Improved Performance of Leading Indicators Doesn’t Necessarily Reflect a Reviving U.S. Economy

Despite leading indicators showing some improvement as signified by a rise in home sales and stock prices, experts agree that the economy isn’t necessarily making a turn for the better. Many analysts believe that we have a long way to go before we can see significant improvement.

So if the economy as a whole is still suffering, why are we seeing small changes with the leading indicators? Here are a few reasons:

• Home prices have plummeted. According to the National Association of Realtors, existing home sales rose 6.5 percent in December. However, the celebration is only short-lived with the realization that the increase comes from the biggest slump in prices since the Great Depression due to record-breaking foreclosures.
• Potential company buyouts increase hope in stocks. When people hear of the possibility of companies merging, hope in the financial markets is often revived, resulting in stocks advancing. We’ve seen evidence of this as some major pharmaceutical entities have recently spoken of prospective acquisitions, causing stocks in the sector to rise.
• The financial bailout is doing its job. Since the money supply has increased thanks to the Fed purchasing securities and lending more to banks, the leading indicators index increased at a time when it otherwise would have suffered.

The moral of the story is, while leading indicators may show some minor improvements, they are still associated with more significant issues that negatively affect the economy. So though it may appear that hope is on the horizon, it’s good to keep the big picture in mind, reviving an economy takes time; and in the case of the current recession, it could take years. The rise in home sales should not be taken as any indicator of a market bottom. It is also a good idea to continue monitoring mortgage rates and other housing-related news here for updates on the continually changing state of the U.S. housing market.