Interest in alternative data sets has exploded in recent years as investors scour the world for relatively obscure numbers that may offer insights overlooked in standard economic releases. Some of these figures are genuinely useful for developing an edge in trading and portfolio design, but there’s plenty of junk, too. Accordingly, caveat emptor applies when it comes to new and often untested economic and financial indicators. One intriguing set of benchmarks that’s caught our attention comes by way of LegalShield, which sells legal services products. The firm also publishes several alternative economic data sets, including the LegalShield Real Estate Index. In early February, the company issued a press release that noted that this so-called leading indicator was predicting weakness for existing home sales. A few weeks later, the official January sales report did in fact reflect a decline, according to the National Association of Realtors. One accurate forecast could be luck, of course, but Legal Shield’s data is certainly worthy of a closer look as a potential source of deeper perspective on economic trends. For some context, The Capital Spectator posed five questions to James Rosseau, Legal Shield’s chief commercial officer, about the firm’s alternative economic benchmarks.

You recently launched several indexes that use alternative data sources for measuring trends in a number of US economic sectors. What are the indexes and what sectors of the economy do they target?

Debuting in May, the LegalShield Law Index is made up of five indices: the Consumer Financial Stress Index, Housing Activity Index, Bankruptcy Index, Foreclosure Index, and Real Estate Index. Each index depicts the health of the US economy using LegalShield’s unique and proprietary database of member demand for and usage of legal services. The five LegalShield indices closely track a handful of key economic indicators, such as the Consumer Confidence Index (developed by the Conference Board), housing starts (reported by the US Census Bureau), and foreclosure starts (reported by the Mortgage Bankers Association). LegalShield publishes the Law Index monthly, on the sixth business day of each month.

How are the indexes constructed in terms of source data? Are the underlying numbers generated in-house at your company? Or do you use outside data and analytics?

The five indices are generated from LegalShield’s proprietary data, which tracks the demand for different types of legal services for the various areas of law over the past 15-plus years—actual consumer and business demand for various legal services provided by our closed panel of dedicated law firms covering all 50 states. Each time a LegalShield partner law firm receives a request from a LegalShield member, the request is logged as an “intake” within one of roughly 70 unique areas of law (e.g., real estate, criminal, bankruptcy), depending on the nature of the legal need. In aggregate, these intakes predict the health of the US economy.

What’s the intent of these indexes—what niche are they designed to fill? Are they intended as tools to forecast the results in conventional economic releases?

Each index is a leading economic indicator and is released in a more timely manner than traditional economic indices. Our index predicts economic activity that represent more than 70 percent of the gross domestic product of the United States. The LegalShield Law Index provides actionable intelligence about the direction of the US economy in the mid- to near-term.

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Have your indexes been formally studied or backtested? If so, is there a public web link for reading the results?

Each LegalShield index has undergone a battery of statistical tests overseen by a Ph. D. economist to validate its relationship to an existing economic indicator that sheds light on the health and direction of the U.S. economy. We are working on a site to house the data, though we are happy to provide the information to anyone who asks. Meantime, the LegalShield Law Index can be found here, updated each month:

http://connect.legalshield.com/legalshieldlawindex

What’s the basic logic for expecting that the data in your indexes will provide something new that’s not otherwise available for analyzing and anticipating economic activity?

The LegalShield Law Index is the only measure of its kind, in that it relies on a unique set of hard data: the legal matters opened each month by a huge number of individuals, heads of households and small business owners. Had the LegalShield index existed in 2008, it would have indicated the economic conditions six months in advance the economic conditions that precipitated the Great Recession. For this reason, we are excited to share our forward-looking data about the US economy, based on the actual legal needs of our members and the work of our provider law firms—data that covers more than one-and-a-half decades of activity. In aggregate, our index foreshadows economic activity based on actual legal events in the lives of individuals, families and small businesses.