Leading, Lagging, Coincident

Leading Indicators

Leading Indicators are an effective means to identify when public equities portend a significant downswing.  When LEI starts to drop down and fall, start to watch with a focused approach.  When Coincident Economic Indicators start to fall down, public equities are expected to follow.

Ironically, the Conference Board’s Index of Leading Economic Indicators (LEI) really isn’t leading data. Upon release, the data is almost two months old, and most of the 10 component reports have been released prior to the LEI itself. It purports not to signal a change in market direction until the index has moved in the same direction, up or down, for three consecutive months, which it rarely does. It is widely viewed as a better harbinger of recession than expansion. However, it has predicted a number of recessions that did not occur, suggesting that “economists have correctly predicted nine of the last five recessions.”

Leading Indicators Index is put out by the Conference Board, and latest indicators can be found here.   Details of each of the ten (10) elements of Leading Economic Indicators (LEI) are listed after the jump.

LEI nov 2019

Leading Economic Indicators Component Elements

  1. Average weekly hours, manufacturing (data / graph)
  2. Average weekly initial claims for unemployment insurance (here and here)
  3. Manufacturers’ new orders, consumer goods and materials
  4. ISM® Index of New Orders (data / graph)
  5. Manufacturers’ new orders, nondefense capital goods excluding aircraft orders  (graph)
  6. Building permits, new private housing units (graph)
  7. Stock prices, 500 common stocks (graph)
  8. Leading Credit Index (data and graph)
  9. Interest rate spread, 10-year Treasury bonds less federal funds
  10. Average consumer expectations for business conditions

The Jobless Claims Report, is a report released weekly by the Department of Labor. In a weakening economy, unemployment filings will trend upward. They are generally analyzed as a four-week moving average, in order to smooth week-to-week variance. However, this report has a built-in bias in that self-employed persons, part-timers and contract employees who lose their jobs don’t qualify for benefits and thus are not counted.

M2 Money Supply is a technical calculation of how much money is moving around in the economy is released by the Federal Reserve.   An upward trend suggests inflation. However, in a digital world in which vast sums of money can be transmitted across the globe in an instant, this indicator has lost much of its importance over the last decade.