October 2011 LEI Says Economy May Gain Momentum in Spring

The October 2011 release The Conference Board’s Leading Economic Indicator (LEI) values show the economy is and will be growing. They say it might even be expanding in Spring 2012.

Says Ataman Ozyildirim, economist at The Conference Board: “The October rebound of the LEI — largely due to the sharp pick-up in housing permits — suggests that the risk of an economic downturn has receded. Improving consumer expectations, stock markets, and labor market indicators also contributed to this month’s gain in the LEI as did the continuing positive contributions from the interest rate spread. The CEI also rose somewhat, led by higher industrial production and employment.”

Says Ken Goldstein, economist at The Conference Board: “The LEI is pointing to continued growth this winter, possibly even gaining a little momentum by spring. The lack of confidence has been the biggest obstacle in generating forward momentum, domestically or globally. As long as it lasts, there is a glimmer of hope.”

This leading indicator is used to predict growth over the coming six months.  The LEI increased 0.9% in October.

On the other hand, ECRI’s WLI (which Econintersect reports on weekly) is negative indicating a contracting economy six months from today. Further ECRI issued a recession “call” stating that the USA economy will begin contracting within 6 months.

Econintersect believes the USA economy is currently weakly expanding but very close to levels that historically indicated that a recession is underway (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.  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.

This index is based to a large extent on monetary measures which have been extraordinarily manipulated by monetary policy to stimulate the economy. For this reason, the hyper-values produced by this index are not necessarily linked to any real economic dynamics – and likely are causing erroneous readings.

Many of the index components are linked to indices which have significant backward revision – making real time forecasts problematic.  Further, a portion of the data is not available when the index is originally published.  In short, the index is constantly revised – and eventually will be correct – just not in real time.  The Conference Board’s statement:

To address the problem of lags in available data, those leading, coincident and lagging indicators that are not available at the time of publication are estimated using statistical imputation. An autoregressive model is used to estimate each unavailable component. The resulting indexes are therefore constructed using real and estimated data, and will be revised as the unavailable data during the time of publication become available.

The index does not adjust for inflation or population growth.

Econintersect does not believe this index is properly indicating the current economic dynamics. At times, The Conference Board Economists  “talk down” the hyper values claiming it is showing only moderate or slight growth.  However, it is also argumentatively true, that the LEI trends down historically before the starting date of recessions.

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