Wednesday, June 23, 2010

A Peak In The Leading Indicator Index Indicative Of Mid-Cycle Economic Phase

A number of strategists are citing the fact the economic leading indicators index is rolling over based on April's report and thus the economy is rolling over as well. Investors should note though that this is not an uncommon occurrence when the economy is moving into its mid cycle phase. A recent report from Fidelity provides a chart of the LEI versus the coincident indicator index.

"The number of leading indicators rising on a one-month basis fell significantly from seven out of 10 in March to four out of 10 in April (see Exhibit 3, right). On a more sustained six-month basis, eight out of 10 indicators rose in April—the same as the prior month. The declines on a one month basis were relatively small for all of the leading indicators except building permits, which fell 12% in April from the prior month--a sign of continued stress in the residential housing markets. However, continued strength on a six-month basis and mixed messages on a one-month basis could be indicative of the economy moving into the mid-cycle stage of economic recovery (emphasis added).

While leading indicators tend to rise in near unison immediately following recessions, interpreting them becomes more difficult as the economic recovery gains footing because these indicators tend to rattle around in a more volatile manner. The Conference Board combines these 10 leading indicators into a weighted Leading Economic Indicators (LEI) index that helps paint a broader picture than any one of its subcomponents. As an economic recovery develops, it is helpful to observe these leading indicators alongside other data to gauge a recovery’s strength. The Coincident Economic Indicators (CEI) Index, which helps to gauge current economic conditions as opposed to the leading nature of LEI, is suitable for this purpose."


Rising Corporate Confidence: Yet to Show Signs of Reversal
Market Analysis, Research & Education
A unit of Fidelity Management & Research Company
June 14, 2010

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