Leading Indicators Steady Some Fragile Nerves

Economic Blog  Posted by lplresearch

Friday, May 21, 2021

After some shaky economic data releases in recent weeks, most notably the latest employment report, investors had turned their eyes towards Thursday’s Leading Economic Index (LEI) report for confirmation that strong underlying economic trends are still intact. Indeed, investors received the news they were hoping to, as the LEI strongly suggested that economic growth would continue at a strong clip.

On Thursday, May 20, the Conference Board released its April 2021 report detailing the latest reading for the LEI, a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it. The index grew 1.6% month over month, following up March’s strong 1.3% rebound from a brief dip into negative territory in February. Moreover, the index’s nominal value made a new all-time high, overtaking the previous peak from January 2020 prior to the recession.

While the Conference Board did acknowledge that measures of employment and production have yet to fully recover, it stated that it expects economic growth to continue, and even accelerate, in the near-term. For now, at least, investors seem willing to chalk the latest employment report up to “choppy data.”

“High magnitude swings in recent economic data have likely contributed to the unease in markets recently,” said LPL Financial Chief Investment Strategist Ryan Detrick. “There are a lot of questions out there at the moment, but we think investors need to focus on the broader trend. We are at the beginning of a new economic cycle, which brings some unique near-term challenges, but the bottom line is that in aggregate the direction is unequivocally positive.”

As seen in the LPL Chart of the Day, overcoming a difficult winter, the LEI has bounced sharply the last two months. This confirms our call for a reacceleration in economic growth, which we anticipate will continue at least for the next few months.

View enlarged chart.

Eight of the ten components grew in April, while two were unchanged. Average weekly initial claims for unemployment insurance, stock prices, and the ISM New Orders Index represented the three largest contributors. Average weekly manufacturing hours and manufacturers’ new orders for nondefense capital goods, excluding aircraft, held steady in April.

Strong breadth among the underlying indexes reinforces our view of a broad reacceleration. With the majority of the most at-risk population fully vaccinated, and the rest of the population coming along quickly, economic reopenings have begun in earnest. The Centers for Disease Control and Prevention’s recent scaling back of mask mandates should only get the ball rolling even quicker. And while there will always be the risk of one-off disappointments from economic data releases, we believe the overwhelming majority of the evidence points towards a promising second leg of this economic recovery.


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All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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