Bill Evans trashes his leading index again

Westpac’s Leading Index for November is out and rose strongly:

The annualised growth rate of the Westpac Melbourne Institute Leading Index, which indicates the likely pace of economic activity three to nine months into the future, was 3.9% in November, above its long term trend of 2.8%. The annualised growth rate of the Coincident Index, which gives a pulse of current activity, was 2.7%, below its long term trend of 3.0%.

But as Bill Evans himself notes, the index no longer works:

The Index is sending a somewhat more buoyant growth signal than we current expect to be the case. Over the course of the last six months the annualised growth rate in the Index has increased from 1.5% (well below trend) to 3.9% (above trend). Our current forecast for GDP growth over the course of 2013 is 2.75%, below trend growth in the economy. Note that the growth rate in the Index should not be interpreted as the forecast growth rate in the economy. Rather we use its growth rate relative to trend growth in the Index to gauge likely growth in the economy relative to the economy’s trend growth.

Trend growth in the Australian economy is around 3.25%, although 2012 is likely to be the first year since 2007 that growth in the economy has exceeded that trend. We use a range of tools to forecast growth. Our forecast for growth in the economy in 2013 is 2.7% – below trend growth whereas to date the Index is pointing to above trend growth, at least in that 3 to 9 month “window”.

The Coincident Index has proved a much better guide to future growth for the past tow years and it continues to signal weakness. Not that any of that reality will penetrate ye olde MSM thick skull:

er20130123BullLeadingIndex (1).pdf by Belinda Winkelman