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posted on 09 April 2016

Leading Index Review: January 2015 Philly Fed Leading Index Forecasts No Change In Rate of Growth

Written by Steven Hansen

This post is a review of all major leading indicators follows - and no leading index is particularily strong. A summary of the indices are at the end of this post.

The leading indicators are to a large extent monetary based. Econintersect's primary worry in using monetary based methodologies to forecast the economy is the current extraordinary monetary policy which may (or may not) be affecting historical relationships. This will only be known at some point in the future. Econintersect does not use any portion of the leading indicators in its economic index. All leading indices in this post look ahead six months - and are all subject to backward revision.

Philly Fed Leading Index

The Philly Fed Leading Index for the United States is continuously recalculated (what good is a leading index whose history continues to be recalculated?). Note that this index is not accurate in real time as it is subject to backward revision, Per the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the leading indexes for the 50 states for January 2016. The indexes
are a six-month forecast of the state coincident indexes (also released by the Bank). Forty-six state coincident indexes are
projected to grow over the next six months, while four are projected to decrease. For comparison purposes, the Philadelphia
Fed has also developed a similar leading index for its U.S. coincident index, which is projected to grow 1.6 percent over the
next six months.

[click on graphic to enlarge]

z philly fed leading.PNG

Index Values Over the Last 12 Months

This index has been noisy, but remains above 1%, and is about mid-range of the values seen since the end of the Great Recession.

Chemical Activity Barometer (CAB)

- The CAB is an exception to the other leading indices as it leads the economy by two to fourteen months, with an average lead of eight months. The CAB is a composite index which comprises indicators drawn from a range of chemicals and sectors. Its relatively new index has been remarkably accurate when the data has been back-fitted, however - its real time performance is unknown - you can read more here. A value above zero is suggesting the economy is expanding. Econintersect's analysis of this index is [here].

z chemical_activity_barometer.png

ECRI WLI Index

ECRI's Weekly Leading Index has not been accurate in forecasting recessions. Econintersect's review of this index is [here].

The Conference Board's Leading Economic Indicator (LEI)

Looking at the historical relationships, this index's 3 month rate of change must be in negative territory many months (6 or more) before a recession occurred. Econintersect's review of this index is [here].

Nonfinancial leverage subindex of the National Financial Conditions Index

A weekly index produced by the Chicago Fed signals both the onset and duration of financial crises and their accompanying recessions. Econintersect has some doubt about the viability of this index as its real time performance has been subject to significant backward revision. In other words the backward revision is so large that one really does not know what the current situation is. The chart below shows the current index values, and a recession can occur months to years following the dotted line below crossing above the zero line.

Leading Indicators Bottom Line.

No recession in the next six months but most suggesting moderate but flat economic growth:

  • Chemical Activity Barometer (CAB) is in expansion territory, and its rate of growth is flat.
  • ECRI's WLI continues to suggest there will be little growth over the next six months but at least this index is now in positive territory.
  • The Conference Board (LEI) is indicating modest and but relatively flat growth 6 months from today.
  • The Philly Fed's Leading Index is indicating essentially flat economic growth.
  • The Chicago Fed's Nonfinancial leverage subindex is not warning a recession could be near.


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