Are Tech Book Sales a Leading Economic Indicator?
by Madeline Schnapp
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Pages: 1, 2, 3, 4
More Than Just a Coincidence
What the data suggests is that in this economic downturn, tech book sales appear to be a useful leading economic indicator (coincident with the stock market indices). The close correlation of O'Reilly's technical books sales to the NASDAQ over a two-and-a-half year period of observation certainly appears to be more than mere coincidence. We do not have access to a compendium of publisher sales data from a retail vendor such as Amazon, but a plot of all tech book sales data at Amazon versus the NASDAQ and several of the aforementioned economic indicators would certainly be interesting. The data also suggests that segmenting book sales data along economic sectors might be useful in gauging future economic downturns of other sectors of the economy.
The correlation of the data begs the question as to why tech book sales would track the NASDAQ, or in other words, what is it about consumer purchasing behavior that leads to the trends we observed? As mentioned previously, the behavior of the NASDAQ is a reflection of future earnings expectations of corporations three to six months in the future. Technical book sales closely track the need of technical people to acquire new skills at some point in the future. These purchases may reflect work in a pipeline, or new projects in the works, and are thus a gauge of future expectations.
I posed this question to Hal Varian, Dean of the School of Information Management and Systems at the University of California, Berkeley, and co-author of Information Rules: A Strategic Guide to the Network Economy. His response was, "The stock market is supposed to represent the value of the physical capital (machines) and the intangible capital (brands, reputation, patents) that a company owns. In the last boom, we saw the value of both kinds of capital in IT explode (as measured by the NASDAQ), since investors thought these companies would be very profitable. Of course, this physical capital is highly complementary to human capital in IT-related areas. Workers who had IT-related human capital (knew programming, system administration, and so on) received high wages. Hence, workers with related skills, who wanted to acquire more human capital (get higher wages), bought O'Reilly books in order to do so. So the same factor -- the belief that IT was going to be a very profitable investment -- drove investor behavior in the stock market and knowledge workers' investment in technical books."
What's the Future
If we accept the premise that tech book sales are a leading economic indicator, the data suggests that we haven't hit bottom yet but aren't falling off an economic precipice as we were earlier in the year (the events of September 11, 2001, notwithstanding). After declining sharply for nine months, the NASDAQ, manufacturing data, and O'Reilly tech book sales appear to be approaching some sort of bottom. In business cycle jargon, that would mean we are between business cycle phase number 2 (the trough) and phase number 3 (the recovery). The CCI and HWI are still falling, but if we are transitioning between phase number 2 and 3, we should see those indices begin their inflection in the next month or so. We are now in a period where the data is mixed, indicating a period of economic fragility. We will continue to watch sales at Amazon closely. A sustained period of strong sales would suggest a stronger economic outlook three to six months in the future, while a sustained period of weak sales would suggest continued weakening. The true test of whether or not all of this is mere coincidence will be if O'Reilly's tech book sales at Amazon predict a turn around.
Bibliography
1. Tainer, Evelina M., Using Economic Indicators to Improve Investment Analysis, 1993, John Wiley and Sons, New York, 270 pp., ISBN: 047158
2. Moore, Geoffrey H., Business Cycles, Inflation, and Forecasting, NBER Studies in Business Cycles, no. 24, 2nd Ed., 1983, Ballinger, Massachusetts, 499 pp., ISBN: 0884102858
3. Rogers, Mark R., Handbook of Key Economic Indicators, 1994, Irwin Professional Publishing, 298 pp., ISBN: 0786301937
