Courtesy of Doug Short’s Advisor Perspectives.
The Latest Conference Board Leading Economic Index (LEI) for June increased 0.3 percent to 123.7 from May’s revised 123.3 (previously 123.7) and downward revisions were made to the four prior months. The latest indicator value came in above the 0.2 month-over-month percent forecast by Investing.com. However, the the MoM change would have been 0.0% without the revision to the prior month.
Here is an overview from the LEI technical press release:
The Conference Board LEI for the U.S. increased in June after declining in May. Positive contributions from the majority of components more than offset the negative contribution from weekly hours worked in manufacturing. Over the first half of this year, the leading economic index increased 0.3 percent (about a 0.6 percent annual rate), about the same pace as in the second half of 2015. However, the weaknesses among the leading indicators have remained slightly more widespread than the strengths over the most recent six months. [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.
For additional perspective on this indicator, see the latest press release, which includes this overview:
“The U.S. LEI picked up in June, reversing its May decline,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Improvements in initial claims for unemployment insurance, building permits, and financial indicators were the primary drivers. While the LEI continues to point to moderating economic growth in the U.S. through the end of 2016, the expansion still appears resilient enough to weather volatility in financial markets and a moderating outlook in labor markets.”
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, LLC 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 gauge of recession risk.
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:
