The Conference Board’s Leading Economic Index (LEI) is one of our favorite economic indicators. It is designed to predict future movements in the economy based on a composite of 10 economic indicators (like manufacturers’ new orders, stock prices, and weekly unemployment claims) whose changes tend to precede shifts in the overall economy. Last week, the LEI painted a continued strong backdrop for future economic growth, as it rose slightly above the previous month and 5.9% year over year (YoY).
Looking under the hood, the LEI has risen or been flat for 29 consecutive months, the longest streak in more than 30 years. While the yield curve, peak earnings, Federal Reserve (Fed) worries, and trade issues with China have been getting all the attention recently, all recessions going back to the early 1970s first saw the LEI turn negative YoY; and because of its solid track record of predicting recessions, the LEI is a component of LPL Research’s Five Forecasters.
“The fact that the LEI has been very successful at forecasting recessions, and is one of the few forward-looking economic indicators, make it one of our favorites. The continued strong data suggest a recession is nowhere in sight and signal solid underlying fundamentals in the U.S. economy,” said Ryan Detrick, LPL senior market strategist.
Last, examining all seven recessions going back to early 1970 shows some interesting developments. It turns out the LEI turned negative year over year on average eight months (with a median of six months) before a recession officially occurred. That is what we call a nice track record. Again, with the LEI up 5.8% year over year, we believe we are a long way from this economic indicator flashing any major recession warning.
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