Market Insights: Leading Economic Indicator update
Milestone Wealth Management Ltd. - Jun 20, 2015
At Milestone, we look at various leading indicators and strategies to give us the best tools to make proactive shifts in our asset allocation.
At Milestone, we look at various leading indicators and strategies to give us the best tools to make proactive shifts in our asset allocation. It is the long-term trend that is most important to us, as moving aside from short and even intermediate-term corrections is extremely difficult and thus not usually a successful long-term strategy. The Leading Economic Indicator (LEI) is a heavily watched index compiled by The Conference Board in the U.S. which comprises ten economic data sets that should lead overall economic activity. They post the index monthly and the May number was just released with a surging 0.7% growth rate. This is now back-to-back months of 0.7% growth (historically high monthly number) showing signs of a forward-looking healthy economy overall.
From The Conference Board press release:
"The Conference Board LEI for the U.S. increased sharply in May, with building permits and the yield spread once again making large contributions. In the six-month period ending May 2015, the leading economic index increased 2.2 percent (about a 4.4 percent annual rate), slower than the growth of 3.4 percent (about a 7.0 percent annual rate) during the previous six months. However, the strengths among the leading indicators remain more widespread than the weaknesses."
“...confirming the outlook for more economic expansion in the second half of the year after what looks to be a much weaker first half,” said Ataman Ozyildirim, Director, Business Cycles and Growth Research, at The Conference Board. “While residential construction and consumer expectations support the more positive outlook, industrial production and new orders in manufacturing are painting a somewhat more mixed picture.”
There are various ways to manipulate the data series of this index to attempt to provide the most accurate lead time ahead of a recession (in the U.S. recessions are officially confirmed by the NBER). As you can see from the chart below, using the 6-month moving average of the 6-month rate of change seems to provide a reliable recession indicator.
Conference Board Leading Economic Index Increased Again in May
"As we can see, the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk."