Leading Economic Indicators Offers Favorable Read

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).

Comments

[markfl:]

"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."

I'll tell you why I'm not convinced yet. Average weekly hours have fallen month after month to the lowest on record: 33.0. Trucking company Werner Enterprises offered a grim outlook for freight hauling on their trailers over the near future. www.google.com/hostedn...

Data in the indicators should show in the ground truth economy. Let's see the July employment report. If hours drop to 32.9 then there's something funny going on here. Employment lags, but you can't produce higher output indefinitely while weekly hours head south. Same reason why home prices can't bottom until inventories reduce markedly.

Jul 21 10:40 AM

[WhoisJohnGalt:]

In my opinion, the LEI is a nice overhead indicator but should be the last thing to confirm one's evaluation of the economy. Individual numbers are less robust, especially those regarding unemployment.

Let us also not forget the market's current irrational desire to find diamonds in the rough. Yes, the macro indicators are showing deceleration in sliding numbers, but they are still negative no matter how you look at it. To think these numbers are strong enough to charge economic recovery within months or a year is asking for a correction in market prices.

Jul 21 12:50 PM

[conceptwizard:]

There is no economy left to recover. The US manufacturing economy was lost to offshoring and free trade ideology. It was replaced by a mythical “New Economy.”

The “New Economy” was based on services. Its artificial life was fed by the Federal Reserve’s artificially low interest rates, which produced a real estate bubble, and by “free market” financial deregulation, which unleashed financial gangsters to new heights of debt leverage and fraudulent financial products.

The real economy was traded away for a make-believe economy. When the make-believe economy collapsed, Americans’ wealth in their real estate, pensions, and savings collapsed dramatically while their jobs disappeared.

The debt economy caused Americans to leverage their assets. They refinanced their homes and spent the equity. They maxed out numerous credit cards. They worked as many jobs as they could find. Debt expansion and multiple family incomes kept the economy going.

And now suddenly Americans can’t borrow in order to spend. They are over their heads in debt. Jobs are disappearing. America’s consumer economy, approximately 70% of GDP, is dead. Those Americans who still have jobs are saving against the prospect of job loss. Millions are homeless. Some have moved in with family and friends; others are living in tent cities.

If this is truly the case where are the jobs going to come from for a sustainable recovery?

Jul 21 03:55 PM