Written by Steven Hansen
This post is a review of all major leading indicators follows – and their trends are mixed.
Analyst Opinion of the Leading Indicator Forecasts
Most of the leading indicators are based on factors which are known to have significant backward revisions – and one cannot take any of their trends to the bank. I continue to pose the question – “what good is a leading indicator where the data for that month is continued to change for many months after it is issued?”.
The only indicators with minimal backward revision are ECRI, RecessionALERT, and the Chemical Activity Barometer. Unfortunately, the Chemical Activity Barometer is targeted to the industrial sector of the economy – and at best seems to be a coincident indicator, not a leading indicator.
At this point, Econintersect sees NO particular dynamic at this time which will deliver noticeably better growth in the foreseeable future.
The leading indicators are to a large extent monetary based. Econintersect does not use any portion of the leading indicators in its economic index. Most leading indices in this post look ahead six months – and are all subject to backward revision.
Philly Fed Leading Index
The Philly Fed Leading Index for the United States is continuously recalculated. Note that this index is not accurate in real time as it is subject to backward revision, Per the Philly Fed:
The Federal Reserve Bank of Philadelphia has released the leading indexes for the 50 states for January 2017. The indexes are a six-month forecast of the state coincident indexes (also released by the Bank). Forty-seven state coincident indexes are projected to grow over the next six months, two are projected to decrease, and one (Alaska) is not available. For comparison purposes, the Philadelphia Fed has also developed a similar leading index for its U.S. coincident index, which is projected to grow 1.8 percent over the next six months.
*Note: The state leading indexes reflect changes made to the state coincident index methodology, which were implemented with the January 2017 release.
z philly fed leading.PNG
Index Values Over the Last 12 Months
This index has been noisy, but remains above 1%, and is below mid-range of the values seen since the end of the Great Recession.
Chemical Activity Barometer (CAB)
The CAB is an exception to the other leading indices as it leads the economy by two to fourteen months, with an average lead of eight months. The CAB is a composite index which comprises indicators drawn from a range of chemicals and sectors. Its relatively new index has been remarkably accurate when the data has been back-fitted, however – its real time performance is unknown – you can read more here. A value above zero is suggesting the economy is expanding. Note that the authors of this index want to be measured against industrial production. Econintersect‘s analysis of this index is [here].
z chemical_activity_barometer.png
ECRI WLI Index
ECRI’s Weekly Leading Index – the methodology used in created this index is not released but is widely believed to be monetary based. Econintersect‘s review of this index is [here].
The Conference Board’s Leading Economic Indicator (LEI)
Econintersect’s review of this index is [here]. The LEI has historically dropped below zero in its six-month moving average anywhere between 2 to 15 months before a recession.
Econintersect Economic Index
Unlike the other leading indices, Econintersect Leading Index (LEI) only forecasts one month in advance.
The EEI is a non-monetary based economic index which counts “things” that have shown to be indicative of direction of the Main Street economy at least 30 days in the future. Note that the Econintersect Economic Index is not constructed to mimic GDP (although there are correlations, but the turning points may be different), and tries to model the economic rate of change seen by business and Main Street. The vast majority of this index uses data not subject to backward revision.
Econintersect Economic Index (EEI) with a 3 Month Moving Average (red line)
RecessionAlert.com
RecessionALERT.com has constructed a Weekly Leading Economic Index (WLEI) for the U.S Economy that draws from over 50 time-series from the following broad categories – Corporate Bond Market Composite, Treasury Bond Market Composite, Stock Market Composite, Labor Market Composite, and Credit Market Composite. From the authors of the index:
Leading Indicators Conclusion: trends are generally improving, and not indicating a recession over the next six months.
- Chemical Activity Barometer (CAB) growth rate is average for times of economic expansion and its rate of growth is accelerating.
- ECRI’s WLI is forecasting a slowing in the rate of growth in the business cycle six months from today.
- The Conference Board (LEI) 6 month rolling average is indicating improving rate of growth over the next 6 months.
- The Philly Fed’s Leading Index continued backward revisions make this index worthless – however its growth trend currently mixed but the latest value was an improvement.
- RecessionAlert’s Weekly Leading Economic Index is showing slowing in the rate of growth.
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