Leading Indicators Continue to Forecast Growth

Economic Blog Posted by lplresearch

Friday, June 18, 2021

As the economic focus has frantically shifted from inflation concerns to peak growth fears to the Federal Reserve’s (Fed) tightening timeline in recent weeks, it can be helpful to take a step back and assess the broad economic trend with a diversified set of indicators.

Through this lens, we are encouraged by the latest reading of the Leading Economic Index (LEI), which strongly suggested that economic growth would continue at a strong clip in the near-to-intermediate term.

On Thursday, June 17, the Conference Board released its May 2021 report detailing the latest datapoint 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 and spans many segments of the economy. The index grew 1.3% month over month, building on the strength seen in recent months since flirting with negative territory in February.

“Three consecutive monthly gains in excess of 1% tend to be rare, and in fact, we never experienced that coming out of the 2008 recession,” said LPL Financial Chief Investment Strategist Ryan Detrick. “That we have seen this dynamic twice now exiting the trough of the most recent recession speaks to the speed and strength of the recovery. We certainly understand near-term jitters, but we expect broader economic trends to remain positive over the intermediate term, consistent with the LEI’s message.”

As seen in the LPL Chart of the Day, the LEI has shown strong growth the last three months after limping through the second half of winter.

View enlarged chart.

Seven of the ten components grew in May, while two fell and one remained unchanged. Average weekly initial claims for unemployment insurance, the ISM New Orders Index, and the interest rate spread represented the three largest contributors. Building permits and manufacturers’ new orders for nondefense capital goods excluding aircraft detracted from the overall index’s performance, while average weekly manufacturing hours held steady.

Strong breadth among the underlying components reinforces our view of continued economic strength. While supply chain bottlenecks and a slower-than-desired labor market recovery have acted as near term speedbumps, we expect those dynamics to largely self-correct and propel the economy further in the second half of the year. Reopening effects are snowballing, and we believe ever-increasing vaccination numbers, warmer weather, and the potential for strong employment growth later in 2021 warrant continued optimism for this economy.


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