posted on 30 June 2016
Leading Index Review: May 2016 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:
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].
ECRI WLI Index
ECRI's Weekly Leading Index - the methodology used in created this index is not released but is widely believed to be monetary based. Econintersect's review of this index is [here].
The Conference Board's Leading Economic Indicator (LEI)
Econintersect's review of this index is [here]. The LEI has historically dropped below zero in its six-month moving average anywhere between 2 to 15 months before a recession.
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)
RecessionALERT.com 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 Conclusion: mixed but not indicating a recession over the next six months.
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