Conference Board’s Leading Economic Indicator

Presented by:Robert Alcala Brian Truong

Yingsak Vanpetch

Introduction

• Source: Conference Board• Frequency: Monthly• Period Covered: Prior Month• Volatility: Revised the next month

– Uses Estimates of certain components when actual data is not yet available

• Market Significance: moderate to high• Website:

http://www.conference-board.org/economics/bci/

What is it?

• It is an Index.

• Composite Indicator– Ten Components meant to lead the Economy.

That is, this indicator peaks before the Economy does, and troughs before the economy does.

Criteria for Each Indicator

• Each indicator was chosen to best match the following six criteria:– Conformity – to the business cycle– Consistent Timing – pattern as leading– Economic Significance- economically logical– Statistical Adequacy- collected and processed

reliably– Smoothness – movements not too erratic– Currency- Published reasonably promptly

What is in the Report?

• Average Weekly Hours (manufacturing)– Adjustments to working hours are made in

advance of new hires or layoffs

• Average weekly jobless claims for unemployment insurance– Reverses value of this component – More sensitive to business conditions than

other measures of unemployment

• Manufacturer’s new orders for consumer goods/materials– Increases in new orders for consumer goods

usually mean positive changes in actual production

• Vendor performance – – Time it takes to deliver– Longer time means more business.

(manufacturing supplies)

• Manufacturer's new orders for non-defense capital goods– Increases in order means positive changes in

actual production– Counterpart of new orders for consumer

goods

• Building permits for new private housing units– Permits mean future construction and that’s

ahead of other types of production

• The Standard and Poor’s 500 stock index– Changes in stock prices reflect investor’s

expectations for the future of the economy and interest rates

– S&P incorporates 500 largest companies in US

• Money Supply (M2)– Demand deposits, traveler’s checks, savings

deposits, currency, money market accounts and small-denomination time deposits

– Adjusted for inflation– Bank lending declines when inflation

increases faster than MS. This makes expansions difficult.

– Increase in DD = expectations inflation will rise, decrease in bank lending, savings up.

• Interest rate Spread (10 year Treasury vs Federal Funds target)– Yield curve– Implies expected direction of short-, medium-,

and long term interest rates. – Inverted generally precede recession

• Index of Consumer expectations– Optimism means increased future spending

How is information collected?

• Much of data comes from other organizations. For example:– Average weekly hours and jobless claims

comes from the Department of Labor– Vendor performance comes from a monthly

survey from the National Association of Purchasing Managers

– Consumer Expectations from University of Michigan’s Survery Research Center

Why is this indicator important?

• This leads the economy

• The indicators are parts of the demand side of the economy either directly or indirectly. For example,– Factory orders are direct– Stock prices increases (wealth increases

means consumer spending increases) are indirect

Indicator Coverage

• This indicator is on the National Level.

How do we interpret the Data?

• We look at one number, the percentage change.

• We want to notice consecutive changes or patterns.

• Rule of thumb: Three consecutive declines in index within three months signals a recession

• Not foolproof

• Economists like to see a sharp, prolonged decline of more than 1% accompanied by broad based declines in most components to signal recession

• Diffusion Index measures breadth

Calculating the Diffusion Index

• Calculate if a component had a positive change, a negative change or no change at all.

• Components that rise more than 0.05% receive a value of 1; components that change less than 0.05% receive a value of 0.5; and components that fall more than 0.05% receive a value of zero.

• Sum the values of the components, as calculated in step 2. Divide by the total number of components (for the CB's leading index, there are 10; for the coincident index, four; and for the lagging in index, seven).

• Multiply by 100.

Caveats and Key Points

• To some, it is only a marginal Predictor of economic downturns

• Historical data revised so chart is different

• When exactly recession began or ended in dispute

• But overall useful.

• Should be used in conjunction with other indicators like coincident and lagging.

Latest Release and Analysis

• Leading index increased slightly in March following two consecutive declines

• The weaknesses among the indicators have become increasingly more widespread than the strengths over the past few months

• Despite a small pick up in December, the leading index has been essentially flat since mid-2006.

• At the same time, real GDP growth was at a 2.5 percent annual rate in the fourth quarter of 2006, following a 2.0 percent rate in the third quarter.

• The recent behavior of the leading and coincident indexes suggests that slow economic growth is likely to continue in the near term.

Index Values for Past Six Months

Conclusion

• Look at percentage change not actually value

• Strong indicators but not foolproof

• Best used in conjunction with other indicators

• The economy right now is expanding but seems to be nearing a slow down.