Posted by Marcelo Perez

For the second consecutive month, the Conference Board reported an expansion in the index of leading economic indicators. January’s LEI index rose a bullish 0.4% for the month, compared to a downwardly-revised 0.2% gain in December. This follows a 0.7% drop in November and a 1.0% decline in October. Today’s report shouldn’t be taken with a grain of salt, as a trend seems to be developing. The recession’s intensity could ease over the next few months, according to the Conference Board, as the LEI is foreshadows what is to come. Two months does not make a trend but it may be the beginning of a recovery, one that has come without any government assistance. The economy may have already made its highly sought-after bottom. 

Economists were expecting a flat reading for the month. The index is down 1.9% (-3.7% annual rate) in the last six months. Compare that to a decline of 1.1% (-2.1% annual rate) during the previous six months.

The index is used to predict the direction of the economy’s movements in the months to come. The index is made up of 10 economic components, whose changes tend to precede changes in the overall economy. The ten components are:

     1. the average weekly hours worked by manufacturing workers
     2. the average number of initial applications for unemployment insurance
     3. the amount of manufacturers’ new orders for consumer goods and materials
     4. the speed of delivery of new merchandise to vendors from suppliers
     5. the amount of new orders for capital goods unrelated to defense
     6. the amount of new building permits for residential buildings
     7. the S&P 500 stock index
     8. the inflation-adjusted monetary supply (M2)
     9. the spread between long and short interest rates
     10. consumer sentiment

Five of the components were positive for the month. 

The positive contributors — beginning with the largest positive contributor — were real money supply, the interest rate spread, index of consumer expectations, manufacturers’ new orders for nondefense capital goods, and manufacturers’ new orders for consumer goods and materials.

The negative contributors — beginning with the largest negative contributor — were average weekly initial claims for unemployment insurance (inverted), building permits, average weekly manufacturing hours, stock prices, and the index of supplier deliveries (vendor performance).

The biggest positive contributor was real money supply. This is logical and expected as the Fed has vigorously and continuously pumped large amounts of money into our financial markets, in an attempt to quell the credit crunch and restart our economy.

The Conference Board’s coincident index decreased 0.5% in January, while the lagging index decreased 0.1%.