The Leading Economic Index is calculated by The Conference Board, a business organization founded in 1914. It is based on the index from 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 June rose slightly to 102.2 (2004 = 100), the fifth consecutive monthly increase, with contributions from the financial and new orders components more than offset declines in building permits and the labor market indicators. While growth in the index has moderated over the first half of 2014, strengths among the leading indicators have generally outpaced weaknesses.
In addition to growth in the Leading Indicators, the Conference Board reported that its index of Coincident Economic Indicators, a measure of current economic activity, also been increasing at a 2.6 percent annual rate over 2014, and the Lagging index has been growing at about 2.6 percent.
The LEI is a good indicator of long-term growth prospects and has generally turned downward before a recession and upward before an expansion, and the month to month changes (even reductions) in the indices during the first quarter are reflections of this.
We generally do not track the LEI on a consistent basis, but rather look at changes over the long term. The LEI has recovered strongly since the recession, and is now showing the economy to be nearing the peak of its business cycle. While this is not a clear indicator of a near-term recession, it does indicate that firms are continuing to be cautious about future prospects for economic growth – particularly when one considers that the Conference Board’s track of lagging economic indicators suggests that views of past growth are better than predictions of future activity.
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