Yesterday, we saw the release of the Leading Economic Indicators (LEI). It was the second consecutive month of a slight rise in the index.
I have not been a fan of the outfit behind LEIs — the Conference Board — as they have, in a very BLS-like manner, continually modified the leading indicators in a way that overstates growth.
Recall that a few years ago, the LEI was reconfigured — mostly to include more financial factors, and less real world economic data. Inthat way, its a bit more like government data. The reconfigurations seem to be avoid showing negatives.
However, I have plenty of respect for the work of Northern Trust’s Paul Kasriel and Asha Banglore. Kasriel warns not to dismiss the LEIs out of hand. Kasriel notes that “year-over-year contractions in the quarterly average level of the LEI usually presage recessions.”
Paul also adds the LEI can be combined with other data points to enhance the reliability of recession forecasts. The “Kasriel Recession Warning Index” is a combination of year-over-year percent change in real monetary base, and 4-qtr. moving average percentage point spread between Treasury 10-yr. yield and fed funds rate. (see chart below)
Further, Kasriel’s colleague, Asha Banglore, notes that “strongly negative readings of the year-to-year change in the LEI are associated with recessions,” with 1966-67 as the sole exception.
This leads me to temper my dislike of the LEI, and try to tease out what lies beneath. So let’s take a look at the LEIs, looking at what caused this increase.
The 0.1% LEI reading was marginally positive primarily due to 3 factors: 1) increasing stock prices (.16); 2) Positive yield curve (.14); 3) An unfathomable 0.13% increase in building permits.
We know the market has bounced 10% since recent lows, and the Fed sure has steepened the Yield curve. So much for the Fed managed portion of the economy — how about the real world?
Building permits up 0.13%? That’s a big WTF? and should be ignored. Consumer expectation and the average workweek both declined 0.19%.
Hence, we see somewhat of a disconnect between the LEI and the real economy.
For those wanting more info on how to use the LEIs in econometric forecasting, see the article links discussed.
Kasriel Recession Warning Index*
U.S. LEADING ECONOMIC INDICATORS AND RELATED COMPOSITE INDEXES FOR APRIL 2008
Conference Board U.S. Business Cycle Indicators
Index of Leading Indicators – Premature to Rule out Recession
Asha G. Bangalore
Northern Trust, May 19, 2008
LEI and KRWI – It’s Different This Time?
Northern Trust, April 21, 2007
RECESSION IMMINENT? BOTH THE LEI AND KRWI ARE FLASHING WARNING
Paul L. Kasriel
Northern Trust, March 22, 2007
Leading Indicators Show Economy Remains Sluggish
THE ASSOCIATED PRESS, May 19, 2008
Leading Economic Indicators