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Leading Indicators Forecasting Continued Growth

Leading Indicators Forecasting Continued Growth

July 23, 2021
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On Thursday, July 22, the Conference Board released its June 2021 report detailing the latest reading for the Leading Economic Index (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 0.7% month over month, a bit slower than the previous three months but still squarely in positive territory.

“The market’s upward momentum is contending with a few bearish narratives at the moment, one of which is second derivative economic growth concerns,” said LPL Financial Chief Investment Strategist Ryan Detrick. “And while June’s LEI growth certainly did come in below the elevated levels of the past few months, we continue to see plenty of strong economic growth ahead of us.”

As seen in the LPL Chart of the Day, the LEI’s growth rate came off its hot run rate from the last three months, but it is still growing at a healthy clip by historical standards.

View enlarged chart.

Eight of the ten components grew in June, while two fell. Average weekly initial claims for unemployment insurance, the Institute for Supply Management (ISM) New Orders Index, and the Leading Credit Index represented the three largest positive contributors. Building permits and average weekly manufacturing hours detracted from the overall index’s performance.

We noted in last month’s coverage of the May LEI report that the trailing three months had all seen monthly gains in excess of 1%, which is a historicaly rare feat. Perhaps, then, some giveback was to be expected this month as the LEI can be a volatile series. Through this lens, we caution against interpreting the deceleration as a sign that the economic outlook is deteriorating. The broader trend remains definitively positive, we remain in the early stages of a new economic expansion, which can be accompanied by occassional jitters, and continued strong breadth among underlying components should act as support for the overall index. We continue to see plenty of reasons for optimism as we move into the second half of 2021 where we expect labor supply to come back online and bottlenecks to begin to resolve themselves, allowing for increased output.

 

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