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July 21, 2008

Leading Economic Indicators

The Conference Board this morning announced a decrease of 0.1% in June in the index of leading economic indicators. The index is simply a weighted average of the 10 indicators listed below. You’ll notice some contain words such as “permits” and “new orders.” Indicators with words like that typically are good for forecasting future economic activity.

Leading Index (Factor)

1 Average weekly hours, manufacturing. (0.2552)
2 Average weekly initial claims for unemployment insurance. (0.0307)
3 Manufacturers' new orders, consumer goods and materials. (0.0773)
4 Index of supplier deliveries – vendor performance. (0.0668)
5 Manufacturers' new orders, nondefense capital goods. (0.0183)
6 Building permits, new private housing units. (0.0271)
7 Stock prices, 500 common stocks. (0.0391)
8 Money supply, M2. (0.3550)
9 Interest rate spread, 10-year Treasury bonds less federal funds. (0.1021)
10 Index of consumer expectations. (0.0284)

Combine the performance of the 10 together and you have an index that’s a good tool to predict economic growth. A general rule of thumb is that the economy will dip into a recession if the index declines three months in a row. Since 1959, the index has forecasted all seven recessions. However, it has also predicted five recessions that never happened. Therefore, people often joke that the index has accurately predicted 12 of the last seven recessions (a little economist humor).

After five months of decline, the index either rose or was unchanged in the three months before June. Taking all of this into account, the Leading Index is, at the very worst, currently forecasting a mild recession. How does this compare with your forecast?

By: Wade Rousse

Posted by Wade at July 21, 2008 5:12 PM

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