Why the Leading Economic Index rises with more economic activity

Market Realist

The past week's key economic and business indicator releases (Part 2 of 6)

(Continued from Part 1)

The Leading Economic Index (or LEI)

The Conference Board’s Leading Economic Index (or LEI) for the U.S. is issued monthly. It’s a composite index of economic indicators that should lead overall economic activity. In effect, it’s a business cycle indicator. It’s based on ten different economic statistics.

  1. Average weekly hours, manufacturing
  2. Average weekly initial claims for unemployment insurance
  3. Manufacturers’ new orders, consumer goods and materials
  4. ISM Index of New Orders
  5. Manufacturers’ new orders, non-defense capital goods excluding aircraft orders
  6. Building permits, new private housing units
  7. Stock prices, 500 common stocks
  8. Leading Credit Index
  9. Interest rate spread, ten-year Treasury bonds less federal funds
  10. Average consumer expectations for business conditions

Since it’s a combination of previously released indices, it isn’t really a market-moving release. The LEI is a forward-looking index that is mainly used to identify turning points in the economy. However, this index can be volatile. Analysts tend to identify three-month trends as an indication that the economy is moving into another part of the business cycle.

Highlights for June

The LEI for the U.S. increased 0.3% in June to 102.2—it was 100 in 2004. June’s reading followed a 0.7% increase in May, and a 0.3% increase in April. For the month of June, the rate of economic activity continued to expand moderately, backed by stronger consumer demand driven by sustained job gains and improving confidence. However, a stronger housing market and more business investment could also provide an upside to the overall economy.

The index of leading indicators is designed to predict turning points in the economy like recessions and recoveries. An increase in the LEI reflects an economy that’s expanding moderately.

Investors’ takeaway

The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth. It’s 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 Vanguard Total Stock Market ETF (VTI), and the SPDR Dow Jones Industrial Average ETF (DIA), which track blue-chip companies like Johnson & Johnson (JNJ) and ExxonMobil Corp. (XOM), also reflects the course that the U.S. economy is taking.

While the LEI provides vital insights into the performance of the economy, investors often rely on the Beige Book to assess the future course of the Fed’s policy. Continue reading the next section in this series to learn what the Beige Book is.

Continue to Part 3

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