: Once more people are working, stocks should rebound. But investors who rely solely on the official unemployment rate—the percentage of workers who are jobless—could be misled. The statistic excludes so-called discouraged workers who have given up looking for a job. And the data doesn’t capture companies that force employees to take pay and benefit cuts or furloughs. “You’d get a better idea just asking people on the street if they’re employed,” scoffs John Williams, founder of economic research firm Shadowstats.com. Strategists put more trust in weekly unemployment-claims data, a different figure that gives a clearer sense of companies’ hiring and firing.

Many market watchers are hoping for a modest increase in inflation, as a sign that the global economy is starting to crawl out of recession. But investors who watch the so-called core consumer price index (CPI), the most widely used gauge, might miss the first stages of a rally and lose out on run-ups in stocks of energy and raw-materials companies. Core CPI excludes the cost of food and energy, and analysts like Strategas economist Don Rissmiller think energy is where prices may surge first, as billions of stimulus dollars pumped into infrastructure projects stoke demand for metals and fuel. Investors looking for a better indicator than the CPI should watch prices for commodities like copper and oil.