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A Framework That Provides Clarity

During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Tech Consumer Conundrum


With CNBC looking more and more like The Weather Channel, and the Nasdaq completing a losing week, it's easy to assume the next two quarters will not be pretty ones for most tech stocks.

Another dose of bad news crossed the wires this week when The Conference Board, a privately funded organization that tracks economic trends, said consumer confidence fell 0.2% in August after a 0.1% decline in July, the first back-to-back drops since 2001. Even worse, the respected University of Michigan Consumer Index slumped 13.3 points this month on top of an 8.6-point drop in August.

The measures are particularly important in a period in which consumer dollars are doing much of the work that has kept the tech sector afloat. Case in point: Dell (DELL:Nasdaq) . The giant PC maker had a tough time last quarter despite selling a record number of computers -- at prices too low to sustain profitability. So, how bad will the next quarter look if volume heads south? Indeed, shares of Dell dropped to a 52-week low this week.

A similar question could be asked of Apple (AAPLE:Nasdaq) : If iPod sales are a prime driver of the company's growth spurt, what happens if consumers tighten their belts and think twice before buying pricey but nonessential gadgets?

There are other negative indicators popping up as well: the CPI rose 0.5% in August as gasoline prices surged by more than 7%; retail sales also declined by 2.1%...

Lakshman Achuthan, managing director of the Economic Cycle Research Institute, looks at the Long Leading Index (LLI), essentially a basket of key indicators, as well as the shorter-term Weekly Leading Index (WLI). Both are holding up, he says, "which suggests to us in the aftermath of Katrina the fundamentals were such that the recession risk is low."

It's worth noting that unlike the CPI and consumer confidence indices, the WLI contains two weeks of post-Katrina data. "The weekly index shows that some of the shine has gone off [as a result of the hurricane] , but it's not plunging at all."

Achuthan says the LLI, which dates to 1919, has been remarkably accurate at predicting the effect of economic shocks on the overall economy, including the effect of Pearl Harbor and the market crash of 1987, neither of which pushed the economy into recession. It also tracked the recessionary effect of the first Gulf War and the oil shock in late 2000...
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