US: Leading Indicators

Fri Jan 23 09:00:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Leading Indicators - M/M change 0.4% 0.2% to 0.6% 0.5% 0.6% 0.4%

The index of leading economic indicators rose a solid 0.5 percent in December in what, however, is a somewhat shallow gain reflecting the Fed's zero interest-rate policy, a policy that looks to be shifting higher, and the report's credit index that has long been signaling strength in lending activity that has yet to be confirmed by other data.

Otherwise, the month's strength is mostly negligible though a decline in unemployment claims is the third largest factor, but here too claims so far this month have been on the rise. A clear negative reading in the report is a decline in building permits.

This report is ambitious by its definition and, in December's case at least, unconvincing.

Market Consensus Before Announcement
The Conference Board's index of leading indicators continues to signal very strong near-term rates of growth, at 0.6 percent in November following revised growth rates of 0.6 percent and 0.8 percent in the prior two months. Once again the yield spread was the biggest positive for the index reflecting the Fed's near zero rate policy. Manufacturing orders, based on the ISM, were another strong plus in the latest report as was the stock market. Credit indications were also solid. On the negative side is November's sharp decline in building permits as well as initial unemployment claims which peaked back over 300,000 briefly late in the month.

A composite index of ten economic indicators that should lead overall economic activity. This indicator was initially compiled by the Commerce Department but is now compiled and produced by The Conference Board. It has been revised many times in the past 30 years -- particularly when it has not done a good job of predicting turning points.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the index of leading indicators, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly -- and causing potential inflationary pressures. The index of leading indicators is designed to predict turning points in the economy -- such as recessions and recoveries. More specifically, it was designed to lead the index of coincident indicators, also now published by The Conference Board. Investors like to see composite indexes because they tell an easy story, although they are not always as useful as they promise. The majority of the components of the leading indicators have been reported earlier in the month so that the composite index doesn't necessarily reveal new information about the economy. Bond investors tend to be less interested in this index than equity investors. Also, the non-financial media tends to give this index more press than it deserves.