Key Points
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The LEI took out the September 2018 high, led by the continued plunge in unemployment claims.
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A deteriorating six month trend; and the trends in several LEI components bear watching.
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This year could be a mirror image of the typical year, with stronger first quarter growth giving way to a weaker second quarter.
Most regular readers know I keep a close eye on leading economic indicators; with the most widely-watched index put out by The Conference Board on a monthly basis. Its Leading Economic Index (LEI) has ten components, all of which (obviously) are economic indicators that tend to lead the overall trend in economic growth. At the same time, the Coincident Economic Index (CEI) is also released; which not coincidentally, has the same four components used to date recessions by the National Bureau of Economic Research (NBER).
The LEI for March was released last Thursday, and it increased by 0.4%, which was better than expectations and led by the continued plunge in initial unemployment claims. Although February’s reading was revised down by one-tenth, the gain in March was sufficient to get the LEI back up above the September 2018 high and further ease near-to-medium term recession concerns. The CEI also ticked up and was in line with expectations, with only industrial production being the weak link.
The chart below is a long-term look at the LEI, with notations for peaks in advance of recessions. Notice that the LEI has done its “job” by peaking in advance of every recession (while also bottoming and starting to move higher before recessions ended). Caveat: The Conference Board does make periodic changes to its components to adjust to the changing dynamics of the economic cycle, so some of the trend seen in the chart is essentially “back-fit” with today’s LEI construct.
Although the March reading did slightly take out last September’s high, you can also see it’s been in a fairly flat trend since then. In fact, The Conference Board specifically noted in its release last Thursday that the “weaknesses and strengths among the leading indicators have become equally balanced over the last six months.” In this most recent six month stretch, the LEI increased 0.4%, which was much slower than the 2.8% growth during the prior six month stretch.
LEI in 6m Flattish Trend
Source: Charles Schwab, FactSet, The Conference Board, as of March 31, 2019.
In the table below, you can see all of the 10 components of the LEI, as well as the four components of the CEI, with both the level and trend associated with each. In keeping with my long-held and oft-expressed view that “better or worse matters more than good or bad” when it comes to the relationship between economic data and the stock market; I keep a closer eye on the trend column than I do the level column. Also, you can see the direction of the trend via the “+” or “-” notations: a single + or - shows the change from the prior month. In other words, if the trend is “Stable (-)” it means it dropped from “Improving” the prior month; or if the trend is “Improving (++)” it means it moved up two notches from “Worsening” the prior month, etc.
Source: Charles Schwab, The Conference Board, as of March 31, 2019.
Notice the uptick in the trend in initial unemployment claims; which had been in a worsening trend until the latest release. There are a few caveats worth noting with regard to the celebratory aura surrounding claims’ downside breach of 200k. Yes, the fewest people in nearly 50 years filed for unemployment insurance in the past couple of weeks, but it’s not solely due to the tightness in the labor market. Importantly, many states have imposed stricter rules on their unemployment insurance programs; including making it harder to qualify, reducing the duration of benefits and cutting payouts. In fact, according to a recent AP report, just 30% of people out of work in the United States now receive unemployment insurance, down from about 40% before the Great Recession.
The LEI chart above simply tracks the level of the index over time; but we can also look at it in year-over-year terms to allow history to be a judge about the future. As you can see in the chart below, the LEI in growth rate terms remains comfortably above the average threshold at which recessions began historically. That said, given the aforementioned deterioration in the past six months, I will continue to keep a close eye on these indicators—individually and collectively.
Y/Y Change in LEI Not Signaling Trouble Yet
Source: Charles Schwab, FactSet, The Conference Board, as of March 31, 2019.
The uptick in the leading indicators confirm what other data releases for the U.S. economy show, which is that growth has rebounded a bit after a very slow start to the year. From The Conference Board release: “Taken together, the current behavior of the composite indexes and their components suggest that the expansion in economic activity should continue, but the pace of growth is likely to decelerate by year end.”
Important Disclosures:
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
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