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Economic indicators bottoming or more economic weakness?

Conference Board


The Conference Board is nonprofit business membership and research organization of over 1,000 public and private corporations and other members, encompassing 60 countries. The member-driven not-for-profit think tank organization continues to play an integral role in reporting economic conditions for the U.S. economy since its formation in 1916. It publishes unbiased information, including the widely tracked economic indicators – leading, coincident, and lagging economic indicators. The composite economic indicators help identify peaks and troughs in the business cycles.


Based on the uncertainties surrounding the U.S. and global economy and central banks, many investors have turned to the Conference Board’s economic indicators, including the Lagging Economic Indicators (LAG), Coincident Economic Indicators (CEI), and Leading Economic Indicators (LEI) for guidance to help uncover the state of the economy.


Lagging Economic Indicators (LAG)


(1) Non-farm payrolls (NFP) – U.S. Bureau of Labor Statistics publishes monthly labor market reports. (2) Average hourly earnings – U.S. Bureau of Labor Statistics releases the price businesses pay for labor on the first Friday of each month. (3) Unemployment rate – One of the most significant lagging indicators. It shows the percentage of the workforce that is unemployed but seeking employment. (4) Corporate earnings – It is a popular lagging indicator widely tracked by investors. Because it reports the past performances of a company, it is often late to pivotal turns in business cycles.


Coincident Economic Indicators (CEI)


(1) Gross Domestic Product (GDP) – It is one of the broadest measures of economic activity. The important coincident indicator measures the change in the total value of all goods and services produced. (2) Gross National Product (GNP) – Another popular coincident indicator measuring economic activities. Unlike GDP, GNP includes the net income from foreign investments. (3) Personal spending or consumer spending – Because 70% of the US GDP comes from consumer spending, it is one of the most followed measures of economic health. (4) Retail sales – U.S. Census Bureau releases the total value of consumer-level sales approximately 13 days after the month ends. It is a gauge of consumer spending and economic activity. (5) Industrial production – This indicator measures the value of the output produced by industrial manufacturers. It is another relevant coincident indicator since production is sensitive to changes in the business cycle. (6) Consumer Price Index (CPI) – Investors and traders monitor CPI for changes in the price of goods and services to determine inflationary pressures and shifts in monetary policies. (7) Producer Price Index (PPI) – Another widely followed inflation indicator that records finished goods and services from producers. Changes in PPI can lead to cost-push inflation.


Leading Economic Indicators (LEI)


(1) Central bank monetary policies – One of the most important leading indicators in the financial market. Actions by central bankers via adjustments in monetary policies can influence the economy by stimulating or slowing the business cycles, creating price stability, and allowing for employment. (2) Money supply is a complex leading indicator. The degree of money in circulation signals the willingness of consumers and businesses to spend and invest. (3) Consumer confidence – There are many sentiment indicators available. However, the Conference Board’s Consumer Index is one of the most influential of all consumer confidence surveys. (4) Capacity utilization – The indicator reports on the extent a company uses its machinery and productive capacity. Higher capacity utilization can lead to higher economic output and growth. (5) New housing starts – The number of new residential buildings is highly correlated with building permits and is a powerful indicator of construction. (6) Commodity prices – Commodities such as Oil is a leading indicator of economic conditions and inflationary forces. (7) Bond yields – Another critical leading indicator that serves dual purposes - convey investor confidence (risk appetites) and economic conditions. (8) Stock market – Some believe it may be one of the best leading indicators of the economy and investor sentiments. When stocks perform well, it signals an economy that is expanding or recovering, and vice versa.


Conference Board - LAG, CEI, and LEI for May 2023


The Conference Board Laging Economic Index (LAG) for the U.S. increased by 0.1% in May 2023 to 118.4 (2016 = 100), improving upon the decline of 0.1% in April.

The Conference Board Coincident Economic Index (CEI) for the U.S. increased by 0.2% in May 2023 to 110.2 (2016 =100), following the 0.3% increase in April. While industrial production hurt the CEI, sales, employment, and income growth led to positive gains for May.


The Conference Board Leading Economic Index (LEI) for the U.S. declined by 0.7% in May 2023 to 106.7 (2016 = 100) after declining 0.6% in April. The LEI fell primarily due to a deterioration in customer expectations for business conditions, new orders, inverted yield curves, and weaker credit readings.


Conclusion


CEI tends to be highly correlated with real GDP. On the other hand, LEI anticipates turning points in the business cycle by around seven (7) months, peaking and bottoming ahead of economic tops and bottoms.


Although the two Conference Board’s LAG and CEI indicators have improved from the prior months, the LEI remains weak, declining in the last fourteen (14) months, indicating slowing U.S. economic activities. However, the LEI contracted by 1.4% from November 2022 to May 2023, a smaller rate of decline than the -0.4% over the previous six months.


The current decline in LEI would imply an impending U.S. economic recession as the negative contributions to the indicator remain widespread among the financial and non-financial components. LEI year-over-year % change appears headed for a retest of the lows established during 2001 and 2020 at -11 to -10%. A rebound from here may signal a business cycle bottom and the start of a U.S. economic expansion.

A brief review of the LEI chart and the SPX Index suggests a positive divergence is developing. The LEI continues to trend lower. However, the SPX Index appears to have bottomed out last year and has trended higher. Stocks typically decline ahead of recessions and slowdowns or soft landings.


Since SPX Index is one of the leading contributors to the Conference Leading Economic Index, it is normal for stocks to advance before a bottom in the business cycle. If the October 2022 low (SPX – 3,491.58) is indeed a market bottom, this would imply the worst of the economic contraction is behind us. Also, the magnitude (-27.54%) of the stock market (SPX) decline from January to October 2022 is more contained than under recessionary conditions, hinting that it may be discounting an economic slowdown or a soft landing rather than a deep recession or a hard landing.


Source: Courtesy of Conference Board, Bureau of Economic Analysis (BEA) – Chart 1

Source: Courtesy of Conference Board, Bureau of Economic Analysis (BEA) – Chart 2

Source: Courtesy of Conference Board, Bureau of Economic Analysis (BEA) – Chart 3

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