Leading Economic Indicators Show A Nice Recovery, But Are They Still Relevant?

(MoneyWatch)  The Conference Board released its monthly index of Leading Economic Indicators (LEI) for the U.S. this week, making a string of six positive reports. The index rose by one point, to 103.5; four of this year's monthly gains have been greater than one point, suggesting a strong recovery is in the making. But the ingredients of the LEI are manufacturing oriented, in an economy that is dominated by service businesses. So should we be looking at another index?

The LEI has recovered well this year, rising about five percent in the seven months since it hit bottom. Its recovery over the same time span was about five percent in 1991, and just one percent in 2002. (The seven-month gain coming out of the 1982 recession, however, was nearly 10 percent.)


This strong rise comes in spite of a number of components holding it back. One is building permits, which have made little progress since June. The other is the money supply, which has been declining throughout 2009, but made a tiny positive contribution to the September calculation. And the factor with the heaviest weight, the manufacturing work week, has been down for two months and flattish all year.

Driving the index higher are capital good orders, stock prices, and consumer expectations.

The LEI must be a reasonable predictor: otherwise economists wouldn't try to forecast it, and surprising LEI reports wouldn't have their power to move the financial markets.

But the LEI has been around for a long time, since 1959 I believe, and its age is showing, at least in the data points that go into the index. (They're listed in the table below, from The Conference Board's web site.)


Is composition of the LEI still relevant? Four of the ten factors are manufacturing related, and factor with the second largest weight is the average manufacturing work week. The largest weight goes to the money supply.

The consumer sector is directly represented by just one indicator, which is given a very low weighting. Likewise the broad service sector seems underrepresented.

Economists have proposed other indicators, such as the Human Development Index and the Genuine Progress Index, which focus on education or sustainability. Those are important goals, of course, and we should benchmark our society's results in those areas, but they're not updated often, and the world needs a frequent and objective business-oriented measure more like the LEI.

It's possible that indicators that would be more service and consumer oriented are responding to the same economic influences as those in the LEI, but at some point the LEI may be looking in the wrong direction.

I'll be looking further for alternatives, and maybe even building my own index. So if readers know of any alternatives to the LEI that are regularly published, or if you have individual indicators that you think would be representative, please let us know with a comment below.

By the way, the MoneyWatch site has had an overhaul, and it's now quick and easy to sign up - just name and e-mail, I'm told - and add your two cents.