CB LEI: Down In January, Annual Revisions

The latest Conference Board Leading Economic Index (LEI) figure for January was down 0.3% from the December final figure of 120.0. Annual revisions were made.

The February 18, 2022 release incorporates annual benchmark revisions to the U.S. composite economic indexes, which bring them up-to-date with revisions in the source data. These revisions do not change the cyclical properties of the indexes. The indexes are updated throughout the year, but only for the previous six months. Data revisions that fall outside of the moving six-month window are not incorporated until the benchmark revision is made and the entire histories of the indexes are recomputed.

The Conference Board LEI for the U.S. declined slightly in January. Large negative contributions from initial claims for unemployment insurance (inverted) and consumer expectations for business conditions more than offset positive contributions from the other components. In the six-month period ending January 2022, the leading economic index increased 2.6 percent (about a 5.2 percent annual rate), slower than the growth of 4.6 percent (about a 9.4 percent annual rate) over the previous six months. However, over the same period, the strengths among the leading indicators have remained more widespread than weaknesses. •

The Conference Board CEI for the U.S., a measure of current economic activity, increased in January. The coincident economic index rose 1.4 percent (about a 2.8 percent annual rate) between July 2021 and January 2022, slightly slower than the growth of 1.5 percent (about a 3.1 percent annual rate) over the previous six months. However, the strengths among the coincident indicators have remained very widespread, with all components advancing over the past six months. The lagging economic index also continued to rise, and at a faster rate than the CEI. As a result, the coincident-to-lagging ratio is down slightly. Real GDP expanded at a 6.9 percent annual rate in the last quarter of 2021, after increasing 2.3 percent (annual rate) in the third quarter.

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, February 18, 2022…The Conference Board Leading Economic Index® (LEI) for the U.S. decreased by 0.3 percent in January to 119.6 (2016 = 100), following a 0.7 percent increase in December and a 0.8 percent increase in November.

“The U.S. LEI posted a small decline in January, as the Omicron wave, rising prices, and supply chain disruptions took their toll,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “Initial claims for unemployment insurance, consumers’ outlook and declines in stock prices, and the average work week in manufacturing all contributed to the decline—the first since February 2021.

“Despite this month’s decline and a deceleration in the LEI’s six-month growth rate, widespread strengths among the leading indicators still point to continued, albeit slower, economic growth into the spring. However, labor shortages, inflation, and the potential of new COVID-19 variants pose risks to growth in the near term. The Conference Board forecasts GDP growth for Q1 to slow somewhat from the very rapid pace of Q4 2021. Still, the US economy is projected to expand by a robust 3.5 percent year-over-year in 2022—well above the pre-pandemic growth rate, which averaged around 2 percent.”

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 two to 15 months before a recession. Here is a 12-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.