Wednesday, November 25, 2015
Cutting through rhetoric - what is the LEI telling us?
There is economic reality and then there is the rhetoric of talking heads about the economy. Depending on the week, we can hear from Fed officials that the economy is ready for a rate increase or you can hear about how "data dependent" decisions require more information. So what will a simple look at the data tell us as we prepare for the holiday?
The leading economic indicator (LEI) index has been available for a long-time but sometimes gets missed in all of the talk about the latest economic announcement. It is still a good base indicator that provides early warning about economic downturns. There is no question that if the index turns negative, there will be a recession or you are in a recession. Generally, if the index falls below 1%, there will be a recession. The US economy shows signs of slowing but we are still above the 1% threshold. There should be a concern about the decline, but the rate is still good.
Looking at the percentage change from a year ago will show that the LEI has turned negative. It can stay negative for some time without a recession, but equity gains will slow in this type of environment. Reducing equity exposure should be considered for the end of the year.