CB Leading Economic Index: Continues To Fall, But No Recession Signal

seekingalpha08-20

The latest Conference Board Leading Economic Index (LEI) decreased in July to its lowest level since April 2020.The index fell 0.6% from the previous month to 100.4, marking its fifth consecutive ...

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We are currently 31 months off from the 2021 peak.   TERADAT SANTIVIVUT By Jennifer Nash The latest Conference Board Leading Economic Index (LEI) decreased in July to its lowest level since April 2020. The index fell 0.6% from the previous month to 100.4, marking its fifth consecutive monthly decline. “The LEI continues to fall on a month-over-month basis, but the six-month annual growth rate no longer signals recession ahead,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “In July, weakness was widespread among non-financial components. A sharp deterioration in new orders, persistently weak consumer expectations of business conditions, and softer building permits and hours worked in manufacturing drove the decline, together with the still-negative yield spread. These data continue to suggest headwinds in economic growth going forward. The Conference Board expects US real GDP growth to slow over the next few quarters as consumers and businesses continue cutting spending and investments. US real GDP is expected to expand at a pace of 0.6 percent annualized in Q3 2024 and 1 percent annualized in Q4.” More Background on the Conference Board Leading Economic Index® (LEI) The LEI is a composite index of several indicators. It is a predictive variable that anticipates, or leads, turning points in the business cycle and anticipates where the economy is heading. Since the LEI is comprised of multiple components, it is meant to provide a clearer picture as it is able to smooth out volatility associated with individual components. The ten components of Conference Board LEI include: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500® Index of Stock Prices; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.  Here is a chart of the LEI series with documented recessions as identified by the NBER. Note the peaks of the index preceding each of the recessions and the troughs occurring near the end of each recession.  Leading Economic Index and Recession Risk For a better understanding of the relationship between the LEI and recessions, the next chart shows the percentage off the previous peak for the index. We are currently 14.8% off the 2021 peak. The chart also calls out the number of months between the previous peak and official recessions. On average, there is usually 10.6 months between a peak and a recession. We are currently 31 months off from the 2021 peak.  Leading Economic Index and Its 6-Month Smoothed Rate of Change Based on suggestions from Neile Wolfe of Wells Fargo Advisors and Dwaine Van Vuuren of RecessionAlert, we can tighten the recession lead times for this indicator by plotting a smoothed six-month rate of change to further enhance our use of the Conference Board's LEI as a gauge of recession risk.  The LEI has historically dropped below its 6-month moving average (of 6-month ROC) anywhere between 2 to 15 months before a recession. Currently, the LEI has been below its 6-month moving average (of 6-month ROC) for 25 months. Note that there have been times where the LEI has been below the 6-month for multiple months without a recession. Here is a 12-month smoothed out version, which further eliminates the whipsaws:  Currently, the 12-month moving average (of 12-month ROC) has been negative for 19 months. Conference Board Coincident Economic Index® The Conference Board also includes its coincident economic index (CEI) in each release. The CEI measures current economic activity and is made up of four components: nonagricultural payroll, personal income less transfer payments, manufacturing and trade sales, and industrial production. The Conference Board Coincident Economic Index® (CEI) for the U.S. was flat in July 2024 at 112.5 (2016=100), after increasing by 0.2 percent in June. The CEI grew by 0.9 percent in the six-month period between January and July of 2024, faster than its 0.5 percent growth rate over the previous six-month period. The CEI’s component indicators—payroll employment, personal income less transfer payments, manufacturing and trade sales, and industrial production—are included among the data used to determine recessions in the US. All components improved in July, except for industrial production, which experienced its largest negative contribution to the CEI since January 2024. Observations show that when the LEI starts declining, the CEI continues to rise. The LEI has declined or been flat each month since April 2022. Over that same time frame, the CEI experienced only 5 monthly declines. Here's a chart including both the CEI and LEI.  Here is a chart of the LEI/CEI ratio, which perhaps has been a leading indicator of recessions. I count the lead time as the number of months that the ratio has been declining prior to a recession. The LEI/CEI ratio has now declined for 28 consecutive months. There have been times where the ratio has been in decline for several months without a recession.  Original Post  Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2460902120"}