In our pervious article, we mentioned the US industry research organization, the Conference Board, and its Leading Economic Index (LEI). Last time, five of its components were revealed. Today, we are going to share the rest and see how well the LEI performs.
6. Building permits for new private housing units
The property market is an economic sector that rises or falls before the changes in economic activities. Therefore, privative housing building permits can be treated as a leading indicator of property market activities.
7. S&P 500 Index
Like Hong Kong, the stock market usually reacts dramatically before recessions. Since 1973, the United States has experienced six recessions. On average, S&P 500 index peaked 5 months before recessions.
8. Leading Credit Index
The index combines six financial indicators to analyse the resilience of the financial system.
9. Interest rate spread between 10-year treasury yields and overnight borrowing rates
When the economy deteriorates, the spread becomes narrow. On the other hand, when the economy improves, the spread becomes widen.
10. Average Consumer Expectations for Business and Economic Conditions
Since consumption is about two-thirds of the US economy, consumers’ expectations of future business and economic conditions are very important. If they are optimistic about the future, consumption will be increased. Conversely, if they are pessimistic, consumers will reduce their budget on consumption.
Is LEI a good leading indicator?
From 1967 till now, LEI usually peaked six months before the recession on average and fell sharply before the recession, such as during 2000 and 2007 (see Figure 1). If you are interested in getting the latest data, you can pay more attention to the Conference Board website.
Figure 1: The relationship between the LEI (blue line) and the recession (grey area)
Image source: The Conference Board