US: Leading Indicators

Thu Feb 19 09:00:00 CST 2015

Consensus Consensus Range Actual Previous Revised
Leading Indicators - M/M change 0.3% 0.1% to 0.4% 0.2% 0.5% 0.4%

The index of leading economic indicators slowed to plus 0.2 percent vs a slightly downward revised plus 0.4 percent in December. Once again the yield spread is the biggest positive for the index reflecting the Fed's near zero rate policy. Consumer expectations are the 2nd largest positive in the month, though one that may reverse in the next report given last week's plunge in the consumer sentiment index. Credit indications, which continue to be very positive in this report, are the 3rd largest positive.

Negatives in the report are marginal with stock prices and ISM new orders the weakest. Both of these could easily bounce back in next month's report.

Though the headline of plus 0.2 percent doesn't look all that strong, steady rates of sustainable modest growth are a plus for business planning. Two other readings in this report underscore the steady rate of growth with the coincident index at plus 0.2 percent for a 2nd straight month and the lagging index at plus 0.3 percent for a 3rd straight month.

Market Consensus Before Announcement
The Conference Board's index of leading indicators was most recently boosted by Fed policy. But in the latest report, there is not much else to encourage optimism. The index of leading economic indicators rose a solid 0.5 percent in December in what, however, was a somewhat shallow gain reflecting the Fed's zero interest-rate policy (the interest rate spread in leading indicators), a policy that looks to be shifting higher, and the report's credit index that has long been signaling strength in lending activity but has yet to be confirmed by other data. Otherwise, the month's strength was mostly negligible though a decline in unemployment claims was the third largest factor. A clear negative reading in the report was a decline in building permits.

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.