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What is the Conference Board Leading Economic Indicator?

What is the Conference Board Leading Economic Indicator?

What is the Conference Board Leading Economic Indicator? How can we predict the recession in advance?

Leading indicator is including several indicators that can reflect changes in the economy in advance. Investors often use it to predict short-term future changes in the economy. In general, predictors that predicts (or “leads”) a turning point in the business cycle, is about seven months in advance. In a sense, the peaks and troughs of leading indicators appear earlier than the stages of the economic cycle, so it is an important forecasting and planning tools. At the same time, the comprehensive index of indicators is including the indicators that can reflect the current economic situation, and determine the current economic situation.

Composition of indicators

It is including the following 10 indicators.

  1. Average weekly hours worked by manufacturing employees:
    The average number of hours a manufacturing worker works per week and represents the business need for continuous production labor.
    When workers are busier working in a longer time, it means that the economy is getting better, and vice versa.
  2. Weekly initial claims for unemployment insurance:
    The average number of people applying for unemployment insurance for the first time reflects changes in the unemployment rate and affects national income.
    When the number of people receiving unemployment benefits falls, or continues to be lower than expected, it means that the economy is improving, and vice versa.
  3. Manufacturers’ new orders, consumer goods and materials:
    The number of new orders for consumer goods and materials in the manufacturing industry can show the short-term operating capacity of the company.
    Since raw materials are upstream of the industrial chain, when orders increase, it may reflect a change in the economy.
  4. ISM Index of New Orders:
    Manufacturing new orders index, which shows whether manufacturing orders are increasing or decreasing, and measures the prosperity of the manufacturing industry
  5. Manufacturers’ new orders, nondefense capital goods excluding aircraft orders:
    This refers to the order status of products that are might use for more than 3 years. This is also a leading indicator of manufacturing sentiment, as manufacturers must have orders before they can formulate production plans, which boosts productivity.
  6. Building permits, new private housing units:
    Refers to new residential construction projects. Consumers’ willingness to buy a home represents a bullish outlook on the future economy, also being a leading indicator of the housing market and the economy.
  7. S&P 500 Index:
    This is the metric that most people care about first. Because of the part of the stock price is the company’s expected revenue, in addtion, there are more informations are mixed inside, but the response is also the most immediate.
    When the stock price rises, it may reflect factors such as an increase in corporate earnings or an increase in people’s confidence in the future.
  8. Leading Credit Index:
    Currency sector leading credit index compiled by the Conference Board (TCB), which is used to replace the M2 with a weak lead, thereby improving the leading indicator’s ability to predict turning points in the business cycle.
  9. Interest rate spread, 10-year Treasury bonds less federal funds:
    The spread between long-term and short-term interest rates provides an indication of bond investors’ expectations for future economic performance.
  10. Average consumer expectations for business conditions:
    The average expectation of consumers on market outlook, can predict the consumption boom in the next 6 to 12 months.

How to use the LEI to predict a recession?

LEI is a barometer and forecasting tool for future economic conditions, it points to changing conditions in the economic. A reliable rule of thumb is to look at the Duration, Depth, and Diffusion of exponential downsides—the so-called 3D law. In detail, duration refers to the duration of the exponential decline, and depth refers to the magnitude of the decline. To put it another way, duration and depth are measured by the index’s rate of change over the past few months. While diffusion is a measure how large the range of the decline is (the proportion of index components that fall below 50 when most components deteriorate).

The 3D law provides a signal of impending recession when the following two criteria are met.
(1) When most of the LEIs are in the “shrinking” area
(2) The decline in 6 months should be less than the median -4%
Whenever the both criteria are met, the LEI signals a decline.

Is it difficult to understand?
Simply put, once there is a turning point in the economy, the leading indicator composite index will move in the same direction for three consecutive months.

For example, when the leading indicator has moved in the same direction of -0.2%, -0.2% and -0.1% in the past three months, it is a signal that the economy “may” fall into recession. When the economy is in recession, the leading economic indicator will “definitely” appear three consecutive months of decline.

  • The decline continues to expand -> the prosperity deteriorated
  • The decline continues to shrink -> the prosperity is expected to bottom out and recover
  • The incline continues to expand -> the prosperity is getting better
  • The incline continues to shrink -> the prosperity will slow down

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