In the computer world it’s called “garbage in, garbage out.” Or simply “GIGO” for short.
It refers to computer code.
If the code is wrong when it goes in, the software or program will never work coming out. The same statement applies equally to economists and their many forecasts.
They put mountains of data into their models. Stacks of government statistics, surveys of business owners, other estimates of economic activity, and much more.
It’s all largely incomplete data and it produces flawed and inaccurate reports and forecasts. It’s a simple case of garbage in and garbage out.
But that doesn’t mean the future of the economy is impossible to predict. You just have to separate the garbage.
This economic indicator cuts out all the garbage.
The Ultimate Economic Indicator
The economy is made up of billions of decisions by individuals based on billions more factors.
It’s tough to track and even tougher to predict.
However, there is one way to get an idea of the economy’s next move.
That way is jobs.
Now, I’m not talking about the monthly government jobs report. The monthly unemployment data has been so manipulated and skewed over the last few decades I don’t know anyone outside of the media who pays much attention to it anymore. Those with their own money on the line sure don’t pay attention to it.
What I am talking about with jobs is what people are doing with their jobs.
When the economy is truly strong, businesses will aggressively hire new people. They’ll offer better pay, more benefits, and whatever it takes to attract talent from competitors.
Also during the good times, people will tend to leave their jobs confident they’ll have a better one soon or, demand for them is so high, they already have a new job lined up.
The exact opposite happens during downturns. Businesses don’t hire. Workers tend to be more focused on keeping their jobs than exploring for opportunities elsewhere.
As a result of all this, a measurement of job turnover called “voluntary quits” soars during boom times and collapses during recessions.
So the rate at which people are voluntarily quitting their jobs is, has been, and will be highly correlated with true state of the economy.
It’s also why this chart, recently featured at A Dash of Insight, is so important.
It cuts out all the natural job creation and destruction that normally occurs and shows the rate of “voluntary quits” throughout the United States:
As you can see, voluntary quits correlates with the economy. It rises during periods of expansion and recedes during recessions.
It’s pretty much the perfect economic indicator.
It’s really simple.
There are no biased models. No politically-driven statistics. No surveys of what people feel. In other words, there’s no garbage.
It’s based purely on what people are actually doing and the economic factors they’re reacting to.
That’s what makes it great and how we can use it to see what part of the economic cycle we’re actually in.
The Long View
As we’ve long-predicted here, the long-term economic trend is and will continue to be up.
Improvement is the natural state of people’s lives. Very few people wake up and say, “I’m going to do a bad job today.”
As a result, growth is the natural state of the economy. It’s why periods of expansion tend to be long and recessions - depending on how much they are interfered with by politicians - tend to be short.
Right now all looks good and, looking at the voluntary quits rate, looks even better.
People are becoming more confident about their personal job prospects. The economic growth with will follow. And it will benefit a lot of the lagging sectors in stocks.
The time to get worried will be when people are overconfident and start to leave their jobs too much. But looking at the chart (and adding in population growth), that time could easily be two or three years away or maybe even more.