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posted on 01 May 2016

Leading Index Review: March 2015 Philly Fed Leading Index Forecasts Marginal Slowing 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 March 2016. The indexes are a six-month forecast of the state coincident indexes (also released by the Bank). Forty-two state coincident indexes are projected to grow over the next six months, while eight 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 1.4 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'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.

Econintersect Economic Index

Unlike the other leading indices, Econintersect Leading Index (LEI) only forecasts one month in advance.

The EEI is a non-monetary based economic index which counts "things" that have shown to be indicative of direction of the Main Street economy at least 30 days in the future. Note that the Econintersect Economic Index is not constructed to mimic GDP (although there are correlations, but the turning points may be different), and tries to model the economic rate of change seen by business and Main Street. The vast majority of this index uses data not subject to backward revision.

Econintersect Economic Index (EEI) with a 3 Month Moving Average (red line)

z forecast1.PNG has constructed a Weekly Leading Economic Index (WLEI) for the U.S Economy that draws from over 50 time-series from the following broad categories - Corporate Bond Market Composite, Treasury Bond Market Composite, Stock Market Composite, Labor Market Composite, and Credit Market Composite. From the authors of the index:

Leading Indicators Bottom Line.

Leading Indicators Conclusion: mixed but not indicating a recession over the next six months.

  • Chemical Activity Barometer (CAB) growth rate is weak and its rate of growth is insignificantly accelerating.
  • ECRI's WLI is forecasting little growth in the business cycle six months from today but is currently trending up rapidly.
  • The Conference Board (LEI) 6 month rolling average is indicating an slowing rate of growth over the next 6 months.
  • The Philly Fed's Leading Index continues to forecast stable but slowing rate of growth.
  • The Chicago Fed's Nonfinancial leverage subindex is not close to warning a recession.
  • RecessionAlert's Weekly Leading Economic Index is accelerating and no longer in contraction
  • Although Econintersect Economic Index is in contraction, at this point it is not a recession warning (but is indicating the economy is slowing at main street level).

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