Leading Economic Indicators

Definitions

The Conference Board Leading Economic Index is an American leading indicator. It forecasts future economic activity.

Ten components feed The Conference Board Leading Economic Index for the U.S.:

• 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
• 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

S&P 500

The Standard & Poor’s 500 stock index is a leading indicator because stock price changes reflect investor expectations for the economy and interest rates.

Money Supply (M2)

M2 measures demand deposits, traveler’s checks, savings deposits, currency, money market accounts, and small-denomination time deposits. Bank lending feeds account deposits. When inflation rises faster than money supply, lending usually declines. That makes expansion harder. So a jump in demand deposits often signals expected inflation, less bank lending, and more saving.

Interest rate spread (10-year Treasury vs. Federal Funds target)

This spread is the yield curve. It implies the expected direction of short, medium, and long-term rates. Yield curve changes are the most accurate predictor of downturns. This is especially true when the curve inverts, meaning long-term returns are expected to fall below short rates.

Index of Consumer Expectations

This is the only leading indicator built purely on expectations. It leads the business cycle because consumer expectations forecast spending or tightening. The data comes from the University of Michigan’s Survey Research Center and releases monthly.

As of December 20, 2012

The Conference Board Leading Economic Index (LEI) for the U.S. fell 0.2 percent in November to 95.8 (2004 = 100). October rose 0.3 percent. September rose 0.4 percent.

“The U.S. LEI decreased slightly in November, bringing its six-month growth rate to zero,” says Ataman Ozyildirim, economist at The Conference Board.