The Importance of the Leading Economic Index

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How the Conference Board’s Leading Economic Index (LEI)  accurately predicts recessions and recoveries in the U.S. economy.

By Jim Hingst

 Jim Hingst is a contributing writer for Sign Builder Illustrated magazine.

For more than 60 years the Conference Board’s Leading Economic Index (LEI) has accurately predicted recessions in the U.S. Does that mean that the index is bulletproof? Certainly not! But when someone is batting 1000, it’s hard to bet against them. In fact, economists are betting that there is a 70% chance that the U.S. will be in a recession within the next 12 months. Even if events do not occur within the predicted timeframe, it’s not if we will have a recession, but when as explained in the article “Surviving the Next Recession.” 

 

What is The Conference Board?

 

The Conference Board is an independent, non-profit think tank which has been forecasting the ups and downs of the U.S. economy since 1916. The composite LEI  helps economists, businesspeople and investors forecast future developments in the economy anywhere from 7 to 20 months in advance.

 

What accounts for the accuracy of the LEI is that it encompasses 10 key inputs both financial and nonfinancial. These economic indicators are a compilation of statistics from surveys of private businesses and government agencies.  The remarkable prescience of the LEI is especially significant now because it has been on a downward trend for the last 13 months as explained in “Weathering the Gathering Economic Storm.” 

The leading economic indicators in the LEI include:

 

Financial Inputs:

 

● Leading Credit Index. This index monitors the lending environment in the U.S. Favorable lending conditions indicate growth in the economy. When money is tight, the economy is in decline.

 

● S&P 500 Index of Stock Prices. The stock index appraises the value of the business sector and the financial health of stockholders. Average stock prices are generally a reliable leading indicator foreshadowing economic events in the near future. The question that many have is if the financial market is robust, how can the country be heading for a recession? A possible explanation is that overinflated prices for tech stocks are propping up the stock index.

 

● Interest Rate Spread. The “spread” measures the variance between short-term treasury rates and those for 10-year bonds. Read “Inversion of theYield Curve”. 

 

Non-Financial Inputs:

 

● ISM® (Institute for Supply Management) Index of New Orders. Based on a survey of purchasing and supply managers, this index factors in new orders; backorders; new export orders; imports; and inventories. An increase in purchasing activity indicates an expanding rather than contracting economy.  

 

● Average Consumer Expectations for Business Conditions. Consumer expectations reflect how the public views the outlook for the business environment, job security and prospects for income growth for the next 6 to 12 months. This leading economic indicator expresses how consumers believe the economy will affect their lives.

 

● New Home Building Permits. Higher material costs and climbing mortgage rates, which are now over 7%, have contributed to a decrease in building permits. This suggests a slowdown in the construction field. The ensuing ripple effect impacts sales of building materials and has a major effect on the overall economy.

 

● Average Weekly Manufacturing Hours. An increase in the weekly average of working hours for manufacturing suggests an increase in demand which will fuel production – a good sign for a growing economy. By contrast, manufacturing output declines in response to a drop in orders from retailers. It indicates that retailers are lowering inventories in anticipation for lower sales. Changes in manufacturing hours respond very quickly in response to changes in the health of the economy, which make it a key indicator to watch.

 

● New Manufacturers’ Orders for Non-Defense Capital Goods (excluding aircraft). Investments in capital goods, which includes buildings, equipment and machines, suggests that businesses plan to expand production capacity.

 

● New Manufacturers’ Orders for Consumer Goods & Materials. While orders for capital goods provide investors with a long-term view of the country’s economic future, new orders for consumer durable goods, such as appliances, furniture and vehicles, typically provide insight into short-term spending. Spending for either consumer durable goods or business durable goods indicates an upswing in the economy.

 

● Average Weekly Unemployment Claims. An increase in applications for unemployment foretells higher unemployment, lower consumer spending and a decrease in business activity. As a leading economic indicator, applications for unemployment do not show up in the unemployment rate for several weeks. By comparison, the unemployment rate is considered as a lagging indicator.

 

Conclusion.

Whether you are a financial analyst for a major corporation or the owner of a small shop, keeping a watchful eye on the Leading Economic Index is critical in guiding your business decisions.  Expect that inflation will continue unabated until 2025. As the Fed attempts to control inflation with additional rate hikes, interest rates will rise which will dampen consumer spending. When the LEI is on a downward trend, as it is now, you should prepare for a recession, which typically last for an average of 10 months. Key to survival is refocusing your sales efforts so revenues offset your shop and administrative expenses. Sales suggestions are covered in my article: “Sales Survival in an Anemic Economy.”

Read these other articles by Jim Hingst:

Harvesting More Leads from Social Media

Choosing a Business Structure

Funding Your Business

Pricing for Greater Profits

Dealing with Competition

Measuring the Success of Business Plans

Developing a Sales and Marketing Plan

Crafting Your Digital Marketing Message

 

About Jim Hingst: Sign business authority on vehicle wraps, vinyl graphics, screen printing, marketing, sales, gold leaf, woodcarving and painting. 

After fourteen years as Business Development Manager at RTape, Jim Hingst retired. He was involved in many facets of the company’s business, including marketing, sales, product development and technical service.

Hingst began his career 42 years ago in the graphic arts field creating and producing advertising and promotional materials for a large test equipment manufacturer.  Working for offset printers, large format screen printers, vinyl film manufacturers, and application tape companies, his experience included estimating, production planning, purchasing and production art, as well as sales and marketing. In his capacity as a salesman, Hingst was recognized with numerous sales achievement awards.

Drawing on his experience in production and as graphics installation subcontractor, Hingst provided the industry with practical advice, publishing more than 190 articles for  publications, such as  Signs Canada, SignCraft,  Signs of the Times, Screen Printing, Sign and Digital Graphics and  Sign Builder Illustrated. He also posted more than 500 stories on his blog (hingstssignpost.blogspot.com). In 2007 Hingst’s book, Vinyl Sign Techniques, was published.  Vinyl Sign Techniques is available at sign supply distributors and at Amazon. 

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