The Insider's Guide to Economic Forecasting

 

The slow recovery in CIL reflects weak demand for credit from businesses that are hesitant to make new investments, especially if they are already carrying a lot of debt. It also reflects tighter standards by banks in response to the increase in bad loans following the excessive lending of the boom years. The Federal Reserve's quarterly survey of senior loan officers at major U.S. banks also sheds light on banks' willingness to extend new credit.

A good way to gauge business investment trends is to check commercial and industrial loans.

This survey is doubly relevant for Inc. readers because it asks loan officers about the movement of standards for small and medium-size businesses as well as for large corporations. In the first quarter of 2003 the survey provided good overall news for the supply side of new lending, with only 10.7% of banks reporting tightening of lending standards, compared with 22% in the previous quarter. But for small companies, the share of banks tightening standards actually increased slightly, from 13.8% in the fourth quarter of 2002 to 14.5% in the first quarter of 2003. Look for any flattening in the decline of CIL in coming months as a sign of life in the demand for credit, and look at the quarterly Fed survey (out in July) to see if banks are loosening up, especially for small firms. While CIL may not actually begin to pick up until late 2003 or into 2004, in the interim you should look for a leveling off of the decline. That may be a good sign that a recovery is afoot. By the time CIL actually picks up, a recovery is almost certainly well on its way.

Data: CIL is released by the Federal Reserve weekly for "large commercial banks" and monthly for "all commercial banks." You can follow the latest press releases here: www.federalreserve.gov/releases/h8, and get historical data and analysis via the St. Louis Fed at: research.stlouisfed.org. The Federal Reserve's Quarterly Bank Officer Survey is available at www.federalreserve.gov/boarddocs/SnLoanSurvey.

Semiconductors

Most every business is somehow tied to the technology sector. Because of this, you can tell a lot about both the health and direction of the ailing sector by keeping an eye on the semiconductor industry, as chips are used in just about everything produced these days.

One of the best gauges of movement in the chip market is what is known as the "book-to-bill" ratio, which compares new orders "booked" to actual shipments being "billed." Steve Cullen, director of semiconductor research services at In-Stat/MDR, a market research firm, explains that the book-to-bill ratio is "great for the nonprofessional economy watcher because it gives a quick, reliable indication of whether things are getting better or worse."

The ratio was a good predictor of investment in technology during the last recession. When the ratio is one, things are at steady state. For every $1 million in past orders the company bills for, it's booking another $1 million in new orders. When bookings exceed billings (a ratio over one) it signals that demand is picking up. During the 1990s, the book-to-bill ratio for chips was such a strong predictive indicator that it began driving stock prices of companies releasing the information. As a result, most decided to pull the plug on disclosure.

What companies still do make public are bookings and billings for "semiconductor equipment" -- i.e., the materials that go into making chips. The book-to-bill ratio began falling from a high of 1.46 in March 2000, about six months before investment in computers and software hit its peak. It bottomed out at a dismal 0.44 in April 2001 and, after making a brief rebound in the first half of 2002, has been below one for the past nine months. In May, the book-to-bill stood at 0.89, with new bookings at $751 million, down 32% from those posted a year earlier. Pay attention in coming months to whether the book-to-bill continues to slide or breaks above one.

Data: The book-to-bill ratio is measured by the Semiconductor Equipment and Materials International; get the monthly press releases at www.semi.org/web/wpress.nsf/url/booktobill.

Commercial Structures

Investment in computers has been growing strong for more than a year, yet business investment in structures -- such as office buildings, factories, hospitals, and other institutional buildings (the category also includes utilities and mines) -- has yet to recover. Insiders such as Richard Berner, Morgan Stanley's chief U.S. economist, have referred to the end of this construction bust as an important "milestone for recovery."

 PREV  1 | 2 | 3 | 4  NEXT