November 22, 2019
October’s leading indicators show the domestic economy could be bottoming.
The Conference Board’s Leading Economic Index (LEI) declined 0.1% in October, following a downwardly revised 0.2% decline in September. As shown in the LPL Chart of the Day, the LEI grew 0.3% year over year last month, tying June 2016 for the slowest growth of the expansion. Historically, year-over-year declines have preceded every U.S. recession since 1955, so we monitor this metric in our Five Forecasters.
Even though the gauge barely eked out a year-over-year gain last month, we see signs that the worst may be over for the domestic economy.
Manufacturing continues to have an outsized impact on the LEI. While manufacturing weakness is concerning, the sector has been in decline for many months because of the global economic slowdown. October’s slight increase in initial jobless claims also dragged on the LEI, but unemployment claims are still near a cycle low. We’d expect to see a larger pickup in claims if a recession were around the corner.
Slowing year-over-year LEI growth has also been more reflective of past economic strength than present weakness. In 2018, the LEI surged as much as 6.6% year over year through September before trade tensions flared up. Since then, the gauge’s long-term growth has slowed as the domestic economy has moderated from an impressive pace.
Now that the LEI has been largely flat for over a year, future releases may be more indicative of where the economy could be heading.
“The year-over-year LEI print was this low earlier in the cycle, and we recovered,” said LPL Financial Senior Market Strategist Ryan Detrick. “However, we believe a positive macroeconomic catalyst, such as a potential ‘phase one’ trade deal with China, will be necessary before LEI growth can pick back up.”
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