Written by Steven Hansen
The Conference Board Leading Economic Index (LEI) for the U.S. improved again in March to 100.9 (2004 = 100, previous month reading = a upwardly revised 100.1). The index growth has been noisy but remains in a growth trend.
This index is designed to forecast the economy six months in advance. The market expected growth of 0.2% to 0.9% (consensus 0.7%) in the LEI (versus the 0.8% reported).
Both the LEI and ECRI’s WLI are forecasting 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. increased 0.8 percent in March to 100.9 (2004 = 100), following a 0.5 percent increase in February, and a 0.2 percent increase in January.
“The LEI rose sharply again, the third consecutive monthly increase,” said Ataman Ozyildirim Economist at The Conference Board. “After a winter pause, the leading indicators are gaining momentum and economic growth is gaining traction. While the improvements were broad-based, labor market indicators and the interest rate spread largely drove the March increase, offsetting the negative contribution from building permits. And, for the first time in many months, the consumer outlook is much less negative.”
“The March increase in the LEI suggests accelerated growth for the remainder of the spring and the summer,” said Ken Goldstein, Economist at The Conference Board. “The economy is rebounding from widespread inclement weather and the strengthening in the labor market is beginning to have a positive impact on growth. Overall, this is an optimistic report, but the focus will continue to be on whether improvements in the labor market can be sustained, fueling stronger economic performance over the next few months.”
The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.2 percent in March to 108.3 (2004 = 100), following a 0.4 percent increase in February, and a 0.1 percent decline in January.
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:
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 relatively flat (no acceleration or deceleration) 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.