The latest Conference Board Leading Economic Index (LEI) for December was down 0.3% from the revised November figure of 111.5.

This month's release incorporates annual benchmark revisions to the 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. As a result, the revised indexes, in levels and month-on-month changes, will not be directly comparable to those issued prior to the benchmark revision.

The Conference Board LEI for the U.S. decreased in December, after a small improvement in November. Large negative contributions from initial claims for unemployment insurance (inverted), the ISM® New Orders Index and building permits fueled the recent decline. Over the second half of 2019, the leading economic index declined by 0.4 percent (about a -0.7 percent annual rate), a reversal from its growth of 0.5 percent (about a 0.9 percent annual rate) over the first half of 2019. In addition, the weaknesses among the leading indicators have become slightly more widespread than the strengths. The diffusion index is now below 50.

The Conference Board CEI for the U.S., a measure of current economic activity, edged up in December. The coincident economic index rose 0.8 percent (about a 1.5 percent annual rate) between June and December 2019, slightly faster than its growth of 0.5 percent (about a 0.9 percent annual rate) over the previous six months. The strengths among the coincident indicators have remained very widespread, with all components advancing over the past six months. The lagging economic index declined, while the CEI improved, causing the coincident-to-lagging ratio to increase. Real GDP expanded at a 2.1 percent annual rate in the third quarter of 2019, 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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For additional perspective on this indicator, see the latest press release, which includes this overview:

“The US LEI declined slightly in December, driven by large negative contributions from rising unemployment insurance claims and a drop in housing permits,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The LEI has now declined in four out of the last five months. Its six-month growth rate turned slightly more negative in the final quarter of 2019, with the manufacturing indicators pointing to continued weakness in the sector. However, financial conditions and consumers’ outlook for the economy remain positive, which should support growth of about 2 percent through early 2020.”

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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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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Here is a chart of the LEI/CEI ratio, which is also a leading indicator of recessions.

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