The Conference Board Leading Economic Index or “LEI” warns of turning points in theU.S economy and gives an overall indication of the near-term future performance.
The LEI is one index out of three that are published at the same time:
- The Conference Board Leading Economic Index
- The Conference Board Coincident Economic Index
- The Conference Board Lagging Economic Index
All three are composites of existing economic indicators, but the LEI is the one that’s most followed.
What is Conference Board Leading Economic Index (LEI)?
The Conference Board Leading Economic Index anticipates (or “leads”) turning points in the business cycle by around 7 months.
The LEI is made up of 10 sub-indices which tend to move ahead of the overall economy.
The 10 sub-indices are:
1. Average weekly hours in manufacturing
The average weekly hours worked by manufacturing workers. Before hiring or firing employees manufacturing firms will normally increase worker hours when demand requires or cut back on worker hours when demand falters, which is why this is included as a leading economic indicator.
2 Average weekly hours in manufacturing
The average number of initial applications for unemployment insurance – As is probably obvious if the number of applications for unemployment increases this means more people out of work, which means people will have less money to spend, which means a weaker economy and market sell-offs all else being equal.
3. Manufacturers’ new orders for consumer goods and materials
The amount of manufacturers’ new orders for consumer goods and materials – An increase in the number of new orders should indicate a pickup in demand and vice versa.
4. Speed of delivery of new merchandise to vendors from suppliers
This is a leading indicator because an increase in demand can cause an increase in delivery time as suppliers have trouble keeping up with new demand.
5. Manufacturers’ new orders for nondefense capital goods excluding aircraft orders
The number of new orders for capital goods unrelated to defense. Another way of looking at new orders should lead the business cycle as pickups in new orders indicate rising demand.
6. Building permits for new private housing units
The number of new building permits for residential buildings. As builders try to anticipate demand, new building permits normally move higher ahead of demand which is why this is considered a leading economic indicator.
7. The S&P 500 stock index
The S&P 500 Index includes the stock prices of the 500 largest companies in the US. Markets anticipate making changes in the stocks that make up this index a leading indicator of future economic activity.
8. The inflation-adjusted monetary supply (M2)
In simple terms, this is watched as it is a measure of bank lending which increases ahead of economic expansion and decreases ahead of economic contraction making this a leading economic indicator.
9. Interest rate spread (10-year Treasury bonds less federal funds rate)
9. The spread between long and short interest rates – as we learned in our lessons on interest rates, normally the shorter term the loan the lower the interest rate one will pay. This is considered a leading economic indicator as when the distance between short-term interest rates and long-term interest rates narrow this is indicative of a situation where the market participants are anticipating Fed interest rate cuts which normally come during economic slowdowns, and vice versa.
10. Average consumer expectations for business conditions
This index measures how optimistic the consumer is about the economy and is a leading indicator as to when the consumer feels that the economy is not good and not going to be good they will normally pull back spending causing economic slowdown and vice versa.
What the market focuses on when this indicator is released depends on what is happening in the market during that time, so the best way to learn how to incorporate this indicator into your analysis and trading is to follow the indicator in real-time
When is it released?
The Conference Board Leading Economic Index® is published monthly at 10:00 am ET.