Leading Index Review: November 2013 Philly Fed Leading Index Continues to Show Growth

Econintersect: A positive index number projects positive economic growth for the next 6 months. The November 2013 forecast (released today) growth is 1.5% over the next 6 months. A positive number indicates growth. A review of all major leading indicators follows.

Per the Philly Fed:

The Federal Reserve Bank of Philadelphia has released the leading indexes for the 50 states for November 2013. The indexes are a six-month forecast of the state coincident indexes (also released by the Bank). Forty-nine state coincident indexes are projected to grow over the next six months, while one index is projected to decrease. For comparison purposes, the Philadelphia Fed has also developed a similar leading index for its U.S. coincident index, which is projected to grow 1.5 percent over the next six months. .

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This index has been noisy, but remains above 1%.

United States from the Philadelphia Fed – This index is the super index for all the state indices.

The leading index for each state predicts the six-month growth rate of the state’s coincident index. In addition to the coincident index, the models include other variables that lead the economy: state-level housing permits (1 to 4 units), state initial unemployment insurance claims, delivery times from the Institute for Supply Management (ISM) manufacturing survey, and the interest rate spread between the 10-year Treasury bond and the 3-month Treasury bill.

This index is subject to backward revision.

The Other Leading Indicators

The leading indicators are to a large extent monetary based. Econintersect‘s primary worry in using monetary based methodologies to forecast the economy is the current extraordinary monetary policy which may (or may not) be affecting historical relationships. This will only be known at some point in the future. Econintersect does not use any portion of the leading indicators in its economic index. All leading indices in this post look ahead six months – and are all subject to backward revision.

ECRI’s WLI has been predicting economic expansion for over a year.

Current ECRI WLI Index

The Conference Board’s Leading Economic Indicator (LEI) – Looking at the historical relationships, this index’s 3 month rate of change must be in negative territory many months (6 or more) before a recession occurred. Ths index is in positive territory and improving – implying any recession is months away.

Nonfinancial leverage subindex of the National Financial Conditions Index – a weekly index produced by the Chicago Fed signals both the onset and duration of financial crises and their accompanying recessions. Econintersect has some doubt about the viability of this index as its real time performance has been subject to significant backward revision. In other words the backward revision is so large that one really does not know what the current situation is. The chart below shows the current index values, and a recession can occur months to years following the dotted line below crossing above the zero line.

Leading Indicators Bottom Line – no recession in the next six months:

• ECRI’s WLI is positive.
• The Conference Board (LEI) is indicating moderate growth over the next 6 months.
• The Philly Fed’s Leading Index is indicating economic growth.
• The Chicago Fed’s ANFCI is not close to warning a recession could be near.

Steven Hansen