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November 2012 Leading Economic Index Projects Weak Growth

Written by Steven Hansen

The Conference Board Leading Economic Index (LEI) for the U.S. declined 0.2% in November to 95.8 (2004 = 100).  Overall, the index value has been in a tight range for most of 2012 implying growth is sluggish.

This index is designed to forecast the economy six months in advance. The market expected a -0.3% to 0.2% improvement in the LEI (versus the -0.2% reported).

At this point, the LEI and ECRI’s WLI both are forecasting slow growth for the next six months.

Additional comments from the economists at The Conference Board add context to the index’s behavior.

The Conference Board Leading Economic Index® (LEI) for the U.S. declined 0.2 percent in November to 95.8 (2004 = 100), following a 0.3 percent increase in October, and a 0.4 percent increase in September.

“The U.S. LEI decreased slightly in November, bringing its six-month growth rate to zero,” says Ataman Ozyildirim, economist at The Conference Board. “The LEI points to increasing risks of slowing economic activity in the near term, but the coincident economic index, measuring current conditions, continued to increase in November. Gains in the residential construction and financial components of the LEI have been roughly balanced with weak consumer expectations, manufacturing new orders and labor market indicators over the last six months.”

Says Ken Goldstein, economist at The Conference Board: “The indicators reflect an economy that remains weak in the face of strong domestic and international headwinds, as it faces a looming fiscal cliff. Growth will likely be slow through the early months of 2013.”

The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.2 percent in November to 104.9 (2004 = 100), following a 0.1 percent increase in October, and a 0.2 percent increase in September.

The November 2012 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:

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LEI as an Economic Monitoring Tool:

The usefulness of the LEI is not in the headline graphics but by examining its trend behavior. Econintersect contributor Doug Short (Advisor Perspectives / dshort.com) produces two trend graphics. The first one shows the year-over-year growth, as well as the three month rolling average of the rate of change – shown against the NBER recessions.

For a better view of the current conditions, the above chart is zoomed below to better show the current timeframe.

As an analyst, I keep my eyes on 3 month rate-of-change (red bars). There is a short term (half year) trend along the zero line. Any recession warning follows months of negative growth of this index. This is why the authors of this index are saying no recession is coming this year.

The methodology for this index was “improved” in December 2011.

As a comparison to the LEI, ECRI’s WLI (which Econintersect reports on weekly)  continues to be positive indicating a marginally better economy 6 months from now.

Current ECRI WLI Index

Econintersect believes the USA economy continues to be 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 track record of real time performance.

Related Articles

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

Can ECRI’s Weekly Leading Index be Trusted? by Georg Vrba, P.E.

All Posts on Leading Economic Indicator All Posts on Economic Forecasts

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