Conference Board Leading Economic Index Fell In June

The latest Conference Board Leading Economic Index (LEI) for June fell to 111.5, down from the May figure of 111.8.

The Conference Board LEI for the U.S. decreased for the first time this year. Large negative contributions from building permits, the ISM® New Orders Index, and initial claims for unemployment insurance (inverted) fueled June’s decline. In the first half of 2019, the leading economic index increased 0.2 percent (about a 0.4 percent annual rate), significantly slower than the growth of 1.5 percent (about a 2.9 percent annual rate) over the second half of 2018. In addition, the strengths and weaknesses among the leading indicators are now more balanced.

The Conference Board CEI for the U.S., a measure of current economic activity, increased in June. The coincident economic index rose 0.3 percent (about a 0.6 percent annual rate) between December 2018 and June 2019, much slower than the growth of 1.3 percent (about a 2.7 percent annual rate) over the previous six months. Also, the strengths among the coincident indicators have become less widespread, with three out of four components advancing over the past six months. The lagging economic index increased, but at a faster rate than the CEI. As a result, the coincident-to-lagging ratio declined in June. Real GDP expanded at a 3.1 percent (annual rate) in the first quarter, after increasing 2.2 percent (annual rate) in the last quarter of 2018. [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 fell in June, the first decline since last December, primarily driven by weaknesses in new orders for manufacturing, housing permits, and unemployment insurance claims,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “For the first time since late 2007, the yield spread made a small negative contribution. As the US economy enters its eleventh year of expansion, the longest in US history, the LEI suggests growth is likely to remain slow in the second half of the year.”

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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