July Leading Indicators

Highlights

• The Conference Board's Leading Indicators Index rebounded back into positive territory in July after a one-month contraction in June.
• The index increased 0.1% in July after falling 0.3% in June. The Briefing.com consensus called for the index to increase 0.2%, though.

Key Factors

• Since seven out of the 10 index components are known prior to the release, the slight downward surprise will probably not result in any market reaction.
• Of the three estimated components, orders of nondefense capital goods excluding aircraft (+0.01%) was the only component to post a positive contribution to the index. Consumer goods orders had no effect on the index while M2 declined 0.08%.
• The index would have been much stronger if not for a strong drop in July's consumer confidence reading. The rebound in the preliminary reading in August will drive the Leading Indicators Index higher next month.

Big Picture

• The leading indicator index does not provide much information on where the economy is headed. It is composed of 7 key economic variables that are known prior to the release and 3 estimated components. Therefore, the only differences between the actual indicator and the consensus is due to the estimation techiniques for money supply, new orders of nondefense captial goods, and new orders for consumer goods. Usually the differences between the leading indicator estimates and consensus estimates for these variables are minor and do not effect the overall index.

Category	JUL	JUN	MAY	APR	MAR
Total Index	0.1%	-0.3%	0.5%	0.0%	1.4%
Manufacturing Workweek	0.07%	-0.33%	0.20%	0.13%	0.33%
Initial Claims	0.05%	-0.05%	-0.01%	-0.08%	0.14%
Cons. Gds Orders	0.00%	0.01%	-0.09%	-0.02%	0.21%
Vendor Performance	0.07%	-0.26%	-0.02%	-0.26%	0.27%
Nondef. Cap Gds Orders	0.01%	-0.04%	-0.01%	0.15%	-0.13%
Building Permits	-0.08%	0.04%	-0.16%	-0.30%	0.14%
Stock Prices	-0.01%	-0.14%	-0.23%	0.14%	0.21%
Real M2	-0.08%	0.16%	0.34%	-0.11%	-0.13%
Interest Rate Spread	0.30%	0.32%	0.34%	0.39%	0.38%
Consumer Expectations	-0.22%	0.03%	0.07%	-0.04%	-0.01%

Release Details

Leading Indicators

• Importance (A-F): This release merits a C-.
• Source: The Conference Board.
• Release Time: 10:00 ET around the third week of the month for the month prior.
• Raw Data Available At: http://www.tcb-indicators.org/.

In Brief

The Leading Indicators report is, for the most part, a compendium of previously announced economic indicators: new orders, jobless claims, money supply, average workweek, building permits, and stock prices. Therefore, the report is extremely predictable and of very little interest to the market. Though this series does have some predictive qualities, it is a common criticism that it has predicted "nine of the last six" recessions.
The Commerce Department previously published the leading indicators series. The collection and publishing of these data is now done by the non-profit Conference Board, which also produces the Consumer Confidence index.

In Depth

Purpose
The purpose of the leading index is straightforward: It is designed to signal turning points in the business cycle.
Composition
The index of leading indicators includes the ten economic statistics listed below.

1. The interest rate spread between 10-year Treasury notes and the federal funds rate.
2. The inflation-adjusted, M2 measure of the money supply.
3. The average manufacturing workweek.
4. Manufacturers' new orders for consumer goods and materials.
5. The S&P 500 measure of stock prices.
6. The vendor performance component of the NAPM index.
7. The average level of weekly initial claims for unemployment insurance.
8. Building permits.
9. The University of Michigan index of consumer expectations.
10. Manufacturers' new orders for nondefense capital goods.

The Conference Board, the organization that produces the leading index, standardizes these variables according to their individual weights in order to construct a composite leading index. Note that we have listed the components in order of importance. The difference between 10-year Treasuries and the fed funds rate carries the most weight; historically, this approximation of the slope of the yield curve has proven relatively more successful than other components at predicting future economic activity. Along those same lines, orders for nondefense capital goods carry the smallest weight because they have typically proven relatively poorer at pointing to changes in the direction of economic growth at large.
Performance
The leading index receives plenty of criticism. Indeed, skeptics often joke that it has correctly signalled nine of the last six recessions. Meanwhile, in its literature, The Conference Board cites the lead times with which the leading index has correctly predicted economic downturns. It is thus fair to ask whether the leading index is useless or priceless.
The answer lies somewhere in between. The charge that the index predicts recessions that do not come to fruition--and fails to warn of those that do--is hardly a fair criticism. No forecaster, even armed with an arsenal of economic statistics, has a perfect track record when it comes to predicting recessions. It is therefore unreasonable to assume that a ten-component index can do any better. That said, the index does have some reliability problems. For example, it failed to turn down prior to the 1990-91 recession, and in 1995 it signalled a downturn that never came to pass.
Usefulness
The leading index is more useful now that The Conference Board has taken control of it (the Department of Commerce stopped producing it at the end of 1996). Conference Board researchers quickly scrapped two of the old components--the change in sensitive materials prices and unfilled orders for durable goods--and added the interest-rate spread that appears in our list above. The index now lacks a wholesale price term, which some see as critical to determining future demand and inflation trends, but on net the new index emits less pronounced false signals and does a better job than it used to.
Briefing finds the leading index most helpful when we can make a statement like this: The leading index has decreased only once during the past year. Of course, even a strong trend like that does not guarantee that a recession will not form over the coming six to nine months. But we can get additional help from looking at the leading index with the coincident index, which is also published by The Conference Board, and alongside a couple of other leading indices published by Columbia University. Indeed, there exists much research that deals with the criteria for determining recession warnings (i.e., the leading index must fall during four of seven months and the