If you have tuned in to financial news at some point over the last couple years, there is a good chance you have heard a few media personalities share their view of a gloomy outlook for the economy. You may have even scrolled by your fair share of internet articles with headlines referencing an imminent recession. While reports like these may make interesting stories, they are sometimes just that – stories. It is true we will see a recession at some point, because that is a natural part of the business cycle, though not every economic data point today paints a picture of an economy in a downturn. In fact, if we take a look The Conference Board Leading Economic Index for the United States, we find that the opposite is true.
Understanding leading economic indicators
First off, what is a leading economic indicator? A leading indicator is a piece of economic data that changes before the economy as a whole moves in a particular direction, and can be used as a way of predicting future changes in the economy. Leading economic indicators can be variable and change quickly, though looking at a combination of these indicators can give the observer an idea of the economy’s outlook.
The Leading Economic Index (LEI) is a well-regarded composite that combines 10 different leading indicators into one index. It is updated monthly by The Conference Board, a business-focused think tank, and includes data points on areas involving the job market, stock market, manufacturing, consumer sentiment, and more. The chart below shows the growth of the LEI over the last 10 years.
Understanding the Leading Economic Indicator Index Chart
So what does this chart tell us? Overall, the Leading Economic Indicator index is not pointing towards an economy that is on the verge of a downturn at this time. As of the last report date in January 2019, seven of the 10 indicators showed an improvement over the previous month. While growth of the index as a whole has slowed over the recent months, the year-over-year trend is still upward. Slower economic growth is to be expected considering where we are in the business cycle today, though the LEI signals that the future is not nearly as dark as some would suggest.
What Economic Indicators Mean for Investors
And what do these leading economic indicators mean for investors? If you are a long-term investor with a sound financial plan, the answer is fairly simple: not much. As Andy Kapyrin discussed in his February 2019 blog, “Economic Foresight and Investment Decisions,” even with perfect knowledge on the direction of the economy, one would still not be able to predict the future of financial markets with accuracy. Stocks and the overall economy do not always move in tandem, especially in shorter timeframes. These indicators can, however, hopefully provide you with some comfort next time you come across a piece of news media calling for a near economic collapse, knowing there is data that shows another side of that story.
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