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Leading Economic Indicators signal strengthening economy

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 moderates in October

After increasing by 0.1 in October, the Index of Leading Economic Indicators rose by 0.7 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.

“November data reflect a U.S. economy that is expanding modestly, discounting some renewal in activity after the government shutdown,” said Ken Goldstein, Economist at The Conference Board. “The coincident economic index shows the economy expanding at a relatively slow pace. The trend in the leading economic
index is stronger, signaling for some time that the economy is developing forward momentum, and will continue to strengthen through early 2014.”

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), KB Home (KBH), Toll Brothers (TOL), Standard Pacific (SPF), and NVR Homes (NVR). 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 could negatively affect margins as business expands. Homebuilder second quarter earnings were generally good, which supports the reading from the Conference Board.

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