Leading Economic Index still flashes red

The Conference Board’s Leading Economic Index was released today for the month of May. Not surprisingly, the index declined again last month by -0.7% following a decline of -0.6% in April 2023. The LEI is now down -4.3% over the last 6 months.

As you can see, the LEI tends to lead the Real GDP down. Granted in some cases, the LEI falls far more than the GDP growth but, the kind of fall we’re experiencing is certainly associated with a recession.

The components of the LEI contributing to this decline over the past 6 months is shown in Gray below and for the month of May only is shown in blue.

The cumulative effects suggest that there are three major areas that have had a positive contribution:

• Credit (a negative number is a positive contribution)

• Stock Prices

• Housing (Building Permits)

What has however weighed down is everything we’ve been talking about:

• Manufacturing

• Consumer expectations

• Average Weekly Hours

• The Yield Curve (Based on 10s - FFR)

Initial unemployment claims have not made much of a difference but, we are seeing this number increase.

When the decline in the index over the most recent six months falls below the threshold of -4.2%, a recession is indicated in the coming 12 months. We crossed that threshold sometime back.

The LEI is a good measure to look at because as you can see from the components, it takes into account a variety of measures from across the economy, most of which are quite current. We don’t know if the recession is confirmed just because the LEI says so but, we can’t ignore the fact that the measures falling like is not happy for the economy.