posted on 18 August 2016
Written by Steven Hansen
The Conference Board Leading Economic Index (LEI) for the U.S improved this month - and the authors state "there may even be some moderate upside growth potential if recent improvements in manufacturing and construction are sustained, and average consumer expectations don't deteriorate further".
This index is designed to forecast the economy six months in advance. The market (from Bloomberg) expected this index's value at 0.1 % to 0.4 % (consensus 0.2 %) versus the +0.4 % reported.
ECRI's Weekly Leading Index (WLI) is forecasting slow growth over the next six months.
Additional comments from the economists at The Conference Board add context to the index's behavior.
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 six month rolling average of the rate of change - shown against the NBER recessions. The LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession.
For a better understanding of the relationship between the LEI and recessions, the next chart shows the percentage off the previous peak for the index and the number of months between the previous peak and official recessions.
The methodology for this index was "improved" in December 2011.
As a comparison to the LEI, ECRI's WLI (which Econintersect reports on weekly) is now in expansion..
Current ECRI WLI Index
Econintersect believes the USA economy is barely expanding at Main Street level, and the growth rate has been declining. (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:
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:
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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