Now it's indices behaving badly

As if the City did not have enough to worry about, economic indicators are "misbehaving" more than ever. The odd index might buck the overall trend occasionally; now an unprecedented number are doing so in tandem.

Research by Commerzbank has shown that many key indicators give investors a deceptive picture of the real state of the world economy, and hopes of a global recovery are the result of reading a series of "false signals".

If the recovery were real, say the analysts, the indicators would be saying one thing, but in many cases they are saying the opposite, effectively misbehaving with the traditional recovery pattern.

Recent trading on equity, bond and currency markets has been dominated by the big macro-economic questions, and particularly focused on the strength and likelihood of a recovery in the US. With each report published, the debate has been reopened, and created unprecedented levels of market volatility. But Commerzbank strategy analysts found that when the big economic indicators are compared with the actual effects they are supposed to show, the correlation is way off.

"The tried and tested indicators don't appear to work," says Commerzbank strategist Mark Tinker. "By trying to impose the traditional framework on the recovery, investors are failing to see what they expect. This leads either to false predictions based on pattern-repeat, or the missing of actual events because they are not supposed to happen."

The chief problem, Mr Tinker says, is that according to the traditional pattern of recovery, the low interest-rate environments in the UK, US and eurozone countries should be creating a chain of events that include rising investment, rising money supply, rising output and rising profits. He believes that waiting for those to happen is as misplaced as was waiting for higher rates to curb consumer spending.

In fact, the behaviour of the consumer is central to the misbehaviour of the indicators. UK consumer confidence reports have varied wildly with spending levels, and the phenomenon has been particularly stark in the US where retail sales figures have swung well away from the Consumer Board (CB) confidence index they are meant to track.

Mr Tinker adds: "Consumer confidence is supposed to rise ahead of consumer spending and sustain the growth needed for recovery, but it is a volatile series with little follow-through to expenditure."

Other indicators are also showing the "wrong" things. The employment indicator is supposed to be showing a sharp increase, but is in fact moving very slowly. The investment spending indices are not rising when they should be, and nor are the equivalent indicators for money supply. Household savings ratios – the source of much concern about the health of the consumer – is rising just when it would be expected to fall.

To confirm the phenomenon still further, the Commerzbank analysts have found a number of market indicators also "behaving badly". Yield curves, credit spreads and risk premiums are all "diverging from the script" of a traditional recovery model.

"The failure of reality to match up to this theory is a root cause of volatility in markets," says Mr Tinker.