The Conference Board Leading Economic Index: The overview
The Conference Board Leading Economic Index (LEI) is an economic indicator that aims to predict changes in the direction of the overall economy. The Conference Board uses a statistical technique called “factor analysis” to combine these ten indicators into a single composite index. LEI designed to be a leading indicator, meaning that it is supposed to signal changes in the economy before they happen. That why this index get’s so much attention in the Stock Market context. The LEI Index is considered one of the most reliable leading indicators of the U.S. economy, and is widely used by economists, policymakers, and investors to monitor economic trends and make informed decisions.
The aim of this article is to break down how this index is build in detail. All the components of the index are very informative indicators on it’s own, so interested reader should find a value in this.
The trajectory of the US LEI continues to signal a recession over the next 12 months.
The index is a composite of ten economic indicators that are known to lead changes in economic activity. These indicators include:
- Average weekly hours worked by manufacturing workers
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders for consumer goods and materials
- Vendor performance (percentage of companies reporting slower deliveries from suppliers)
- Manufacturers’ new orders for non-defense capital goods
- Building permits for new private housing units
- Stock prices (500 common stocks)
- Money supply (M2)
- Interest rate spread (10-year Treasury bonds less federal funds rate)
- Consumer expectations for business conditions
Breakdown of LEI components 6 maonth back
1. Average weekly hours worked by manufacturing workers
Adjustments to the working hours of existing employees are usually made in advance of new hires or layoffs*Average weekly hours worked by manufacturing workers*
2. Average weekly initial claims for unemployment insurance
An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claim requests a determination of basic eligibility for the Unemployment Insurance program.
The initial jobless-claims data is more sensitive to business conditions than other measures of unemployment, and as such leads the monthly unemployment data released by the U.S. Department of Labor.*Initial Claims (ICSA)*
3. Manufacturers’ new orders for consumer goods and materials
Increases in new orders for consumer goods and materials usually mean positive changes in actual production.*Manufacturers' New Orders: Consumer Durable Goods (ACDGNO)*
4. Vendor performance
The time taken to fulfill orders for industrial companies is measured by this component. It is a crucial indicator of vendor performance, as an increase in delivery time can signal a surge in demand for manufacturing supplies. Monthly surveys conducted by the Institute of Supply Management are used to measure vendor performance. This is done through a diffusion index that measures half of the respondents reporting no change, and all the respondents reporting slower deliveries.
5. Manufacturers’ new orders for non-defense capital goods
Manufacturers’ new orders for non-defense capital goods is an economic indicator that tracks the value of new orders placed with domestic manufacturers for capital goods, which are goods that are used to produce other goods, such as machinery and equipment.
This indicator is important because it provides insights into the health of the manufacturing sector and the broader economy. An increase in new orders for non-defense capital goods can indicate that businesses are investing in new equipment and expanding their operations, which can lead to increased production and job growth. On the other hand, a decrease in new orders can suggest that businesses are cutting back on investment and scaling back their operations, which can lead to slower economic growth.
The data for this indicator is typically collected and reported by the U.S. Census Bureau in its monthly Durable Goods Orders report.
6. Building permits for new private housing units
That’s represents the number of permits issued by local authorities for the construction of new privately-owned housing units in a given time period.
This indicator is important because it provides insights into the health of the housing market and the broader economy. An increase in building permits for new private housing units can indicate that developers are optimistic about the demand for new housing, and that there may be growth in the construction industry and related industries. On the other hand, a decrease in building permits can suggest a slowdown in the construction industry and the broader economy.
The data for this indicator is typically collected and reported by the U.S. Census Bureau on a monthly basis.
7. Stock prices (500 common stocks)
To include the stock prices of 500 common stocks in the LEI, economists and analysts typically use a weighted average of the prices of these stocks. This weighted average is designed to reflect the overall movement of the stock market and provide a more accurate representation of changes in investor sentiment.
8. Money supply (M2)
We have discussed Money Supply detailed
9. Interest rate spread
The interest rate spread is an economic indicator that measures the difference between the interest rates on 10-year Treasury bonds and the federal funds rate.
The interest rate spread is an important indicator of the health of the economy because it can provide insights into the expectations for future economic growth and inflation. A widening interest rate spread, which occurs when the difference between the interest rates on 10-year Treasury bonds and the federal funds rate increases, is generally seen as a positive sign for the economy. This is because it suggests that investors are expecting stronger economic growth in the future, which can lead to higher inflation and higher long-term interest rates.
Conversely, a narrowing interest rate spread, which occurs when the difference between the interest rates on 10-year Treasury bonds and the federal funds rate decreases, can suggest a weaker economic outlook. This is because it indicates that investors are less optimistic about future economic growth, which can lead to lower inflation and lower long-term interest rates.
10. Consumer expectations for business conditions
Consumer expectations for business conditions are typically measured through surveys and other forms of market research. The University of Michigan Consumer Sentiment Index is a widely followed survey of consumer confidence and sentiment about the economy, and it is considered an important leading indicator of economic activity. The University of Michigan Consumer Sentiment Index is one of several consumer-oriented indicators included in the LEI.
About The Conference Board
The Conference Board is a global, independent membership organization that conducts research, analysis, and dissemination of economic data, business insights, and practical solutions for corporate and institutional members. The Conference Board provides insights and guidance to executives and decision-makers worldwide, helping them to navigate complex business challenges and make more informed decisions.
The organization was founded in 1916 as the National Industrial Conference Board (NICB) by a group of business leaders concerned about the impact of industrialization on American society. Today, The Conference Board operates in more than 60 countries and offers a range of services, including economic research, executive peer networks, conferences and events, webcasts and podcasts, customized data analysis, and leadership development programs.
The Conference Board is widely recognized for its flagship products, including the Consumer Confidence Index, the Leading Economic Index, and the CEO Confidence Survey. These reports are widely used by economists, policymakers, and business leaders to track economic trends and anticipate shifts in the business environment.