Leading Economic Indicators Offers Favorable Read

by: Markos Kaminis

Quoting the Conference Board, publisher of the Leading Economic Indicators Index,

All in all, the behavior of the composite indexes suggest that the recession will continue to ease and that the economy may begin to recover in the near term.

Leading Economic Indicators

The Conference Board's Leading Economic Indicators Index shows fair weather ahead. The June reporting of the LEI improved 0.7%, versus expectations for a 0.5% gain, based on Bloomberg's survey of economists. On a day that was otherwise light of economic data, though not short of earnings news, Leading Indicators guided the way for stocks Monday.

Of course, the Leading Economic Indicators Index plays importantly in times of economic transition, and would have held weight even if the day offered a full data slate.

Plus, after two sequential quarters of deep economic contraction (-5.5% GDP in Q1, -6.3% in Q4), this third straight monthly improvement in the LEI is just the right reassurance we need that things will improve. The 0.7% rise recorded for this past month matches against May's 1.3% increase and April's 1.0% gain.

Did you notice that the pace of monthly LEI improvement is slowing? This mirrors the stock market, which soared from March's "panic level lows," but has since sought further reason for continued rise.

It seems to us likely that the natural drag of unemployment will limit the pace of recovery over the next few months, maybe couple quarters, weighing on the Coincident Index and even the Leading Economic Indicators Index.

Factors Driving Leading Economic IndicatorsSeven of the ten component factors of the LEI improved in June, giving further cause to believe in a nearing end to our current economic misery (in the numbers anyway). Leading drivers included moderated interest rate spreads, increased building permits, rising stock prices, lower weekly initial claims, average weekly manufacturing hours, supplier deliveries and manufacturers new orders for consumer goods and materials.

The Leading Economic Index crossed paths with the Coincident Economic Index for the first time since the spring of 2006, when it last dropped below it. This rise of the LEI, therefore, looks to signal an important change for the better.

However, the CEI kept rising from the spring of 2006 until just before the start of the recession. A leveling of the CEI now would seem likely then to mark the finish of it. Exactly that sort of leveling is becoming apparent in the graph, but has not been achieved yet. However, the CEI fell less last month (-0.2%) than the prior two (-0.3% each).