Financial Sector Crystal Ball Makes Its Debut
The Center for International Business Cycle Research will launch an index Oct. 1 that will predict the health of the financial services industry.
Using six economic indicators, the index is supposed to show whether financial services are due for expansion or retrenchment, said Anirvan Banerji, an economist at the Columbia University-based research center.
"This index tries to anticipate cyclical swings in the growth of the financial services industry," Mr. Banerji said.
The index uses stock prices for the 40 financial companies that are in the New York Stock Exchange composite index, Dow Jones bond prices, M2 money-supply figures adjusted for inflation, the number of new building permits for private housing, the number of new construction contracts for commercial and industrial buildings, and corporate pretax profits for banking, finance, insurance, and real estate companies.
Distinctiveness of Index
Though some of these components are also part of the federal government's much-followed index of leading economic indicators, the financial services index breaks them out and combines them with figures not currently reviewed.
When it is introduced, the new index will give policymakers a tool to help them consider initiatives involving the financial services industry, which accounts for 15% of gross national product.
But at least for now, the numbers will be less helpful to bankers developing business strategies for their companies.
The latest index would have been a reliable indicator of past downturns, however.
Index Goes Negative
In April 1987, declines in bond prices, housing permits, and corporate profits turned the index negative. Growth in M2 began to slow in July, turning the index more negative. Sure enough, the stock market crashed in 1987, and financial services companies began a prolonged wave of cutbacks and restructurings.
The index figure for July 1991, the latest date for which data are available, is 4.9%, suggesting a slow upturn in the look for financial services.
Bankers do not yet have a tool they can use in planning, however. Even at Citicorp, where top officials helped plan for the index, there is no immediate plan to use the index in strategic planning, according to F. William Hawley, director of international government relations.
"It's important that public policy rest on better numbers," Mr. Hawley said. But the index "wasn't so much intended as something that would be directly applicable to a bank's planning right away. It's kind of pioneering work."
And statistics are not always the best predictors, according to Robert Hall, chairman of the business cycle dating committee at the National Bureau of Economic Research and a professor of economics at Stanford University. He said the current recession began even as many typical indicators - a negatively sloped yield curve, high interest rates -- were absent.