LEIs: Is the Economy Poised to Expand?

One of the reasons I push back against certain mainstream coverage of economic events is that through a combination of cheapness and laziness, they manage to report the spoonfed headline, which is misleading in its brevity.

For example: Yesterday’s Leading Economic Indicators (LEI) was reported as follows: 

The economy should expand modestly in coming months as a healthy job market continues to trump weakness in housing prices, a gauge of future business activity showed yesterday.

The Conference Board said its index of leading economic indicators rose a higher-than-expected 0.3 percent in May, lifted by rising stock prices, higher consumer expectations and the availability of jobs.

Economists said that jobs should continue to be plentiful, despite an unexpected surge in jobless claims last week. The Labor Department reported that unemployment claims totaled 324,000 last week, up 10,000 from the previous week, to the highest since mid-April.

It doesn’t take much digging through the LEIs to make you realize how superficial and misleading the coverage of this actually is.

To Preface this, note that the LEI has been indicating economic softness over the past few quarters. (disclosure: I am less than an ardent fan of the Conference Board who published the LEI). This recent softness shown has been despite the fact the LEIs been reformulated a few years ago — why? because it was showing too much economic softness due to the inverted yield curve; The new reconfiguration made it much harder to show weakness.

What was the big outlier in yesterday’s tick better than expected 0.3 vs 0.2 ?

Last month’s decline in jobless claims was courtesy of a seasonal adjustment due to last year’s Puerto Rico strike. Of course, that begs the question as to why last months seasonal adjustment is doing impacting the LEADING (as opposed to trailing) economic indicators.

There were other questionable aspects of LEIs. Building permits added 0.08 — despite the collapse in the NAHB HMI (which showed decreasing sales, traffic and permit apps) and last week’s reported decreased Housing Starts.

Consumer expectations added 0.05. Meanwhile, nearly every other poll shows consumers have been cranky. Seventy Percent of Americans Say Economy Is Getting Worse; Congress and the White House are at their lowest polling levels since Nixon. U of Mich Consumer Sentiment hit a 10 month low. But according to the LEI, consumers are upbeat.

Then there are the Capex and Manufacturing sectors. Despite the fact that Manufacturers’ orders for non-defense capital goods order are unchanged, the LEI report shows that manufacturing has rebounded — and capex is rebounding.

Bill King adds:

The Philly Fed index has been in decline for 3.5 years; so Street shills and permabulls have ignored it.  But one uptick and the shills are extolling its virtue.  And like the LEI, coincident Philly Fed components are soft.  ‘Current shipments’ fell 4.3; employment fell 7.3; average workweek is flat; ‘manufacturing  growth for next 6 months’ decreased 13.9, its lowest reading this year!  Future orders fell 11. The Philly  Fed says, “The outlook for growth diminished somewhat in June, although manufacturing executives still expect conditions to improve over the next six months.”  ‘Expect’ is now a euphemism for HOPE.

Where is the strength in the Philly Fed survey?  New orders increased 9.6 points.  Future shipments increased 3. Price indices declined a tad. Unfilled orders and delivery times declined; but they’re not a  definitive sign of economic strength.

The preponderance of component declines in the Philly Fed makes its jump to 18 from 4.2 unfathomable. As always, but even more so with economic opinion surveys, the devil is in the details/ components.



The same group of folks who have told us that Real Estate has bottomed, that sub-prime woes were contained, that there is no inflation, and that job creation has been robust are now claiming the soft spot, which they denied in its entirety is over.

Why am I releuctant to believe them?

(Now excuse me while I go flip some Blackstone Group . . . )


Expansion of Economy Is Expected to Continue
NYT, June 22, 2007

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  1. S commented on Jun 22

    If only you could call in your order to flip Blackstone using an I-phone, it would be a perfect day.

    How about that Tom Wolfe quote when Mark Hanes asked why he was on the NYSE floor. He said something like, “the Blackstone IPO is about to debut, this could be the end of capitalism as we know it”.

  2. michael schumacher commented on Jun 22

    participating in it as well BR…good luck to all of us.


  3. KP commented on Jun 22

    Plenty of intellectual dishonesty in the world. If an indicator doesn’t tell you what you want to hear, just tweak the formula until it does and everyone feels better.

    Kinda sums up this market pretty well if you ask me.

    Anyone who doesn’t live with their head up their ass knows that fantasy, just like new car smell, and the excitment of a new lover does NOT last forever.

  4. michael schumacher commented on Jun 22

    Not exactly setting the world alight now is it?? BX that is, unless you are selling from IPO prices it’s sort of a non-event


  5. matt m. commented on Jun 22


    You couldn’t be more wrong about the market. Up..down..sideways..whatever the bid/ask is absolute reality.

    Everything else (commentary-economic reports-EPS projections etc.) is nonsense.

  6. wunsacon commented on Jun 22

    Yep. The Nasdaq in March 2000 was just what it was: neither underpriced nor overpriced. If someone predicted the EPS of many companies at the time didn’t support their stock prices, that was just nonsense.

  7. Red Ocean commented on Jun 22

    “But according to the LEI, consumers are upbear.”

    Was that a Freudian slip or is that a new term for optimistically pessimistic? :)

  8. Stuart commented on Jun 22

    if there is a shred of truth to this, katie bar the door. Thunderstorm to Hurricane.

    from another blog

    A reprint of a comment I made elsewhere (but is still highly relevant):

    Afriend of mine laid out some connections which I find fascinating. First, the Bear Stearns auction of the Merrill CDOs has been continued today. Remember how they initially seized $400 million of CDO obligations, then it went up to $800, then $850m? Well, today Duetsche Bank got into the fray and added another $350m of CDOs it seized and is auctioning, so there’s over $1bn of CDOs up for grabs. Now the auction is continuing. How many reasons are there for that? One. They can’t get the price they want. The rumors in the currency trading circles are that the auction was also continued so the big lenders have time to position themselves with options on the downside of xx vs. yen pairs because (and here’s the great part) the big houses need to unwind the carry trade *right now* to have liquid funds available for margin and leverage calls when it becomes apparent that over $1 trillion of CDOs being held are worth considerably less than face value. Think it through slowly, because it’s huge. I can barely grasp the full extent of this process, so maybe we call in the black-belts to handle this one.
    Update: Bloomberg reports that Merrill has pulled the plug on the auction after selling only a “small portion” of the CDOs. http://www.bloomberg.com/apps/news?pid=20601103&sid=aKayDn8BDFB8&refer=news

    Apparently they either could not get the price or the howls of protest have penetrated – or both. Now to see if Deutsche Bank follows suit…

    Now add the implications of the above to the implications of the smokescreen highlighted in Barry’s report (another excellent piece) on the LEI and Philly Fed.

  9. michael schumacher commented on Jun 22


    great write up….I have a better understanding of the implications now…..most information is woefully lacking any background info. just that they have that amount of CDO’s and have to auction them to no one.



  10. grodge commented on Jun 22

    Disagree with the March 2000 analogy. CSCO, JDSU, SUNW, INTC, etc, etc were all trading at huge forward PE’s.

    Unlike today.

  11. Barry Ritholtz commented on Jun 22

    I agree.

    Markets aren’t terribly expensive today — they certainly aren’t 1999/2000 expensive — but neither are they particularly cheap.

    And if the consumer falters at all, high profits will be in trouble. (Not every retailer has $22.5B handy to buy back shares!)

  12. matt m. commented on Jun 22

    I think (?) wunsacon is arguing about valuation in 2000. Valuation had nothing to do with my comment that the market is the ultimate reality day to day. Everything else is noise.
    Do me a favor….call your trader or broker and tell ask for a better price on the equity security you want to buy or sell, Tell him you think the current bid/offer is not justified according to a report you read. Then make a comment about reality.

    My comments never focus on bullish or bearish, so don’t percieve that I’m some cock-eyed bidder. Just don’t fool yourself on what reality is.

  13. S commented on Jun 22


    The current report circulating is that Bear is planning to rescue the funds by lending them $3.2 billion.

    Using the 10-Q from April, Bear’s debt/asset ratio was 96.5%, where debt is loosely defined as everthing above the stockholders’ equity line.

    It’s impossible to know how liquid its assets are, and by that I mean what the realizable value of those assets are when they are ultimately converted to cash (bids have a way of disappearing when they are most needed).

    I understand anyone who sits on a trading desk and has three or more monitors is smarter than god. So BSC’s assets are undoubtedly very well hedged. But if BSC lends $3.2B to the hedge funds, their already highly leveraged balance sheet will be pushed to an extreme leaving very little wiggle room for imperfect hedges that result in real chargeoffs.

    Interesting times.

  14. Fred commented on Jun 22

    If I were a shareholder, I’d be questioning what Bear is charging themselves, for using my shareholder equity. It’s good for the overall market though.

  15. michael schumacher commented on Jun 22

    >>It’s good for the overall market though.>>


    please tell us all how bailing out a hedge fund that made poor choices with CDO’s is good for the overall market.

    They made a choice, much like you do, and will now have to pay the price for it. Simple as that.


  16. blam commented on Jun 22

    The BS CDO debacle is the air raid siren. Think about it what is being revealed about the depth and risk level of the world’s financial markets.

    Wall Street is heroic in their efforts to avoid establishing a market price for these “marketable securities”. Why ? Because there is no market for these securities. The price of a major financial component, used as collateral for leveraging hundreds of billions of OPM, is completely fabricated, just like it’s much bigger brothers, the yen carry trade and the Asian offshoring.

    What Barry said on stock valuation makes a little sense unless you consider that consumption is based on debt. Corporate margins are at record levels, reported earnings are likely to have been overstated by 20 pct, risk has been extraordinarily undervalued, corporations are as leveraged as the rest of the economy, and that the US government debt service and borrowing is in the process of crowding out private sector borrowing as the money printing operations run out of steam. The whole blasted thing could collapse at any time.

    I think stocks are 40 – 50 pct overvalued.

  17. Fred commented on Jun 22

    “corporations are as leveraged as the rest of the economy”.

    You are 100% mistaken on this point. Corporate balance sheets are in fine shape.

  18. Fred commented on Jun 22


    The early warning system for the capital markets are stress in the CP market and credit spreads. The CP market is expanding at a rate of 20% since last year and 30% over the past 3 months (Thanks Tony Crescenzi).

    The credit spreads also show no sign of stress or widening:


  19. me commented on Jun 22

    “and capex is rebounding”

    It is at Fed Ex. Or sorry, they are building hubs in China.

  20. blam commented on Jun 22

    US corporate bond issuance is expected to decline to $889 billion in 2007 from a record $1.04 trillion in 2006, according to SIFMA. The projected total for this year would still be the second highest on record.

  21. Fred commented on Jun 22

    CASH on the balance sheets is at record levels, and free cash flow continues. Sorry, no cigar on that arguement.

  22. michael schumacher commented on Jun 22


    I’ll repeat it again:

    please tell us all how bailing out a hedge fund that made poor choices with CDO’s is good for the overall market.

    They made a choice, much like you do, and will now have to pay the price for it.

    As usual you have no answer for your wild speculation, much like the property tax situation in florida you incorrectly said was going to save the R.E. market in Florida.

    STFU until you can be a man an address these and other issues you refuse to follow up on.


  23. wunsacon commented on Jun 22

    Matt, BR, I wasn’t talking about valuation per se. Matt, saying “everything else is just noise” except the bid and the ask makes no sense at all, unless you accept the (sarcastic) statement I made about the Nasdaq in 2000. I suppose I understand the point you’re trying to make but disagree with the emphatic delivery.

  24. wunsacon commented on Jun 22

    Ugh. Please disregard my last, poorly written post. Meant to say:

    I wasn’t trying to draw a comparison between the market today and in 2000. I threw out “March 2000” as an example undercutting the statement that “everything else [but ‘the market’] is just noise”. I don’t profess to be a great trader or investor. But, Matt, I don’t buy that phrase.

  25. Winston Munn commented on Jun 22

    Quote: “CASH on the balance sheets is at record levels, and free cash flow continues.”

    Fred, have you stopped to consider that all cash is debt. The cash on the balance sheets and free cash flow represents debt taken on by someone, either consumers or the government.

    When the money supply contracts, that big sucking sound won’t be jobs going to Mexico it will be balance sheet cash disappearing into the black holes from whence it came.

  26. Frankie commented on Jun 24


    Why doen’t YOU STFU!?

    “please tell us all how bailing out a hedge fund that made poor choices with CDO’s is good for the overall market.”

    That is one of the most stupid questions I’ve seen. Do you have any idea how bad the markets would have reacted to a forced liquidation of those funds? Are you that stupid, or just obsessed with arguing with everything one poster says here?


    PS…quit sucking up to Barry with your cute little questions (which he obviously ignores). You are an annoying, angry prick MS.

  27. Winston Munn commented on Jun 24

    Quote: “Do you have any idea how bad the markets would have reacted to a forced liquidation of those funds?”

    Frankie, if the markets are overextended due to inappropriate risks based on dubious credit valuations, isn’t it better to allow an immediate collapse rather than delay the inevitable – isn’t a 20% correction now much better than a 50% drop later on?

  28. jules commented on Jun 25

    “Frankie, if the markets are overextended due to inappropriate risks based on dubious credit valuations, isn’t it better to allow an immediate collapse rather than delay the inevitable – isn’t a 20% correction now much better than a 50% drop later on??

    What market are you talking about? Obviously the CDO market is overextended, but that has nothing to do with the equity markets. The equity markets would have felt more contagion if Bear Stearns had not stepped in and bailed the funds out.

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