US: Leading Indicators

Thu May 21 09:00:00 CDT 2015

Consensus Consensus Range Actual Previous Revised
Leading Indicators - M/M change 0.3% 0.2% to 0.5% 0.7% 0.2% 0.4%

The historic surge posted earlier this week in building permits gave an outsized boost to the index of leading economic indicators which jumped 0.7 percent in April. The jump in building permits is the best news out of housing all year though other data on the sector, including this morning's existing home sales report, have been much less spectacular.

Other pluses for April include the yield spread in a continued reflection of the Fed's near zero-rate policy. Smaller positive contributions come from unemployment claims and the report's credit index as well as consumer expectations though readings on this latter component have been sinking noticeably so far this month.

The one component in negative ground is the new orders index of the ISM report, a reminder that the manufacturing sector, hit by weak exports and weakness in the energy sector, has been and looks to continue to be a drag on economic growth.

The LEI may be over signaling general strength and especially strength in the housing sector. April's 0.7 percent gain, for example, compares with a much more modest 0.2 percent gain for the coincident index. The comparison between the leading and coincident indexes points to a surge of acceleration in store for the economy over the summer, an outlook not shared by many.

Market Consensus Before Announcement
Leading indicators have not been signaling the big bounce back many expect following the slow first quarter. The housing component and the manufacturing components have been holding back this report, now joined perhaps by weakness in consumer confidence. A major positive, however, will be jobless claims which are near record lows.

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.