CB Leading Economic Index: Gains in July

The latest Conference Board Leading Economic Index (LEI) for July was up 0.9% from the June final figure of 115.0 and at another record high.

The Conference Board LEI for the U.S. increased again in July, driven by positive contributions from all components. In the six-month period ending July 2021, the leading economic index increased by 5.4 percent (about a 11.0 percent annual rate), up slightly from 5.0 percent (about a 10.2 percent annual rate) over the previous six months. In addition, the strengths among the leading indicators have remained widespread.

The Conference Board CEI for the U.S., a measure of current economic activity, also improved in July. The coincident economic index rose by 1.8 percent (about a 3.7 percent annual rate) between February and July 2021, slower than the growth of 2.9 percent (about a 5.8 percent annual rate) over the previous six months. Also, the strengths among the coincident indicators have remained very widespread, with most components advancing over the past six months. The lagging economic index continued to increase at about the same pace as the CEI, and as a result the coincident-to-lagging ratio remained unchanged. Real GDP expanded at a 6.5 percent annual rate in the second quarter of 2021, after increasing by 6.3 percent annual rate in the first quarter. More

Here is a log-scale chart of the LEI series with documented recessions as identified by the NBER. The use of a log scale gives us a better sense of the relative sizes of peaks and troughs than a more conventional linear scale.

For additional perspective on this indicator, see the latest press release, which includes this overview:

NEW YORK, August 19, 2021…The Conference Board Leading Economic Index® (LEI) for the U.S. increased by 0.9 percent in July to 116.0 (2016 = 100), following a 0.5 percent increase in June and a 1.2 percent increase in May.

“The U.S. LEI registered another large gain in July, with all components contributing positively,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The Leading Index’s overall upward trend, which started with the end of the pandemic-induced recession in April 2020, is consistent with strong economic growth in the second half of the year. While the Delta variant and/or rising inflation fears could create headwinds for the US economy in the near term, we expect real GDP growth for 2021 to reach 6.0 percent year-over- year, before easing to a still robust 4.0 percent growth rate for 2022.”

For a better understanding of the relationship between the LEI and recessions, the next chart shows the percentage-off the previous peak for the index and the number of months between the previous peak and official recessions.

LEI and Its Six-Month Smoothed Rate of Change

Based on suggestions from Neile Wolfe of Wells Fargo Advisors and Dwaine Van Vuuren of RecessionAlert, we can tighten the recession lead times for this indicator by plotting a smoothed six-month rate of change to further enhance our use of the Conference Board's LEI as a gauge of recession risk.

As we can see, the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. Here is a twelve-month smoothed out version, which further eliminates the whipsaws:

The Conference Board also includes its Coincident Economic Index (CEI) in each release. It measures current economic activity and is made up of four components: nonagricultural payroll, personal income less transfer payments, manufacturing and trade sales, and industrial production. Based on observations, when the LEI begins to decline, the CEI is still rising. Here's a chart including both the CEI and LEI.

Here is a chart of the LEI/CEI ratio, which perhaps has been a leading indicator of recessions. We count the lead time as the number of months that the ratio has been declining prior to a recession. There have been times where the ratio has been in decline for several months without a recession.