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posted on 17 April 2015

March 2015 Leading Economic Index Improves But Continues to Suggest Weaker Growth Ahead

Written by Steven Hansen

The Conference Board Leading Economic Index (LEI) for the U.S. improved again this month - but the authors believe this index's slowing growth rate over recent months is suggesting weaker growth may be ahead.

This index is designed to forecast the economy six months in advance. The market expected this index's month-over-month change at 0.2% to 0.4% (consensus 0.3%) versus the 0.2% reported.

ECRI's Weekly Leading Index (WLI) continues to forecast economic weakness over the next six months.

Additional comments from the economists at The Conference Board add context to the index's behavior.

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.2 percent in March to 121.4 (2010 = 100), following a 0.1 percent increase in February, and a 0.2 percent increase in January.

"Although the leading economic index still points to a moderate expansion in economic activity, its slowing growth rate over recent months suggests weaker growth may be ahead," said Ataman Ozyildirim, Economist at The Conference Board. "Building permits was the weakest component this month, but average working hours and manufacturing new orders have also slowed the LEI's growth over the last six months."

The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.1 percent in March to 112.0 (2010 = 100), following a 0.2 percent increase in February, and a 0.2 percent increase in January.

z conference1.png

LEI as an Economic Monitoring Tool:

The usefulness of the LEI is not in the headline graphics but by examining its trend behavior. Econintersect contributor Doug Short (Advisor Perspectives / dshort.com) produces two trend graphics. The first one shows the year-over-year growth, as well as the three month rolling average of the rate of change - shown against the NBER recessions.

For a better view of the current conditions, the above chart is zoomed below to better show the current timeframe.

As an analyst, I keep my eyes on 3 month rate-of-change (red bars). There is a short term (half year) trend along the zero line. Any recession warning follows months of negative growth of this index. This is why the authors of this index are saying no recession is near.

The methodology for this index was "improved" in December 2011.

As a comparison to the LEI, ECRI's WLI (which Econintersect reports on weekly) remains in contraction territory.

Current ECRI WLI Index

Econintersect believes the USA economy continues to be moderately expanding at Main Street level, but the growth rate has been declining in 2015. (analysis here).

Caveats on the Use of the Leading Economic Index (LEI)

This index is produced by The Conference Board (a private money making company) - who charges for the details of the indices they publish - although the summary of this index is available to the public. Its designed to predict economic growth over the next six months.

This is not a "black box" economic forecasting index as The Conference Board publishes the components. It was completely revised with the release of the December 2011 (analysis comparing the old and new index components - click here). The new components of the index and multipliers:

The index does not adjust for inflation or population growth, is not final for several months after being published, and is subject to annual revision. The methodology in producing this index:

1) normalized levels of the indicator rather than its monthly changes will be used to calculate the component contributions of components based on diffusion indexes such as the ISM New Orders Index; 2) when component data are missing, autoregressions in log differences instead of levels will be used to calculate the statistical imputation of the missing months; 3) trend adjustment will be done in two periods: 1959-1983 and 1984-2010 (same as the volatility adjustment); and 4) LCI contributions to the LEI are calculated from its levels (not monthly changes) and it is inverted As a result of these changes, the history of the revised indexes and their month-over-month changes will no longer be directly comparable to those issued prior to the comprehensive benchmark revision. Based on its performance since 1990, and especially before and during the 2008-2009 recession, the new LEI should provide more accurate predictions of business cycle peaks and troughs.

Econintersect has published correlations of the new LEI to past recessions. At first glance this index provides recession warning.

The fly-in-the-ointment is that this analysis is that the above graph is not a real time analysis. Consider that the LEI is not final when first issued - it is subject to revision for months. From The Conference Board:

To address the problem of lags in available data, those leading, coincident and lagging indicators that are not available at the time of publication are estimated using statistical imputation. An autoregressive model is used to estimate each unavailable component. The resulting indexes are therefore constructed using real and estimated data, and will be revised as the unavailable data during the time of publication become available. Such revisions are part of the monthly data revisions, now a regular part of the U.S. Business Cycle Indicators program.

The data does not exist to establish what The Conference Board's LEI values would have been in real time - at this point only the final numbers are known. Unfortunately, knowing the current values is no assurance that a recession is or is not imminent as there is no track record of real time performance.

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