Based on criticisms of their “rocket ship” index, the Conference Board made sweeping changes to their Leading Economic Index. The changes are as dramatic as night-and-day.
The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.4 percent in December to 94.3 (2004 = 100), following a 0.2 percent increase in November and a 0.6 percent increase in October. This month’s data inaugurates a number of major changes to the components and calculation of the LEI.
To begin to understand the magnitude of the change, here is last month’s index which shows the LEI at the highest level in history:
And here is the December 2011 new and improved LEI which shows the index at levels below the pre-2007 recession – as well as showing some turbulence in the indicator’s post recession climb:
“Revised figures show that adding the new Leading Credit Index™, in conjunction with other changes, makes the LEI a more accurate predictor of U.S. business cycles since 1990,” said Ataman Ozyildirim, economist at The Conference Board. “The improvement is especially pronounced before and during the 2008-2009 recession, and during the current expansion. In December, the LEI for the U.S. increased again. The gain was widespread among the leading indicators, suggesting economic conditions should improve in early 2012. However, the LEI gain in December was held back by negative contributions from the new Leading Credit Index — which indicates weak credit and financial conditions — and from consumer expectations for business and economic conditions.”
Added Ken Goldstein, economist at The Conference Board: “The CEI and other recent data reflect an economy that ended 2011 on a positive note and the LEI provides some reason for cautious optimism in the first half of 2012. This somewhat positive outlook for a strengthening domestic economy would seem to be at odds with a global economy that is losing some steam. Looking ahead, the big question remains whether cooling conditions elsewhere will limit domestic growth or, conversely, growth in the U.S. will lend some economic support to the rest of the globe.”
What changed you might ask? The following is a markup of the components of the index:
There were also changes to methodology.
1) normalized levels of the indicator rather than its monthly changes will be used to calculate the component contributions of components based on diffusion indexes such as the ISM New Orders Index;
2) when component data are missing, autoregressions in log differences instead of levels will be used to calculate the statistical imputation of the missing months;
3) trend adjustment will be done in two periods: 1959-1983 and 1984-2010 (same as the volatility adjustment); and
4) LCI contributions to the LEI are calculated from its levels (not monthly changes) and it is inverted
As a result of these changes, the history of the revised indexes and their month-over-month changes will no longer be directly comparable to those issued prior to the comprehensive benchmark revision. Based on its performance since 1990, and especially before and during the 2008-2009 recession, the new LEI should provide more accurate predictions of business cycle peaks and troughs.
As a comparison to the LEI, 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 before the end of the 1Q2012 – in direct contradiction of the LEI.
Econintersect believes the USA economy is currently weakly expanding, but our forecast only looks ahead one month (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.
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:
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. Such revisions are part of the monthly data revisions, now a regular part of the U.S. Business Cycle Indicators program.
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.
Conference Board: LEI to be Revised by Lance Roberts (GEI News, 19 Jan 2012)