According to the Conference Board, the economy’s future is brighter – although the rate of improvement continues to slow in September 2010. The headlines:
The Conference Board’s LEADING ECONOMIC INDEX® (LEI) for the U.S. continued to increase in September. Initial unemployment claims (inverted) and the financial components contributed positively to the index this month, more than offsetting the negative contributions from supplier deliveries and building permits. The six-month change in the index has continued to slow — to 0.8 percent (about a 1.7 percent annual rate) for the period through September 2010, down sharply from 5.1 percent (about a 10.4 percent annual rate) for the previous six months. In addition, the weaknesses among the leading indicators have been slightly more widespread than the strengths over the past six months.
The Conference Board LEI for the U.S. remains on a general upward trend, although its growth has fallen very sharply in recent months. Its six-month growth rate is at its slowest pace since the middle of 2009, with the weaknesses among its components becoming more widespread lately. Meanwhile, The Conference Board CEI for the U.S. has been basically flat since May this year, after having risen moderately from its most recent trough in June 2009. Taken together, the current behavior of the composite indexes and their components still suggests that economic activity will continue to expand, but at a slow pace in the near term.
The following graph from the 5 Min. Forecast shows the Conference Board’s LEI history:
In the opinion of Econintersect, this LEI is not a long range forecasting methodology – but a short range forecasting tool (see Econintersect’s Economic Forecast). Both the LEI and Econintersect’s short range forward forecasts show low growth. The difference in methodology is great between Econintersect and the LEI as Econintersect does not use any monetary elements. On the other hand, ECRI’s WLI is a longer range leading indicator looking ahead six months.
The following table (annotated by the author) is from the press release of the Conference Board showing the contributions of the various elements:
The big drags on the LEI were supplier deliveries and building permits, while the biggest growth elements were initial unemployment claims, stock prices, and interest rate spreads. The Fed has openly admitted that their low interest rate policy is not working well, and brings into question whether the interest rate spread is a positive element. However, you can go through any index and nit-pik – and you must view this through the aggregate result.
Econintersect believes this index fairly represents the near term economic potential. With the release of the LEI, The Conference Board also releases their coincident indicator which claims the growth rate remains stable. The headline:
The Conference Board CEI for the U.S., a measure of current economic activity, was unchanged again in September. Employment and industrial production made small negative contributions to the index, offsetting the small increases in the other components. The six-month change in the coincident economic index has slowed to 0.9 percent (a 1.8 percent annual rate) in the period through September 2010, down from 1.4 percent (a 2.8 percent annual rate) in the six-month period ending in May 2010. In September, the lagging economic index continued to increase, and with the CEI remaining unchanged, the coincident-to-lagging ratio decreased further. Meanwhile, real GDP grew at 1.7 percent annual rate in the second quarter of 2010, following an increase of 3.7 percent annual rate in the first quarter.
Overall, nothing in the LEI or CEI suggests a double dip or recessionary tendencies.