Another Take on the Index of Leading Indicators

Going through the Conference Board news release on the Index of Leading Indicators gives at best a slightly positive message, but mostly the message is mixed. It bothers me that positive numbers are driven in part by stock prices and building permits. The stock market prices are increasing, but the market has been jittery for the last couple of months as the sub-prime story has unraveled. Also building permits are up, but so are cancellations and there is no good count of cancellations. So building permits at this point in the business cycle may be misleading.

The Conference Board announced today that the U.S. leading index increased 0.3 percent, the coincident index increased 0.2 percent and the lagging index increased 0.2 percent in May.

• The May increase in the leading index reverses its April decline. And April's large decrease was revised up slightly due to data revisions in housing permits and manufacturers' new orders components. The leading index grew 0.3 percent from November to May (a 0.6 percent annual rate). In May, unemployment insurance claims (inverted) and stock prices made the largest positive contributions, followed by housing permits.

• The coincident index increased again in May. From November to May, the coincident index rose by 0.8 percent (a 1.6 percent annual rate). In May, employment made the largest contribution to the index. The coincident index grew at an average annual rate of about 2.5 percent in 2006, but in recent months, its growth has been fluctuating in the 1.5 to 2.0 percent range (annual rate).

• Following an essentially flat period in the second half of 2006, the leading index picked up somewhat in December, but this was followed by two consecutive declines. The leading index is still at the same level as in January 2007, and it is 0.3 percent above its May 2006 level (my emphasis). At the same time, real GDP grew only at a 0.6 percent annual rate in the first quarter of 2007, following a 2.5 percent rate in the fourth quarter of 2006. The recent performance of the leading index has been mixed with increases offsetting decreases and the number of components rising roughly equaling the number falling (my emphasis). The current behavior of the composite indexes suggests that economic growth is likely to continue, albeit at a slow pace, in the near term.

LEADING INDICATORS. Five of the ten indicators that make up the leading index increased in May. The positive contributors — beginning with the largest positive contributor — were average weekly initial claims for unemployment insurance (inverted), stock prices, building permits, index of consumer expectations, and vendor performance. The negative contributors — beginning with the largest negative contributor — were real money supply*, average weekly manufacturing hours and interest rate spread. The manufacturers' new orders for consumer goods and materials* and manufacturers' new orders for nondefense capital goods* held steady in May.