Sympathy for the Devil in the Details of Leading Economic Indicators

Key Points

  • Leading economic indicators are showing no stress on the surface; but it’s what’s beneath the surface that often matters more to the stock market.

  • Global leading indicators are already signaling heightened stress and rising risk of recession.

  • The spread between “soft” and “hard” economic data is eye-opening.

Regular readers likely know two things about me. I keep a close eye on leading economic indicators and focus at least as much on trends as levels. It’s why one of my long-held mottos is “better or worse matters more than good or bad.” It’s human nature to focus on levels—when the economic data is strong, we feel better about both the economy and the stock market. The rub is that the stock market has a fairly uncanny ability to sniff out inflection points in the economy. It’s why we often borrow a phrase from Walter Gretsky to his hockey-playing son Wayne: the stock market tends to “skate to where the puck is going, not where it has been.”

LEI saying all clear?

In terms of the leading indicators, the most widely-followed is the Leading Economic Index (LEI) put out monthly by The Conference Board. As you can see in the chart below, there is no sign of deterioration in the level of the LEI; having been in an accelerating trend for much of the period since coming out of the financial crisis-related recession. Historically, it was an average 13 months from LEI peaks to recession starts. On that basis, it appears the runway remains reasonably long between now and the next recession.

U.S. LEI Still Surging

Source: Charles Schwab, FactSet, National Bureau of Economic Research (NBER), The Conference Board, as of September 30, 2018.

But it’s important to keep an eye on what’s under the LEI’s hood from a trend perspective. That’s why I track both the level and trend of the 10 sub-indicators, seen in the table below. Although it’s not by any means a sea of red, there are some notable weaker trends among the leading indicators; including the average workweek, ISM new orders and building permits.

Source: Charles Schwab, FactSet, The Conference Board, as of September 30, 2018.