The Conference Board’s Leading Economic Index (LEI) is one of our favorite economic indicators. It is designed to predict future movements in the economy based on a composite of 10 economic indicators whose changes tend to precede shifts in the overall economy. Last week, it painted a strong backdrop for future economic growth, as it rose 1.0% month over month (+0.6% prior) and 6.2% year over year. In addition, 8 of the 10 underlying indicators improved, with gains most pronounced in residential construction, manufacturing, labor markets, and financial conditions.
Looking under the hood, the 1.0% jump in January was the second highest since November 2013, while the 6.2% year-over-year gain was the largest since July 2014. Because it has a solid track record of predicting recessions, the LEI is a component of LPL Research’s Five Forecasters, with a negative move year over year suggesting increased risk of recession in the next year.
“The fact that the LEI has been successful at forecasting recessions, and is one of the few forward-looking economic indicators, makes it one of our favorites. The strong recent data indicates that a recession is nowhere in sight and signals solid underlying fundamentals in the U.S. economy,” said Ryan Detrick, Senior Market Strategist.
In addition to the LEI, another leading indicator (and one of the drivers of its underlying components) also supports the notion that a recession is not on the horizon. For more insights on fourth quarter corporate earnings and the rationale for our increased earnings forecast, check out our most recent Weekly Market Commentary, “Raising 2018 Earnings Forecasts”.