Leading Economic Indicator Up – But Risks Growing in August 2011

The August 2011 release of both The Conference Board’s Leading Economic Indicator (LEI) and their coincident indicator (CEI) values show the economy is and will be growing.  Yet, using unseen analysis – the originators of the index continue to talk it down.

Says Ataman Ozyildirim, economist at The Conference Board: “The August increase in the U.S. LEI was driven by components measuring financial and monetary conditions which offset substantially weaker components measuring expectations. The growth trend in the LEI has moderated and positive and negative contributors to the index have been roughly balanced. The leading indicators point to rising risks and volatility, and increasing concerns about the health of the expansion.”

Says Ken Goldstein, economist at The Conference Board: “There is growing risk that sustained weak confidence could put downward pressure on demand and business activity, causing the economy to potentially dip into recession. While the chance of that happening remains below 50-50, the odds have certainly increased in recent months.”

This leading indicator is used to predict growth over the coming six months.

The LEI increased 0.3% in August putting index growth at a 4.8% annual rate over the last six months.  The implication to the casual observer is that the economic growth should be 4.8% in the next six months. During the previous 6 month period – the index grew at 8.0% at an annual rate indicating the current growth is half.

Four of the ten indicators that make up The Conference Board LEI for the U.S. increased in August. The positive contributors – beginning with the largest positive contributor – were real money supply, the interest rate spread, building permits and the index of supplier deliveries (vendor performance). The negative contributors – beginning with the largest negative contributor – were stock prices, the index of consumer expectations, average weekly manufacturing hours, average weekly initial claims for unemployment insurance (inverted), manufacturers’ new orders for consumer goods and materials, and manufacturers’ new orders for nondefense capital goods.

Even the Conference Board’s coincident indicator continues to rise despite much less good data.

This index is based to a large extent on monetary measures which have been extraordinarily strong with stimulative interest rates set at artificially low levels by the Federal Reserve. For this reason, the hyper-values produced by this index are not necessarily linked to any real economic dynamics. Econintersect does not believe this index is properly indicating the current economic dynamics. The discussion published by Conference Board Economists seem to indicate that they have the same opinion.

On the other hand, ECRI’s WLI (which Econintersect reports on weekly) has the exact opposite trend lines indicating a contracting economy.

Econintersect believes the USA economy saw a cycle peak in April 2011, and the economy is now contracting (analysis here).

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