Tuesday, 21 June 2005

US leading index falls further in May

The Conference Board announced yesterday that the US leading index decreased 0.5 percent to 114.1 in May. The April figure was revised to show no change from the previous month, while the index declined 0.6 percent in March. The index has declined 1.1 percent in the six months through May.

Not all economists are worried. As MarketWatch reported:

Economists have been skeptical of the weakness in the leading index, saying the flatting yield curve isn't the sign of economic weakness it once was.

Drew Matus, Lehman Bros. economist, summed up this line of thinking by titling a note to clients: "Don't believe the leading economic index."

"We found that the shape of the yield curve has become less significant as a predictor of recessions in recent years," Matus said.

Similarly from Reuters:

Economists are divided on the degree to which this might presage slower growth ahead, and the Conference Board said it would be changing the way it constructs the index so that the yield curve would only subtract from the index if long rates were to move below short rates.

"We continue to believe that the leading index is a poor leading indicator of the economy," said Stephen Stanley, chief economist at RBS Greenwich Capital.

Paul Kasriel of The Northern Trust Company, however, says "Pay Attention To Your Leaders!".

Even though the LEI may be currently sending too negative an economic signal, I believe there still is much merit in paying attention to its directional signal... Although at 114 basis points average in May, the yield spread was not sending a recessionary S.O.S., it was sending a signal that economic growth would soon be settling down near its long-term trend... Another component of the LEI, real M2 money supply is sending out a more foreboding signal. In the past three months, real M2 growth has contracted at an annual rate 2.8%. Neither the yield spread not real M2 are as good leading indicators as they used to be. Nevertheless, they still are better than any others I know of. Both are sending a warning to the Fed to tread carefully going forward lest it precipitate a recession...

A recession call would probably be premature. The Economic Cycle Research Institute's leading index, for example, has been more benign, and recently turned up.

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