Conference Board Leading Economic Index Down For Third Consecutive Month

The latest Conference Board Leading Economic Index (LEI) for October fell to 111.7, down from the revised September figure of 111.8.

The Conference Board LEI for the U.S. decreased in October. Negative contributions from the ISM® New Orders Index, average weekly hours in manufacturing and unemployment claims, were not enough to offset the large gain in building permits. In the six-month period ending October 2019, the leading economic index decreased 0.1 percent (about a -0.2 percent annual rate), a reversal from its growth of 0.4 percent (about a 0.7 percent annual rate) over the previous six months. In addition, the strengths and weaknesses are roughly balanced.

The Conference Board CEI for the U.S., a measure of current economic activity, remained unchanged in October. The coincident economic index rose 0.8 percent (about a 1.5 percent annual rate) between April and October 2019, slightly faster than the growth of 0.7 percent (about a 1.3 percent annual rate) over the previous six months. The strengths among the coincident indicators have remained widespread, with three out of four components advancing over the past six months. The lagging economic index improved in October. With no change in the CEI, the coincident-to-lagging ratio is down slightly. Real GDP expanded at a 1.9 percent annual rate in the third quarter, after increasing 2.0 percent (annual rate) in the second quarter. [Full notes in PDF]

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.

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Conference Board's LEI

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

“The US LEI declined for a third consecutive month, and its six-month growth rate turned negative for the first time since May 2016. The decline was driven by weaknesses in new orders for manufacturing, average weekly hours, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The major difference this month is the softening in the labor market, whereas conditions in manufacturing remain weak and show no signs of improvement yet. Taken together, the LEI suggests that the economy will end the year on a weak note, at just below 2 percent growth.”

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.

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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.

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Smoothed LEI

As we can see, the LEI has historically dropped below its six-month moving average anywhere between 2 to 15 months before a recession. The latest reading of this smoothed rate-of-change suggests no near-term recession risk. Here is a twelve-month smoothed out version, which further eliminates the whipsaws:

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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.

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