Leading Indicators Signal Growth Ahead

U.S. leading indicators rebounded in July, a good sign for the durability of the expansion.

The Conference Board’s Leading Economic Index (LEI) rose 0.5% month over month, the biggest gain since September 2018, and above consensus expectations for a 0.3% increase. As shown in the LPL Chart of the Day, Leading Indicators Slowing But Growing, the LEI climbed 1.6% year over year.

The LEI, which we include as one of the “Five Forecasters” of our Recession Watch Dashboard, has yet to turn negative this cycle. The index has fallen negative year over year before all nine recessions since 1955.

“Some investors have pointed out slowing LEI growth as a reason for caution,” said LPL Financial Chief Investment Strategist John Lynch. “However, the LEI is signaling moderate U.S. economic growth ahead, with no signs of an imminent recession.”

The LEI is calculated from 10 individual leading data sets, including weekly jobless claims, building permits, and stock prices. This year, the majority of LEI components have boosted month-over-month growth in the index, but more internationally exposed data sets have turned into net drags.

In July, 6 of 10 components rose month over month, but four components—average hours worked, manufacturers’ new orders, new orders for nondefense capital spending, and interest rate spreads—fell month over month. Historically, breadth in LEI components has deteriorated further before a recession began. In contrast, at the end of each of the past six economic cycles, more than half of the LEI components were in decline.

While evidence of slowing growth in leading indicators is disappointing, we are encouraged by what we see outside of manufacturing. Global manufacturing has been the sector hardest hit by prolonged trade tensions and weakened demand, and we don’t expect to see much improvement until a U.S.-China trade resolution is reached. Even then, a recovery in manufacturing may take some time.

IMPORTANT DISCLOSURES

Please see the Midyear Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matters in the Markets for additional description and disclosure.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. All performance referenced is historical and is no guarantee of future results.