Take Me to Your Leader: Analyzing the Latest Leading Indicators

Key Points

  • Leading indicators are at a record high, but in a relatively flat trend over the past year.

  • Manufacturing remains weak, while services/consumer remains healthy; with confidence/employment likely defining whether the divergence persists.

  • Citi’s Economic Surprise Index has shot up, but Bloomberg’s Economic Surprise Index of Leading Indicators has not confirmed.

Each month, on the day of The Conference Board’s release of the Leading Economic Index (LEI) I put together a package of details, including charts and tables. It’s been a while since I shared it with readers of these publications. Leading indicators are always “tells” about the economy looking forward, but they take on increasing importance when late in an economic cycle.

The LEI is made up of 10 components and historically they have done a great job of peaking and rolling over in advance of recessions. In level terms, the LEI is at a record high; however, as you can see in the first chart below, the trajectory over the past year has been fairly flat (a unique condition relative to the past seven cycles, when the peak in the LEI was less of a span over time and more of a point in time).

LEI Level in Flattish Upward Trend

Source: Charles Schwab, Bloomberg, The Conference Board, as of August 31, 2019.

The lack of upward progress can be seen in the year-over-year percentage change version of the chart below. It clearly shows the latest in what has been a trifecta of slowdowns since the economy rebounded out of the 2007-2009 recession.

Trifecta of Mid-cycle Slowdowns?

Source: Charles Schwab, Bloomberg, The Conference Board, as of August 31, 2019.

The relationship between economic data levels and rates of change is always essential to understand. It’s why I’ve always said, when it comes to analyzing economic data (especially as it typically relates to the stock market), it’s crucial to understand that “better or worse tends to matter more than good or bad.” It’s human nature to think of economic data in “good vs. bad” or “strong vs. weak” terms; when we should pay at least as much attention to the data’s rate of change (“better vs. worse”).

What’s important now—obviously—is where the leading indicators go from here. It could be that this is indeed the third meaningful slowdown during this cycle, and that we set to rebound off the near-zero line in year-over-year terms. Or, if the data continues to deteriorate, the likelihood that this move down is indicative of a near-term recession will increase.