What is Conference Board Leading Economic Index (LEI) and this implies a coming recession
What is Conference Board Leading Economic Index?
About The Conference Board Leading Economic Index® (LEI) for the U.S.: The composite economic indexes are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The indexes are constructed to summarize and reveal common turning points in the economy in a clearer and more convincing manner than any individual component. The CEI is highly correlated with real GDP. The LEI is a predictive variable that anticipates (or “leads”) turning points in the business cycle by around 7 months. Shaded areas denote recession periods or economic contractions. The dates above the shaded areas show the chronology of peaks and troughs in the business cycle.
There are 10 components that made up The Conference LEI.
The ten components of The Conference Board Leading Economic Index® for the U.S. 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.
The latest LEI update as of 23 Jan 2023:
The Conference Board Leading Economic Index®(LEI) for theU.S. decreased by 1.0 percent in December 2022 to 110.5 (2016=100), following a decline of 1.1 percent in November. The LEI is now down 4.2 percent over the six-month period between June and December 2022—a much steeper rate of decline than its 1.9 percent contraction over the previous six-month period (December 2021–June 2022).
“The US LEI fell sharply again in December—continuing to signal recession for the US economy in the near term,” said Ataman Ozyildirim, Senior Director, Economics, at The Conference Board.“There waswidespread weakness among leading indicators in December, indicating deteriorating conditions for labor markets, manufacturing, housing construction, and financial markets in the months ahead. Meanwhile, the coincident economic index (CEI) has not weakened in the same fashion as the LEI because labor market related indicators (employment and personal income) remain robust. Nonetheless, industrial production— also a component of the CEI—fell for the third straight month. Overall economic activity is likely to turn negative in the coming quarters before picking up again in the final quarter of 2023.”
LEI has been able to “predict” the recent recessions accurately since 2000 (as per the chart above). As per Jan 2023 data, we should be expecting a recession. Its predictive nature means that it is ahead of the cycle by about an estimated 7 months.
We should see more data affirming this starting with this week’s GDP announcement. The recent layoffs (from Tech and Finance industry) are good reference points. We could expect a decline in GDP, a reduction in earnings, an increase in unemployment and a reduction in disposable income as part of the recession. The above are covered under the 10 components of LEI. LEI looks to be a much more wholesome view of the market. For those who are considering Macro as part of our investing, we can consider monitoring LEI as part of our strategy.
Let us take time to review our portfolio and holdings, hopeful for the best and prepared for the worst.
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