What Do the Leading Economic Indicators Reveal?

Yesterday, we saw the release of the Leading Economic Indicators (LEI). It was the second consecutive month of a slight rise in the index.

I have not been a fan of the outfit behind LEIs — the Conference Board — as they have, in a very BLS-like manner, continually modified the leading indicators in a way that overstates growth.

Recall that a few years ago, the LEI was reconfigured — mostly to include more financial factors, and less real world economic data. Inthat way, its a bit more like government data. The reconfigurations seem to be avoid showing negatives.

However, I have plenty of respect for the work of Northern Trust’s Paul Kasriel and Asha Banglore. Kasriel warns not to dismiss the LEIs out of hand. Kasriel notes that “year-over-year contractions in the quarterly average level of the LEI usually presage recessions.”

Paul also adds the LEI can be combined with other data points to enhance the reliability of recession forecasts. The “Kasriel Recession Warning Index” is a combination of year-over-year percent change in real monetary base, and 4-qtr. moving average percentage point spread between Treasury 10-yr. yield and fed funds rate. (see chart below)

Further, Kasriel’s colleague, Asha Banglore, notes that “strongly negative readings of the year-to-year change in the LEI are associated with recessions,” with 1966-67 as the sole  exception.

This leads me to temper my dislike of the LEI, and try to tease out what lies beneath. So let’s take a look at the LEIs, looking at what caused this increase.

The 0.1% LEI reading was marginally positive primarily due to 3 factors: 1) increasing stock prices (.16); 2) Positive yield curve (.14); 3) An unfathomable 0.13% increase in building permits.

We know the market has bounced 10% since recent lows, and the Fed sure has steepened the Yield curve. So much for the Fed managed portion of the economy — how about the real world?

Building permits up 0.13%? That’s a big WTF? and should be ignored. Consumer expectation and the average workweek both declined 0.19%.

Hence, we see somewhat of a disconnect between the LEI and the real economy.

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For those wanting more info on how to use the LEIs in econometric forecasting, see the article links discussed.

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Index of Leading Economic Indicators (LEI) vs. Real GDP year-to-year percent change

Kasriel Recession Warning Index*

Sources:
U.S. LEADING ECONOMIC INDICATORS  AND RELATED COMPOSITE INDEXES FOR APRIL 2008
Conference Board U.S. Business Cycle Indicators
http://www.conference-board.org/pdf_free/economics/bci/LEI0508.pdf

Index of Leading Indicators – Premature to Rule out Recession
Asha G. Bangalore
Northern Trust, May 19, 2008
http://tinyurl.com/4gma4w

LEI and KRWI – It’s Different This Time?
Paul Kasriel
Northern Trust, April 21, 2007
http://www.safehaven.com/article-7404.htm

RECESSION IMMINENT? BOTH THE LEI AND KRWI ARE FLASHING WARNING
Paul L. Kasriel
Northern Trust, March 22, 2007
http://www.financialsense.com/economy/northern/kasriel/2007/0322.html

Leading Indicators Show Economy Remains Sluggish
THE ASSOCIATED PRESS,  May 19, 2008
http://www.nytimes.com/aponline/business/AP-Economy.html

Leading Economic Indicators
http://globaleconomicanalysis.blogspot.com/2007/01/leading-economic-indicators.html

Category: Data Analysis, Economy

Buffett Sees ‘Plenty’ of European Acquisition Targets

Huge, nearly an hour long Buffett video, via Bloomberg:

click for  l o n g  video
Buffett_euro_ma

Billionaire Warren Buffett speaks at a news conference in Frankfurt at the start of a four-city European tour about his investment strategy and plans to add European companies to the portfolio of his investment and holding company Berkshire Hathaway Inc. Eitan Wertheimer, president of Israel’s Iscar Metalworking Cos., also speaks.

See also:  Buffett’s Shopping Trip to Europe Draws a Crowd

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Source:
Buffett Sees ‘Plenty’ of European Acquisition Targets: Video
Bloomberg, May 19 2008

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1JKvEK68ZUU

Category: M&A, Valuation, Video

Researchers Wanted

Category: Taxes and Policy

USA National Gas Temperature Map

Category: Consumer Spending, Energy

S&P500 Profits Ex 3 Oil Cos = Awful

Category: Earnings, Energy, Valuation

Survey: Is the U.S. economy on the rebound?

Category: Contrary Indicators, Economy, Psychology

How to Call a Recession

Category: Data Analysis, Economy, Employment

Subprime Writedown: Losses Per Employee

Category: Credit, Data Analysis, Derivatives, Finance

CREDIT CRISIS: Scholes vs. Paulson

Myron Scholes, chairman of Platinum Grove Asset Management LP and
1997 winner of the Nobel Prize in economics, said the worst of the
crisis in credit markets may not be over.

"From my perspective, I think that we don’t know if the storm has
passed or if we are still in the eye of the storm. Are there other shoes to
drop and new events or new shocks that will come to the fore?’ In my view, this is probably as bad or worse than the 1989-1990 crisis
and may even rival the worst crisis we’ve seen since the end of the
Second World War,” Scholes said.

click for audio
Audio_scholes

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U.S. Treasury Secretary Henry Paulson said financial market conditions have improved to the point that they will be influenced more by economic forces such as housing than by the credit crisis.

"I expect that financial markets will be driven less by the recent turmoil and more by broader economic conditions, and specifically, by the recovery of the housing sector,” Paulson said in a speech in Washington. He reiterated his view that “we are closer to the end of the market turmoil than the beginning.”

click for video

Paulson_b

Sources:

Scholes, Nobel Laureate, Says Credit Crisis May Not Be Over
Vivien Lou Chen and Thomas R. Keene
Bloomberg, May 16 (2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=a8AZRX5LUMYE&

Paulson Says Capital Markets Show ‘Signs of Progress’
John Brinsley
Bloomberg, May 16 2008
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aGeolnDH4JNc

Category: Credit, Derivatives, Video

Researchers Wanted

Category: Taxes and Policy