October 2013 Leading Economic Index Rises But Under Expectations

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The Conference Board Leading Economic Index (LEI) for the U.S. improved again in October to 97.5 (2004 = 100). The index growth has decelerated this month after strong gains the prior two months.

This index is designed to forecast the economy six months in advance. The market expected a 0.6% improvement in the LEI (versus the 0.2% reported).

Both the LEI and ECRI’s WLI are forecasting growth for the next six months – although the growth projections of ECRI’s WLI are decelerating

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. increased 0.2 percent in October to 97.5 (2004 = 100), following a 0.9 percent increase in September, and a 0.7 percent increase in August.

“The modest rise in the Leading Economic Index in October follows the strong advances recorded in the prior two months, which helps lift the six-month annualized growth rate to 5.1 percent from 3.7 percent in the previous six months,” said Kathy Bostjancic, Director of Macroeconomic Analysis at The Conference Board. “The recent increase in the index supports our forecast that the U.S. economy is poised to grow somewhat faster at 2.3 in 2014 compared to 1.6 percent in 2013. Within the details, the sub-indexes contributing positively to growth are the financial, housing and manufacturing variables. Restraining growth is the ongoing caution of businesses that continue to keep tight reins on capital expenditures.”

“The US LEI has increased for four consecutive months,” said Ken Goldstein, Economist for The Conference Board. “Overall, the data reflect strengthening conditions in the underlying economy. However, headwinds still persist from the labor market, accompanied by business caution and concern about federal budget battles. The biggest challenge to date has been relatively weak consumer demand, which continues to be restrained by weak wage growth and slumping confidence.”

The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.2 percent in October to 106.9 (2004 = 100), following a 0.3 percent increase in September, and a 0.3 percent increase in August.

The 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:

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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 at Main Street level, but the growth rate has been accelerating for the last 3 months (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.

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