Conference Board Leading Economic Index Increased In July

The latest Conference Board Leading Economic Index (LEI) for July rose to 112.2, up from the June figure of 111.6.

The Conference Board LEI for the U.S. increased in July, driven by positive contributions from building permits, initial claims for unemployment insurance (inverted) and the financial components. However, the yield spread remained negative for a second consecutive month. In the six-month period ending in July, the leading economic index increased 0.8 percent (about a 1.6 percent annual rate), around the same rate of growth as over the previous six months. In addition, the strengths among the leading indicators remain more widespread than weaknesses.

The Conference Board CEI for the U.S., a measure of current economic activity, also increased in July. The coincident economic index rose 0.6 percent (about a 1.1 percent annual rate) between January and July, half as fast as its growth of 1.2 percent (about a 2.5 percent annual rate) over the previous six months. Also, the strengths and weaknesses among the coincident indicators are now balanced. The lagging economic index continued to increase, but at a higher rate than the CEI. As a result, the coincident-to-lagging ratio declined. Real GDP expanded at a 2.1 percent annual rate in the second quarter of the year, after increasing 3.1 percent (annual rate) in the first 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 increased in July, following back-to-back modest declines. Housing permits, unemployment insurance claims, stock prices and the Leading Credit Index were the major drivers of the improvement,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “However, the manufacturing sector continues exhibiting signs of weakness and the yield spread was negative for a second consecutive month. While the LEI suggests the US economy will continue to expand in the second half of 2019, it is likely to do so at a moderate pace.”

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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