The latest Conference Board Leading Economic Index (LEI) fell for the 17th consecutive month in August as economic uncertainty and recession fears continue to grow. The index dropped 0.4% from last month to 105.4, the index's lowest reading since June 2020.
With August’s decline, the US Leading Economic Index has now fallen for nearly a year and a half straight, indicating the economy is heading into a challenging growth period and possible recession over the next year,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The leading index continued to be negatively impacted in August by weak new orders, deteriorating consumer expectations of business conditions, high interest rates, and tight credit conditions. All these factors suggest that going forward economic activity probably will decelerate and experience a brief but mild contraction. The Conference Board forecasts real GDP will grow by 2.2 percent in 2023, and then fall to 0.8 percent in 2024.” More
Background on the Conference Board Leading Economic Index® (LEI)
The LEI is a composite index of several indicators. It is a predictive variable that anticipates, or leads, turning points in the business cycle and anticipates where the economy is heading. Since the LEI is comprised of multiple components, it is meant to provide a clearer picture as it is able to smooth out volatility associated with individual components. The ten components of Conference Board LEI include: Average weekly hours in manufacturing; Average weekly initial claims for unemployment insurance; Manufacturers’ new orders for consumer goods and materials; ISM® Index of New Orders; Manufacturers’ new orders for nondefense capital goods excluding aircraft orders; Building permits for new private housing units; S&P 500® Index of Stock Prices; Leading Credit Index™; Interest rate spread (10-year Treasury bonds less federal funds rate); Average consumer expectations for business conditions.
Here is a chart of the LEI series with documented recessions as identified by the NBER. Note the peaks of the index preceding each of the recessions and the troughs occurring near the end of each recession.
In August, most components were negative or made small positive contributions.
Leading Economic Index and Recession Risk
For a better understanding of the relationship between the LEI and recessions, the next chart shows the percentage off the previous peak for the index. We are currently 10.5% off the 2021 peak. The chart also calls out the number of months between the previous peak and official recessions. On average, there is usually 10.6 months between a peak and a recession. We are currently 20 months off from the 2021 peak.
Leading Economic Index and Its 6-Month Smoothed Rate of Change
Based on suggestions from Neile Wolfe of Wells Fargo Advisors and Dwaine Van Vuuren of RecessionAlert, we can tighten the recession lead times for this indicator by plotting a smoothed six-month rate of change to further enhance our use of the Conference Board's LEI as a gauge of recession risk.
The LEI has historically dropped below its 6-month moving average (of 6-month ROC) anywhere between 2 to 15 months before a recession. Currently, the LEI has been below its 6-month moving average (of 6-month ROC) for 14 months. Note that there have been times where the LEI has been below the 6-month for multiple months without a recession.
Here is a 12-month smoothed out version, which further eliminates the whipsaws:
Currently, the 12-month moving average (of 12 month ROC) has been negative for 8 months.
Conference Board Coincident Economic Index®
The Conference Board also includes its coincident economic index (CEI) in each release. The CEI measures current economic activity and is made up of four components: nonagricultural payroll, personal income less transfer payments, manufacturing and trade sales, and industrial production.
The Conference Board Coincident Economic Index® (CEI) for the U.S. improved by 0.2 percent in August 2023 to 110.6 (2016=100), after a 0.3 percent increase in July. The CEI is now up 0.8 percent over the six-month period between February and August 2023—an acceleration from its 0.5 percent growth over the previous six months. The CEI’s component indicators—payroll employment, personal income less transfer payments, manufacturing trade and sales, and industrial production—are included among the data used to determine recessions in the US. All four components contributed positively to the index, with personal income less transfer payments and industrial production being the strongest contributors, followed by manufacturing and trade sales and employees on nonagricultural payrolls. Indeed, over the past six months, the CEI has improved signaling that the current environment remains satisfactory for now.
Observations show that when the LEI starts declining, the CEI continues to rise. Over the last 17 months, the LEI has declined continuously, with the CEI experiencing only three monthly declines in the same period. Here's a chart including both the CEI and LEI.
Here is a chart of the LEI/CEI ratio, which perhaps has been a leading indicator of recessions. I count the lead time as the number of months that the ratio has been declining prior to a recession. The LEI/CEI ratio has been in decline for the past 17 months. There have been times where the ratio has been in decline for several months without a recession.
This article was originally written by Doug Short. From 2016-2022, it was improved upon and updated by Jill Mislinski. Starting in January 2023, AP Charts pages will be maintained by Jennifer Nash at VettaFi | Advisor Perspectives
