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January 2012 Leading Economic Index Forecasts Improving Economy

This is the second month of the “new” Leading Economic Index from The Conference Board, and after a month of review this index appears to be a significant tool useful for long-range outlook economic forecasts.

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.4 percent in January to 94.9 (2004 = 100), following a 0.5 percent increase in December and a 0.3 percent increase in November.

This index is designed to forecast the economy six months in advance.  Additional comments from the economists at The Conference Board add context to this positive outlook. 

Said Ataman Ozyildirim, economist at The Conference Board: “This fourth consecutive gain in the LEI reflected fairly widespread strength among its components, pointing to somewhat more positive economic conditions in early 2012. The LEI’s increase in January was led not only by improving financial and credit indicators, but also rising average workweek in manufacturing. These both offset consumers’ outlook about the economy, which remained pessimistic, though slightly less so. Meanwhile, the CEI rose again in January as employment, income, and sales data all point to improving current economic conditions despite a lack of contribution from industrial production.”

Added Ken Goldstein, economist at The Conference Board: “Recent data reflect an economy that started the year on a positive note. The CEI shows some small signs of economic strengthening in the fourth quarter and continued to point in this direction in January. The LEI suggests these conditions will continue and could possibly even pick up this spring and summer.”

And here is the January 2012 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 – note that Econintersect believes there should also be a dip in 2010 based on historical data:

As a comparison to the LEI, ECRI’s WLI (which Econintersect reports on weekly) is now slightly 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 “new” 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.

The methodology in producing this index:

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.

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 as there is no tract record of real time performance.

Related Articles

Conference Board: LEI to be Revised by Lance Roberts (GEI News, 19 Jan 2012)

All Posts on Leading Economic Indicator

All Posts on Economic Forecasts

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