The Leading Economic Index is calculated by The Conference Board, a business organization founded in 1914. The index is based on the values of 10 variables (Average weekly hours in manufacturing; average weekly initial claims for unemployment insurance; manufacturers’ new orders for consumer goods and materials; The ISM Index of New Orders; manufacturers’ new orders for nondefense capital goods excluding aircraft; building permits for new private housing units; the S&P 500 Index, Leading Credit Index™, the interest rate spread between 10-year Treasury bonds and federal funds, and an index of average consumer expectations for business conditions).
The LEI for August rose to 96.6 (2004 = 100), and is up 2.1 percent over the past 6 months. This growth has been driven by the labor market and financial components of the Index, as well as new manufacturing orders. According to The Conference Board’s economist, Ken Goldstein, “The latest reading points to more pep in the pace of economic activity in the near term.” Interestingly, the Conference Board’s index of concurrent economic indicators (which measure current economic conditions) has been basically flat for three months, suggesting that past predictions of future growth have not been as forthcoming as the LEI would suggest.
That said, the LEI is a good indicator of long-term growth prospects and has generally turned downward before a recession and upward before an expansion. The index has been picking up steam as the year has gone on and there is some sign of a slightly stronger economy in the coming year. The gap between the LEI and the Concurrent index has also been narrowing slightly, also suggesting that long term economic conditions are improving.
We generally do not track the LEI on a consistent basis, but rather look at changes over the long term. The LEI has still not recovered to nearly the level it was prior to the recession, but after a slight lag, the pace of growth has started to accelerate. While this is not an indication of any sort of significant recovery, it also puts to rest earlier concern of a double dip. Rather, it appears as if the economy has dragged itself out of recession and into the next business cycle. The fear now is that, after about 4 years of growth, the business cycle will peak soon and the economy will begin to move toward the next recession. If this is in fact the case, this recovery will be one of the worst on record – following one of the worst recessions on record. Were this pattern to continue, the long term prospects for the US economy would be particularly bleak.
We tend to think that the political reaction to “the Great Recession,” had the perverse effect of not allowing the redistributive powers of recession to work their magic. As such, there is still a great deal of mal-investment of resources away from productive to less-productive activities. One of the good things that recessions do is to set up conditions for future growth. In 2008-2009 this simply did not happen, and the result will be a very weak recovery.