Leading Economic Indicators

The weekly leading indicators re-entered a firm uptrend at the end of Aug. 2010. The positive trend remains intact. The indicators portend continuing economic recovery through Q1 '11. These
indicators were not entirely helpful over Half 2 '10, especially as retail sales -- a coincident
economic indicator -- turned up in Jul. and has been trending positive since. Moreover, the weekly
leading data badly overstated the pace of recovery from 2009 - early 2010, and then badly over-
stated the spring/summer slowdown of this year. The data has its uses, but one has to adjust for
the substantial lack of linearity between the indicators and implied economic performance.

the monthly US Conference Board leading data is trending positive and has painted a less misleading
picture of the path of economic of economic recovery in 2010 than did the weeklies. The monthly
new orders diffusion index turn positive again in Sep. after several months of decline. It has turned
sharply higher and the reading for Dec. matched the cyclical high points seen over Apr. / May.
This indicator has also indicated the prospect of continuous recovery since 03/09.

My longer term leading economic indicator has remained postive since late 2008. Readings
through most of 2010 have been more modest than at the end of 2008, when the indicator was
exceptionally strong. The partial loss of momentum in the trend of the indicator reflects a
rising real oil price, a moderation of the real wage and the error by the Fed of tightening
monetary liquidity earlier in 2010 even as the broader measure of credit driven liquidity
struggled to stay flat. The QE '2 easing program started this past autumn will rectify that mistake
of judgment by the Fed and strengthens the indicator.

My inflation pressure gauges turned up again around mid 2010, and are in firm uptrends.
Capacitiy utilization % is once more recovering, but the real action has been from sharply
rising commodities prices. Clearly, higher inflation readings are ahead as the upturn in the
commodities baskets passes through the system.

In sum, the indicators suggest an acceleration of both the pace of economic recovery and
that of inflation as we move into 2011. In turn, the longer term indicators point to another
year of economic recovery ahead.
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The long Treasury yield is an ok economic indicator on its own as it encapsulates the collective
view of investors and traders regarding the outlook for economic growth and for inflation.
$TYX chart.