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 November rose 0.6 percent to 105.5 (2004 = 100), and is up 2 percent over the past 3 months. This growth rate has actually been accelerating over the past year, and is tracking what would be seen following any recession. According to The Conference Board’s economist, Ken Goldstein, the index is reflecting an economy that is expanding moderately with the biggest challenge to the economy being wage growth. Interestingly, the Conference Board’s index of coincident economic indicators (which measure current economic conditions) was up 0.4 percent to 110.7 and is now above pre-recession levels.
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 LEI has been picking up steam as the year has gone on and suggests a stronger economy in the coming year. That said, the gap between the LEI and the Concurrent index has also been narrowing, and while this suggests that long term economic conditions are improving, a narrowing of the gap also suggests that the business cycle is starting to top out.
We have projected that a recession is on the horizon with a good chance of it starting to show in the later part of 2016. This could be mitigated by certain exogenous conditions (say for example a grand bargain in Washington on tax reform), however, and examination of the Conference Board indexes suggests that the normal actions of the business cycle are present. So while we can expect a good 2015, businesses should begin to prepare for an economy weakening in 2016.
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