Better Days: Leading Indicators Inch Back to Cycle High

Key Points

  • The LEI took out the September 2018 high, led by the continued plunge in unemployment claims.

  • A deteriorating six month trend; and the trends in several LEI components bear watching.

  • 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.