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LEI Warning Of Economic Stumbling Economy

Written by admin | Sep, 17, 2013

lei-index-061711With today’s release of the Leading Economic Indicators (LEI) we are once again reminded that without another round of fresh stimulus the economy is most likely headed towards more than a soft patch. The LEI is a composite index made up of 10 primary different indicators that are “leading” in nature and strives to predict what the economy will be doing in the next 6-9 months. These indicators are:  Average weekly hours in manufacturing, Average weekly initial claims for unemployment insurance, Manufacturers’ new orders, consumer goods and materials, Index of supplier deliveries in vendor performance, Manufacturers’ new orders for nondefense capital goods, Building permits for new private housing units, the S&P 500 index, M2 Money Supply, the Interest rate spread of the 10-year Treasury bonds to the federal funds and the Index of consumer expectations. 

Today’s report came in with a mild uptick of 0.8% but remember that this data is for May. Consumer expectations were a major swing factor in gain for the index. However, data on consumer sentiment for the first two weeks of June are clearly negative. Two other pluses are also uncertain as orders for consumer goods and orders for capital goods are both imputed by the Conference Board given the absence of hard data for May on these readings.

On a weighted basis the S&P 500, M2 Money Supply and the Interest Rate Spread dominate the index and with the S&P 500 declining over the last month it will be no surprise to see weakness in the index especially when combined with new orders declining, unemployment claims rising and weekly manufacturing hours remaining stagnant. 

However, while a month’s numbers do not give us any real indication of direction, the year over year percentage change in the index does, as show in the chart. Overall, the weakness in the LEI index is confirming what we are already seeing in the recent releases of the manufacturing indexes, sentiment gauges and public opinion polls. The economy is weak and getting weaker. This doesn’t bode well for the forward looking earnings assumptions, which are still pegged at record highs, which means that there is substantial downside risk to stock prices when those assumptions have to be ratcheted down to align with real economic growth.

Also, the index is declining from levels that have generally been associated with peaks of economic activity and while we are a good ways away from getting the recessionary signal – the index is certainly trending in that direction. With the weakness in the markets and the economy so far in June it is very likely that we will see another downside push in the report come July.

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