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 non-defense 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 December rose sharply to 93.9 (2004 = 100), following no change in November, and a 0.3 percent increase in October led by a large improvement in initial claims for unemployment insurance and positive contributions from the interest rate spread and the Leading Credit Index, however, consumer expectations and manufacturers’ new orders remain weak.” According to The Conference Board’s economist, Ken Goldstein, economist, this suggests a pickup in growth rates is likely, and that housing has turned the corner and will help strengthen consumption.
The LEI is a good indicator of long-term growth prospects and has generally turned downward before a recession and upward before an expansion. Considering that the economy likely contracted in the 4th quarter (See GDP below) it is likely that growth in the early part of 2013 will be slightly faster than forecast. Generally a strong 4th quarter is followed by a slightly weaker 1st quarter. The increase in December’s LEI may be a harbinger to this.
We generally do not track the LEI on a consistent basis, but rather look at changes over the long term. The LEI has not recovered to nearly the level it was prior to the recession, and has begun to tail off over the longer term in a pattern similar to that seen in earlier recessions. While this is not a clear indicator of a near-term recession, it does suggest that December’s figure represented more of a blip rather than a trend, and businesses and industries should continue 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 past growth has been relatively strong.