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The Leading Economic Indicators Index points to “Recovery Summer”

Brent Nyitray, CFA, MBA

The Conference Board Leading Economic Index is a forward-looking index mainly used to identify turning points in the economy

The index of Leading Economic Indicators (LEI) is 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. Since it’s a combination of previously released indices, it isn’t really a market-moving release. This index can be volatile, so analysts tend to identify three-month trends as an indication that the economy is moving into another part of the business cycle.

The Index of Leading Economic Indicators increases in March

After a reasonably strong February, the Index of Leading Economic Indicators rose by 0.3 to end at +0.8. Overall, the index indicates an economy that’s accelerating. Asset prices and interest rates were positive, offset by weakness in consumer expectations about the economy.

“The March increase in the LEI suggests accelerated growth for the remainder of the spring and the summer,” said Ken Goldstein, an economist at the Conference Board. “The economy is rebounding from widespread inclement weather and the strengthening in the labor market is beginning to have a positive impact on growth. Overall, this is an optimistic report, but the focus will continue to be on whether improvements in the labor market can be sustained, fueling stronger economic performance over the next few months,” he added.

Ever since President Obama mentioned a “recovery summer” early in his tenure, the term has become a bit of a running joke, as the economy remained tepid. This year, however, we may actually see one.

Implications for homebuilders

Overall, the report shows the economy is still expanding moderately, and that the labor market should start improving. While sentiment is generally improving, the overall economy is one of slow growth, which is worrisome for increasing employment. Jobs are the most important economic statistic for homebuilders, and they need to see an increase in job growth to get some activity from the first-time homebuyer.

Overall increases in consumer sentiment, however modest, are starting to drive more business for homebuilders like Lennar (LEN), D.R. Horton (DHI), Toll Brothers (TOL), and PuteGroup (PHM). Housing starts have been so low for so long that there’s some real pent-up demand that will unleash as the economy improves. The shortage of skilled workers can negatively affect margins as business expands. Homebuilder earnings have been generally good, which support the reading from the Conference Board. An alternate way to invest in the homebuilding sector would be through the S&P SPDR Homebuilder ETF (XHB).

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