Leading indicators: More than meets the eye.
JUL. 24, 2019
The Leading Economic Indicator index (LEI) from the Conference Board fell by 0.3% in June from the previous month. That’s the first monthly decline since December 2018 and the weakest reading since January 2016.
While monthly changes in the index can be volatile, a look at year-over-year changes may give a clearer impression of the economy’s direction, and by extension what business conditions and stock performance may be going forward. When the year-over-year change in LEI has turned negative, it has historically been a reliable predictor of economic recessions. The most recent LEI report showed a year-over-year change of 1.6%–still positive but definitely in a deceleration trend.
However, as the chart also shows, we have seen similar drops in LEI during the current expansion—occurring around the previous two periods of global growth uncertainty (in 2012 and 2015.) Moreover, individual components of the LEI index such as consumer sentiment and credit are in better shape right now than they were before previous recessions. This suggests to us that the economy remains reasonably healthy to support a continuation of growth for the near term.
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