Leading Indicators Signal Slower, But Continued, Growth Ahead

Economic Blog
September 19, 2019

U.S. leading indicators were unchanged in August, following a 0.4% increase in July.

The Conference Board’s Leading Economic Index (LEI) was flat month over month, beating Bloomberg estimates of a 0.1% decline. As shown in the LPL Chart of the Day, Slower, But Continued, Growth, the LEI climbed 1.1% year over year. This marks a new low since the 2016 downturn, as the index rolled off strong readings from a year prior.

LEI

The LEI, which we include as one of the “Five Forecasters” of our Recession Watch Dashboard, has yet to turn negative this cycle. The index has fallen negative year over year before all nine recessions since 1955.

The index is calculated from 10 individual leading data sets. Help from lower interest rates was evident in this month’s positive components as we observed strength in building permits and the Leading Credit Index. Some signs of stability from the manufacturing sector were also welcome, including an increase in the average workweek for manufacturing production workers, though the manufacturing economy as a whole remains under pressure.

“The LEI continues to signal future economic growth,” said LPL Research Chief Investment Strategist John Lynch. “While we are monitoring patches of weakness in certain parts of the economy, which weigh on some LEI components, we continue to believe that the strong U.S. consumer and Federal Reserve accommodation will power this economic expansion forward.”

In August, five of ten components rose month over month, but four components fell—Institute for Supply Management  new orders, stock prices, average weekly initial claims for unemployment insurance, and the interest rate spread. Manufacturers’ new orders for nondefense capital goods (excluding aircraft) was unchanged in August. Historically, breadth in LEI components has deteriorated further before a recession has started:  More than half of the LEI components were in decline at the end of each of the past six economic cycles.

While evidence of slowing growth in some leading indicators is disappointing, we remain encouraged by the resilience of the consumer, and benefits of lower rates have started to emerge in certain data. We remain focused on labor market statistics, which drive consumer spending, for potential risks.

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

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This Research material was prepared by LPL Financial, LLC.

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