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Will the LEI lead?
LEI-GDP disconnect
Manufacturing's recovery
Focus on jobless claims
Narrator: Are the leading indicators broken?
So one of the economic data points that we get this week is the Leading Economic Index® from the Conference Board. We just call it the LEI for short.
I really like this index, but admittedly, in the post-pandemic environment, it has not been that useful to look at when it comes to forecasting GDP growth.
So historically, the LEI gives us a heads-up signal for the economy. Are we about to enter a recession? Are we about to enter a recovery? Are we going to continue to be in an expansion?
Animation: Chart showing a scale on one Y axis of 70 to 130 for the leading economic index shows it fluctuating between 70 to 100 in the 2000s and rising from about 70 in 2009 to above 110 in 2020. Meanwhile, a scale on the other Y axis of $14,000 to $26,000 for real GDP in billions shows it steadily rising from $14,000 in 2000 to more than $24,000 in 2026. Both measures dipped in 2020 simultaneously. But while GDP rose afterwards, the LEI rose from 2020 to 20220, and then declined from 120 in 2022 to 100 currently.
Narrator: But if you look at this chart, you can see that there's a pretty big divergence that has opened up between the LEI, which is in the blue line, and real GDP, which is in the yellow line.
So if you were just looking at the LEI, it would be telling you that for the past several years, the economy's been on the verge of, or in the midst of, a pretty significant recession. But clearly, in GDP terms, that has not been the case.
And I think this boils down to a very simple fact in that when you look at the construction of the LEI, most of the components are biased toward the housing market, consumer sentiment, and manufacturing, all of which have been struggling a lot relative to services, relative to labor in the past several years.
So the LEI wasn't really capturing a lot of that offsetting strength and resilience in the services economy and in the labor market.
Now that dynamic could be starting to change a little bit because we have been seeing some better manufacturing data. So I'm not so sure that this gap between GDP and the LEI closes soon or quickly, but I do think that it's worth paying attention to some of the pickup we've seen in U.S. manufacturing data and some of the marginal recovery that we've seen in consumer sentiment.
If both of those continue, then you could see the LEI maybe reestablish itself as an actual leading indicator.
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