US: Leading Indicators

Fri Apr 17 09:00:00 CDT 2015

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

Growth is tepid for the index of leading economic indicators, up only 0.2 percent in March following a downwardly revised gain of only 0.1 percent in February. The leading strength for March, the jobless claims component, may already be evaporating this month. The next biggest positive is the rate spread reflecting what is still the Fed's near zero-rate policy. The most convincing plus is consumer expectations which, based on the gain in this morning's consumer sentiment index, looks to be a positive for April as well.

In the negative column are building permits which, in yesterday's disappointing housing starts report, fell sharply. This is a reminder that housing, despite some hopeful signs, has yet to boost economic growth. And declines in the factory workweek and for factory orders are reminders that the manufacturing sector, due in part to weak exports, may now be pulling down economic growth.

Other readings include a paltry 0.1 percent gain for the coincident index which confirms ongoing weakness in economic growth and a 0.4 percent gain in the lagging index that highlights prior strength in economic growth.

In sum, this report is definitely soft and will not move expectations forward for a Federal Reserve rate hike.

Market Consensus Before Announcement
The Conference Board's index of leading indicators held steady at 0.2 percent in February, pointing to moderate growth for the economy over the next 6 months. Once again the yield spread was the biggest positive for the index reflecting the Fed's near zero rate policy. The stock market was the next biggest positive followed by the report's credit index, an index that has however consistently been pointing to healthier borrowing conditions than government reports. Other readings included a 0.2 percent rise in the coincident index, which points to moderate ongoing growth, and a 0.3 percent rise in the lagging index, which points to moderate past growth. Growth may be slow but it is sustainable.

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.