By Jill Mislinski
The Conference Board LEI for the U.S. increased for a second consecutive month in June, fueled mostly by positive contributions from declining initial claims for unemployment insurance, increasing average hours worked in manufacturing and increasing stock prices. In the first half of 2020, the leading economic index declined 8.4 percent (about a -16.2 percent annual rate), much faster than the slightly negative growth of 0.2 percent (about a -0.4 percent annual rate) over the second half of 2019. In addition, over the first six months of 2020, the weaknesses among the leading indicators became very widespread.
The Conference Board CEI for the U.S., a measure of current economic activity, also increased in June. However, over the past six months the coincident economic index has declined 9.8 percent (about a -18.6 percent annual rate), a reversal from the growth of 0.8 percent (about a 1.5 percent annual rate) over the last six months of 2019. In addition, the weaknesses among the coincident indicators have remained very widespread, with all components declining over the first half of this year. The lagging economic index declined in the past two months, while CEI has been increasing slowly. As a result, the coincident-to-lagging ratio improved in June. In the meantime, real GDP contracted at a 5.0 percent annual rate in the first quarter.
Here is a log-scale chart of the LEI series with documented recessions as identified by the NBER. The use of a log scale gives us a better sense of the relative sizes of peaks and troughs than a more conventional linear scale.
For additional perspective on this indicator, see the latest press release, which includes this overview:
NEW YORK, July 23, 2020... The Conference Board Leading Economic Index® (LEI) for the U.S. increased 2.0 percent in June to 102.0 (2016=100), following a 3.2 percent increase in May and a 6.3 percent decrease in April.
"The June increase in the LEI reflects improvements brought about by the incremental reopening of the economy, with labor market conditions and stock prices in particular contributing positively," said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. "However, broader financial conditions and the consumers' outlook on business conditions still point to a weak economic outlook. Together with a resurgence of new COVID-19 cases across much of the nation, the LEI suggests that the US economy will remain in recession territory in the near term."
For a better understanding of the relationship between the LEI and recessions, the next chart shows the percentage off the previous peak for the index and the number of months between the previous peak and official recessions.
Based on suggestions from Neile Wolfe of Wells Fargo Advisors and Dwaine Van Vuuren of RecessionAlert, we can tighten the recession lead times for this indicator by plotting a smoothed six-month rate of change to further enhance our use of the Conference Board's LEI as a gauge of recession risk.
As we can see, the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk. Here is a twelve-month smoothed out version, which further eliminates the whipsaws:
The Conference Board also includes its Coincident Economic Index (CEI) in each release. It measures current economic activity and is made up of four components: nonagricultural payroll, personal income less transfer payments, manufacturing and trade sales, and industrial production. Based on observations, when the LEI begins to decline, the CEI is still rising. Here's a chart including both the CEI and LEI.
Here is a chart of the LEI/CEI ratio, which is also a leading indicator of recessions.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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