The forward-looking index has declined for 20 consecutive months, is down 12.6% from its peak two years ago, and down 7.6% from last year. Such a sharp and sustained decline in the index has never been seen unless it was immediately followed by an economic recession.Thank you for reading this post, don't forget to subscribe!
- The Conference Board’s leading economic index has declined for 20 consecutive months.
- The index has never fallen this far without the economy going into recession.
- Ned David Research explains why the commonly cited LEI indicator “cries wolf”.
But this time may ultimately be different as it appears the index “has cried wolf,” Ned Davis Research said in a recent note. The firm highlighted why the economic index’s perfect track record of warning about an impending recession may finally be coming to an end.
“LEI may be another victim of pandemic-related distortions,” the NDR said.
This is because the underlying components of the index give too much importance to goods and not enough to services. This is a problem when you consider that services account for about 85% of today’s economy.
“Five of the ten indicators relate to goods and three relate to financials,” the NDR reported. Only one component of the LEI captures the service economy, and that is unemployment claims.
The major index failed to capture the accelerating pace in the US economy during the second half of 2023 due to heavy reliance on goods-intensive components, with GDP growing by about 5% in the third quarter.
“The shift from goods to services has been well documented in this cycle,” NDR said.
Goods-focused components of the LEI include consumer goods and materials orders, the ISM New Orders Index, building permits and consumer expectations for business conditions, all of which have declined from early 2022 peaks.
But at the same time, all these components have been rising in recent months, albeit from low levels, the NDR highlighted. This is not enough to break the LEI out of its rut, and is unlikely to change unless more service-oriented components are added to the index.
“One day the economy will go into recession, but it will not happen because of LEI’s repeated warnings. It will have to wait for a more normal economic cycle,” the NDR said.