LEIs Dip Again

You know the drill:  The (modified) leading indicators come out yesetrday — weak once again; The excuse making should begin any moment. This time, expect to hear how this sentiment drop shouldn’t be taken too seriously, due to Katrina.

Except all this data predates Katrina.

Obligatory snark:  I guess we now wait with baited breath to see if and when the Conference Board will reconfigure the Leading Economic Indicators (again) to shift the weighting of the sentiment aspect . This time, they will attempt to explain how when sentiment declines, its a net positive to the economy. It turns out that the only way sentiment is a negative is when there are widespread mass suicides . . .


The Conference Board said five of 10 indicators that make up the leading index rose in August. These included manufacturers’ new orders for non-defense capital goods, manufacturers’ new orders for consumer goods and materials as well as stock prices.

Negatives sapping the index included activity in building permits as well as the consumer confidence.

Conf Board Chart:


Here’s the specific data from the Conf Board:

Leading Index Factors
1 Average weekly hours, manufacturing 0.2533
2 Average weekly initial claims for unemployment insurance 0.0328
3 Manufacturers’ new orders, consumer goods and materials 0.0755
4 Vendor performance, slower deliveries diffusion index 0.0702
5 Manufacturers’ new orders, nondefense capital goods 0.0191
6 Building permits, new private housing units 0.0263
7 Stock prices, 500 common stocks 0.0375
8 Money supply, M2 0.3521
9 Interest rate spread, 10-year Treasury bonds less federal funds 0.1034
10 Index of consumer expectations 0.0298


The Conference Board’s Index of Leading Economic Indicators Dips in August   (PDF)
September 22, 2005

Gloomy sentiment erodes economic indicator
Future economic activity gauge falls for second straight month in August
MSNBC,  10:42 a.m. ET Sept. 22, 2005

What's been said:

Discussions found on the web:
  1. kharris commented on Sep 23

    ECRI’s Weekly Leading Index (WLI) is similarly tepid, with the accompanying text modestly upbeat. The recent revision to the Conference Board’s series is an oddity, but it brought LEI more in line with WLI. Ignoring the possibility that the Conference Board did a dumb thing (if it stuck to Geoffrey Moore’s methods, that should not be the case, but I don’t know how the switch was done), then we have two composite indices indicating pretty much the same thing. Either they are missing a recent structural change that makes their answers wrong, or they are doing something very valuable – telling us something about workings of the economy that are not obvious on the surface. I hope for the latter, but I suspect the former.

  2. erikpupo commented on Sep 23


    I couldn’t help but bring this to your attention. This excerpt is from the latest issue of the Economist, and it ties in to what you have been discussing on economic indicator issues and what they do to economic policy-making:

    “Stephen Roach, the chief economist at Morgan Stanley, worked at the Fed in the 1970s under the then chairman, Arthur Burns. When oil prices surged in 1973-74, Burns asked the Fed’s economists to strip out energy from the consumer-price index (CPI) to get a less distorted measure. When food prices then rose sharply, they stripped those out too—followed by used cars, children’s toys, jewellery, housing and so on, until around half the CPI basket was excluded because it was supposedly ‘distorted’ by exogenous forces.”

    “As a result, the Fed failed to spot the breadth of emerging inflationary pressures throughout the economy. It looks unlikely to make the same mistake this time..Prices took off in the 1970s largely because of serious policy errors. Policymakers now understand that rising inflation harms growth, and independent central banks are more likely to stamp on inflation swiftly.”

    “The real worry with rising inflation expectations is less that they herald a surge in inflation than that they will limit the ability of the Fed or other central banks to cut interest rates if growth stumbles. It is commonly argued in America that if the housing bubble were to burst, and falling house prices threatened to choke consumer spending, the Fed would slash interest rates to prop up the economy, as it did after the stockmarket bubble popped in 2001-02. But then inflation was falling. Today, with inflation rising, the Fed would no longer have that option. If the economy hits trouble, investors and homebuyers should not expect to be bailed out again.”

  3. pjfny commented on Sep 23

    What would the aug LEI have been without the recent changes in the yield curve factor? I believe the curve was flattening into the end of aug, and if you believe the flattening yield curve means something (as I do) for the future of the economy and it is not being captured by the LEI, we ae missing important clues….comments?

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