Consensus Notes The Conference Board's index of leading indicators jumped 1.0 percent in September for the sixth gain in a row. Eight of the ten components of the leading index rose in the latest month. The largest contributor in September was the rate spread between the federal funds rate, which is very low, and the 10-year Treasury note. The second biggest contributor was consumer expectations. On the debate about when recovery began, July is still the statistical favorite based on the coincident index. This index, which weighs heavily in the decisions on business cycle peaks and troughs, was unchanged in September. This index first showed an increase in July then in August, both at 0.1 percent gains.
Highlights
The index of leading economic indicators rose 0.3 percent in October, pointing to what the report says is slow growth in the first half of next year. Once again the rate spread was the greatest positive in October, at 32 basis points between the fed funds rate and 10-year Treasury yield. The size of the spread reflects the Fed's aggressive policy to hold short rates near zero. Outside of the spread, the remaining components are mixed with unemployment claims and stock prices key positives but with consumer expectations and building permits key and very strong negatives. The coincident index, based on its own set of components, was unchanged pointing to no overall economic growth, at least for October.
Definition A composite index of ten economic indicators that should lead overall economic activity. This indicator was initially compiled by the Commerce Department but is now compiled and produced by The Conference Board. It has been revised many times in the past 30 years - particularly when it has not done a good job of predicting turning points.
Why Investor's Care Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the index of leading indicators, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly-and causing potential inflationary pressures. The index of leading indicators is designed to predict turning points in the economy -- such as recessions and recoveries. More specifically, it was designed to lead the index of coincident indicators, also now published by The Conference Board. Investors like to see composite indexes because they tell an easy story, although they are not always as useful as they promise. The majority of the components of the leading indicators have been reported earlier in the month so that the composite index doesn't necessarily reveal new information about the economy. Bond investors tend to be less interested in this index than equity investors. Also, the non-financial media tends to give this index more press than it deserves.
Frequency Monthly
Source The Conference Board.
Availability Third week of the month.
Coverage Data are for the previous month. Data for June are released in July.