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U.S. Leading Economic Indicator: Either The Fed Was Wrong Before, Or The Fed Is Wrong Now

Jul. 10, 2017 6:58 AM ET2 Comments
Jeff Gonion profile picture
Jeff Gonion


  • The Leading Economic Index for the US has historically predicted economic growth fairly well.
  • The Federal Reserve has recently changed the methods it uses to calculate one of the inputs to the index.
  • This change has compromised both the timeliness and prediction accuracy of the Leading Economic Index.

Below is a chart of the Leading Index provided by the Federal Reserve:

It is important to note that the series is not actually historical data. The entire series is the output of a Vector Autoregressive (VAR) model for the current month. In other words, the statistical model recalculates history based on parameters determined by the entire data series through the current day, so each new release can have a small effect on the entire data-set back to 1982.

Each year, the Fed stops producing the USLEI for 2-3 months while it recalibrates its mathematical models. After it does this, there is a brief flurry of releases for the missed months, before things go back to normal.

6-month economic growth is measured by the Fed's Coincident Index. The Leading Index predicts the 6-month growth of the Coincident Index.

From the Fed's website:

"The leading index for each state predicts the six-month growth rate of the state's coincident index."

How accurately does the USLEI predict 6-month growth?

Until recently, very well. Very well indeed.

This year, the Fed changed the way it calculates the Coincident Index. A description of the changes made by the Fed can be found here.

Now, let's chart the 6-month forward growth rate of the Coincident Index, which is what the US Leading Index predicts. Bear in mind the Coincident Index, like the Leading Index, is the output of a mathematical model (Dynamic Single Factor) and is not historical data.

Below is a chart of the new and old versions for the Coincident Index.

As you can see, the new version is a little noisier than the old version, but the correlation between two versions is 98.8% and, more importantly, there is no appreciable time-lag between the new and old versions, particularly at the peaks and valleys.

This article was written by

Jeff Gonion profile picture
Using economic and computational/statistical models to guide investment decisions

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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