- Today, the Conference Board announced its US Leading Economic Index (LEI) is up for the sixth consecutive month.
- While this announcement is welcome news, it only affirms what we've been saying for months now—recovery is happening.
- All indicators have faults—investors shouldn't give too much credence to any one, or even a compilation like the LEI.
These days, everyone seems to be looking for a clear picture of what the future holds. Will this economic recovery last? Is the recession over? Will the stock market continue to rise? Clarity's hard to come by—which is nothing new, of course—so investors often parse a variety of economic indicators for hints.
Today, the Conference Board announced its US Leading Economic Index (LEI) is up for the sixth consecutive month. This monthly compilation of data pulls from 10 economic releases which all historically lead the business cycle (either by peaking or bottoming out before other economic factors) and is designed to forecast economic activity for the next three to six months. With September's 1% increase, the LEI's current six-month growth rate (11.8% annually) is the highest since 1983—as opposed to a -5.3% annual rate for the preceding six months.
Of the LEI's 10 indicators, stock prices (the S&P 500) are near the top of the list of those most closely watched by the public. This ultimate leading economic indicator has been pricing in an impending recovery since it rocketed off the bottom over seven months ago—not moving in a straight line (never does), but heading higher all the same—with world stocks now up 72%.* And recall, last March, there wasn't a glimmer of global growth anywhere.
In addition to stock prices, seven of the LEI's 10 indicators increased last month: Interest rate spread, an index of consumer expectations, average weekly initial unemployment claims, real money supply, an index of supplier deliveries, new manufacturing orders for non-defense capital goods, and new manufacturing orders for consumer goods and materials. The only two negative factors were average weekly manufacturing hours and building permits. While this announcement sounds good and is certainly positive, it only affirms what we've been saying for months now—recovery is indeed underway and will likely continue in the period ahead.
However, all indicators have faults—investors shouldn't give too much credence to any one, or even a compilation like the LEI. If an investor waits for confirmation of these hints before entering the stock market, the impending rise could be missed. Additionally, although these indicators are touted as "leading," they are announced nearly a month after the fact—today's late-October press release from the Conference Board detailed September's data.
Forecasting isn't as simple as paint-by-numbers—indicators can shade the outline, or even provide a splash of color on an otherwise blank canvas, but they don't paint the whole picture. What's clear is the stock market "V" continues—those sectors hit hardest in the late stages of the bear are still rebounding the most. So what does the LEI tell us? Other economic factors are catching up with the stock market reality—all signs point to a continuing bull market.