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Leading Indicators Drop for Second Straight Month

When investors hear the term "leading economic indicators," they might think they should get excited. After all, this is a tell for what may be coming soon. That being said, the leading economic indicators report from the Conference Board is based on data that are largely known and always covers the prior month rather than the current month.

As 24/7 Wall St. has said on numerous occasions that leading indicators just might not be very leading. Also, despite the term "leading," this report rarely moves the markets.

Thursday's report from the Conference Board showed that the Leading Economic Index (LEI) fell by 0.2% in January to 123.2. The drop in January follows a 0.3% decrease in December and a 0.5% increase in November.

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The Conference Board's Coincident Economic Index for the United States increased by 0.3% in January to 113.2. That follows a 0.1% increase in December and no change in November. The Lagging Economic Index increased by 0.1% in January to 120.0, following a 0.2% increase in December and a 0.4% increase in November.

The Conference Board's report does admit the negative trend but it seems to refute the notion of a recession brewing under our feet. The official statement said:

The U.S. LEI fell slightly in January, driven primarily by large declines in stock prices and further weakness in initial claims for unemployment insurance. Despite back-to-back monthly declines, the index doesn’t signal a significant increase in the risk of recession, and its six-month growth rate remains consistent with a modest economic expansion through early 2016.

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What matters here is that the composite LEI is designed to signal peaks and troughs in the business cycle. The leading, coincident and lagging economic indexes are essentially composite averages of several individual leading, coincident or lagging indicators. It is made of up 10 components, and the report breakdown aims to smooth out some of the volatility of individual components each month.

The 10 components are generally know, and LEI's breakdown is created from the following index readings:

  • Average weekly hours, manufacturing

  • Average weekly initial claims for unemployment insurance

  • Manufacturers’ new orders, consumer goods and materials

  • ISM Index of New Orders

  • Manufacturers' new orders, nondefense capital goods excluding aircraft orders

  • Building permits, new private housing units

  • Stock prices, 500 common stocks

  • Leading Credit Index

  • Interest rate spread, 10-year Treasury bonds less federal funds

  • Average consumer expectations for business conditions

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