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Why Europe’s leading indicator, a crystal ball, is running higher

Xun Yao Chen

Macro European indicators influence restaurant companies' sales (Part 9 of 12)

(Continued from Part 8)

The indicator closest to a crystal ball

The OECD (Organization for Economic Co-Operation and Development) leading indicator is another index that money managers, traders, policymakers, and Wall Street analysts use to assess the outlook of countries outside the United States because, as the name suggests, it’s a forward-looking indicator. While the index applies more to the overall economy and isn’t particularly tailored to the service or food industry, it’s one of the earliest indicators to show possible turnarounds in business trends. This is important because it affects employment, consumer confidence, and disposable income—which are very relevant to restaurant sales.

History and background

The OECD leading indicator for the United Kingdom bottomed in late 2011, and the corresponding indicator for the Eurozone turned a corner in early 2012—much earlier than the alternative indicators we’ve examined so far. The indicator is a composite of several sub-indicators that have historically been able to help identify key turnarounds in business cycle. While the OECD group, based in Paris, uses different components to create the indicator for each country, common factors include manufacturing inventory orders, financial markets, and business confidence surveys.

According to the institution, the magnitude of change doesn’t translate to strength or weakness in economic growth because of how the index was constructed. So it’s best used as an indicator of whether economic activity will be better or worse in the medium term. While the leading indicator isn’t perfect, it has historically been very successful in finding key turn-ups in business cycles. The tricky part is when year-over-year growth is falling, in which case the indicator could signal a looming recession, but in reality the fall could simply mean slower growth ahead.

June data shows an uptrend

Year-over-year growth for the United Kingdom has been mostly flat since the end of 2012, treading around 1.5% growth—which is neither negative nor positive, and which is something investors should look out for. The indicator for the Eurozone has been increasing steadily and now stands at  0.86% growth as of June. The indicator for Russia appears to be turning around, with the year-over-year change bottoming at -1.32% in November 2012, and the most recent data showing -0.47% for March 2013. As long as these indicators don’t start rolling over, we should see higher employment growth and consumer confidence ahead, which would have a positive effect on restaurant sales. Even if the indicator does roll over, investor may not want to rely solely on the leading indicator.

Continue to Part 10

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