The conference board provides this press release on Leading Economic Indicators for June.
“The US LEI fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year.”
The consensus estimate was for LEI of +0.1.
Ten LEI Components
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods and materials
- ISM® Index of New Orders
- Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Leading Credit Index™
- Interest rate spread, 10-year Treasury bonds less federal funds
- Average consumer expectations for business conditions
Comments
- Had they used housing starts rather than permits we may have had a different number.
- The stock market does not lead anything. It peaked in November of 2007 right with the economy.
- Using consumer expectations for business as a measure of anything reliable seems silly.
- The leading credit index is proprietary. What’s in that? What percentage weight does it have?
Leading vs Coincident Indicators
Leading vs Coincident Indicators Annual Rate
June’s -0.3% decline does not show up in the preceding two charts.
Negative contributions were led by building permits, ISM New Orders, and jobless claims. Positive contributions were led by credit conditions, consumer expectations, the factory workweek, and the stock market. The Index of Coincident Economic Indicators rose modestly (Note that two of its four components are estimated).
Leading Indicators 1969-Present
Warning Time
As a leading indicator, the LEI can provide a huge warning time. Too big?
Ahead of the Great Recession, the index peaked in 2005. Year-over-year it peaked in 2003.
The LEI by itself has false positives as does the coincident indicator.
If you use the the LEI and CEI together, recessions are confirmed but take a look at 2001. The LEI was at -12 or so before the coincident indicator touched zero.
They are both near zero now, for the third or fourth time since 2011. The LEI by itself, month-over-month, has been negative seven times since 2010.
Will there be any lead time (LEI +CEI) this time? I suggest not.
A couple of recent posts help explain the current picture.
- Junk Bond Bubble in Pictures: Deflation Up Next
- Housing Slowly Rolling Over: June Permits Down 6.1%, Starts Down 0.9%
Mike “Mish” Shedlock
I see lower growth and not a recession. Even more so if the Fed cuts. The indicators are headed to 2011-14 levels which was when the economy was in recovery. It struggled along but made it. There is a private debt problem in the bond market but I believe this is the very reason the Fed is cutting. The real economy seems to cooling from 3-4% GDP to 1-2% GDP. CFNAI-MA3 is also slowing but not to recessionary levels.
Over the years I’ve seen many forecasts for a “soft landing”, but when was the last time the economy had one?
There will be no landing. We will be Japan and have similar effects but with marginally more growth. It will be the 1/1/1 economy for a decade or longer. Europe has been stumbling along at 0 for while now. Things can go on much longer than we think. I think we were conditioned to hard landings in 2001 and 2008 but now that we are at the end of an interest rate supercycle, we will stumble along with 1% growth, 1% inflation or less and 1% FFR or less.
“Of course, he will be right on a recession before he will be right about global cooling (which certainly won’t happen in his lifetime).”
I like that – Laughing
Depends on how long I live – or not
Global cooling may be happening now.
If I die tomorrow, and the NBER says a recession next month, you may be wrong both ways
They use multiple metrics because some work well in some recessions, while other work well at other times. The key isn’t any one index, but the composite. If it turns out that it doesn’t work well this time, the will make adjustments to it.
Looking at the chart, since 2009 the LEI has moved steadily higher, while the economy has grown steadily. I see nothing to indicate that it isn’t working properly.
Looking at the chart, since 2009…..
That’s where the Fed’s put, QEs and Trillions were injected!
Miracle happened with insane credit infusion! Whah!
The point here is that the LEI has correctly predicted where the economy has gone. IF the LEI does turn down here, and continue to decline, I see no reason to believe it won’t be correct in that prediction as well. One month, however, is not enough. The LEI has been fairly stagnant for the last year, but it also was stagnant from mid-2015 until mid-2016 before continuing to trend higher. Thus, the LEI could begin to decline sharply, as it did in 2007, or it could resume it’s upward trend, as happened in 2016.
How accurate are all these metrics in the low-rate era we’ve been living in since 2009 ?
It would appear from your charts that the LEI is fairly accurate, and gives about a 1-2 year warning, though individual small negatives don’t tell you much. If the overall index peaks, and continues heading down, we could see a recession in a year, or perhaps a bit more. With the election a shade over a year away, timing is everything. If the recession comes at the early end of the 1-2 year timeframe, Trump will most likely be in trouble. If it comes at the long end of it, he’ll most likely be re-elected.