A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

June 1, 2015

Growth: Not great, but not awful
Leading Economic Index, monthly and year over year change

chart

Source: Bloomberg, as of 4/30/2015. Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom Line:

  • The Conference Board Leading Economic Index (LEI) for the US increased more than expected in April—up 0.7% from March and 5.6% on a year over year basis.
  • That could suggest US growth may pick up following a winter slowdown—though not necessarily to the degree that many hoped for this year.
  • Previous positive expectations have wilted in the face of weaker employment gains, retail sales, industrial production and capital spending recently.
  • Yet that may in turn have depressed current sentiment too far.
  • Consider that 7 of the 10 indicators that make up the LEI rose in April — including building permits, interest rate spread, leading credit index and initial unemployment claims.
  • An uptick in building permits could suggest housing sector acceleration—and a boost to growth from part of the economy that's been largely missing in action.
  • A wider interest rate spread (the difference between the 10yr UST yield and the federal funds rate), combined with better credit conditions and very low initial claims for unemployment insurance, certainly are not consistent with the end of past business cycles.
  • Indeed, initial claims for unemployment insurance have historically increased about 20% on a year-over-year basis before the onset of recession. Instead, they just recently made a new low for this business cycle.
  • If it's indeed the case that April's LEI translates into some better-than-expected gains in other economic statistics as spring turns into summer, then sentiment may indeed get a lift—and that could eventually show up in asset prices.

The chart:

  • The chart shows the monthly percentage change (columns) and the year over year percentage change (line) in the Conference Board Leading Economic Index.
  • The 0.7% gain in April followed a 0.4% gain in March after respective readings of -0.2% and 0.2% in February and January.
  • The 0.7% monthly gain is the strongest since a 1% gain in July 2014.
  • The 5.6% year over year gain in April is up from 5.3% in March.
  • Note the very weak LEI in December 2013 and January 2014 ahead of weak 1Q14 growth and also the significant rebound in the following months ahead of 2014's growth rebound.

Definitions:

The Conference Board is a US-based business membership and research association.  The Leading Economic Index (LEI) for the US is designed to signal peaks and troughs in the business cycle.

The Conference Board's Leading Economic Index is an American economic leading indicator intended to forecast future economic activity from the values of ten key variables.

The Conference Board's Leading Credit Index aggregates numerous financial indicators such bond market yield curve data, interest rate swaps and the Federal Reserve survey of bank lending.

Building permits refer to the necessary government or regulatory authorization that must be granted before construction of a new house can begin.

The federal funds rate (fed funds, fed funds target rate or intended federal funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

The U.S. Federal Reserve, or "Fed," is responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.


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