What Financial Conditions Tell Us (Two Charts & A Prediction)

It seems every bank, including central banks, publishes a financial conditions index these days. And because financial conditions typically lead the economy, it makes sense to track them. In fact, they might contain even more information than they get credit for. They might offer the elusive “crystal ball” that foretells our economic fortunes.

Sound far-fetched? Spend a few minutes with this week’s pictures and talk, and you’ll be well equipped to judge for yourself. We start with seven of our favorite indicators, shown in the table below:

With one exception, all of the indicators measure a separate piece of the economy’s financial side. We add business earnings (the exception) because they interact closely with financial conditions. When earnings are healthy, stock prices and business credit conditions are usually healthy, too, whereas weak earnings usually weigh on stocks and credit.

Instead of melding the indicators into a single index, though, we think it’s more revealing to treat them individually. The chart below shows each indicator in the quarter before and the quarter of the last nine business cycle (BC) peaks, although with less data for lending standards, which the Fed began surveying for the first time in mid-1990.

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