Digging Out of a Soft Patch

Leading data released recently have confirmed the U.S. economy could be digging out of its soft patch.

As shown in the LPL Chart of the Day, the Conference Board’s Leading Economic Index (LEI) increased 3.1% year over year in March. Year-over-year LEI growth accelerated, breaking a five-month streak of slowing that coincided with disappointing signs in other economic data.

LEI Indicators Show Economy DIgging Out of Soft Patch

The LEI, which is composed of 10 leading indicators, is one of our favorite gauges to watch because of its prescient track record. The index has fallen negative year over year before all nine recessions since 1955. Even though LEI growth has slowed recently, its long-term change remains squarely in positive territory.

“We’re seeing some signs of growth break through as global headwinds subside,” said LPL Chief Investment Strategist John Lynch. “Even though coincident data have slumped recently, leading indicators point to an economic rebound.”

Initial jobless claims fell to 192K, declining to a cycle low for three straight weeks for the first time since 2009. While most labor-market data serve as lagging indicators of U.S. economic health, jobless claims are a leading indicator. Historically, a 75–100K increase in claims over a 26-week period has been associated with a recession.

Retail sales rose 1.6% in March, the biggest monthly gain since September 2017. Retail sales’ impressive gain last month could have directly benefitted first-quarter gross domestic product (GDP), as consumer spending constitutes about 70% of GDP. At the very least, improving consumer data show individuals feel more empowered about the economic outlook compared to a few months ago.

On Friday, we’ll get more details on just how soft the U.S. economy’s soft patch was in the first quarter. Economists surveyed by Bloomberg estimate GDP grew 1.6%, while regional Fed bank models forecast growth from 1.4% to 2.8%.

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