Where is the Leading Indicators Index leading the economy?

Market Realist

Must know: This week's releases and the upcoming FOMC meeting (Part 8 of 8)

(Continued from Part 7)

The Conference Board’s Leading Economic Index (or LEI) for the U.S., issued monthly, is a composite index of economic indicators that should lead overall economic activity. It is, in effect, a business cycle indicator. It’s based on 11 different economic statistics: average workweek, initial jobless claims, new orders, building permits, unfilled durable goods, commodity prices, consumer expectations, stock prices, and money supply.

As per the February release, the LEI rose by 0.3% in January. Positives in the report included the yield spread and the report’s leading credit index, where gains have been pointing to a rise in lending. A drop in unemployment claims was another major positive, although claims have since moved sideways. A drop in building permits was January’s largest negative.

The Leading Indicators Index is designed to predict turning points in the economy, such as recessions and recoveries. An increase in the LEI reflects an economy that is expanding moderately.

Investor’s takeaway

The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.

The performances of popular exchange traded funds (or ETFs) like the SPDR S&P 500 ETF (SPY), the iShares Core S&P 500 ETF (IVV), and the iShares S&P 100 ETF (OEF), which track large-cap equities of companies like Apple, Inc. (AAPL) and Exxon Mobil (XOM), also reflects the course that the U.S. economy is taking.

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