Leading Indicators Show Tempered Optimism For Economy

On Thursday, November 18, the Conference Board released it October 2021 report detailing the latest reading for the Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward-looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it and spans many segments of the economy. The index grew 0.9% month over month, slightly above the consensus estimate of 0.8% and a strong rebound from September’s 0.1%. One-year growth remains over 9%, advancing for the first time since April and indicating low odds of a recession in the next 6 months.

“We may now be in a mid-cycle environment, but Octobers’s LEI number continues to signal the economy is on healthy footing despite Delta variant-related setbacks,” said LPL Financial Chief Investment Strategist Ryan Detrick. “A mid-cycle economy tends to be bumpier than early cycle with more uncertainties on the horizon, but we expect near-term issues to resolve themselves giving way to the next leg of sustained growth.”

As seen in the LPL Chart of the Day, the LEI’s growth rate remains strong over one year trailing, although base effects (rolling off strong numbers) will become more challenging starting in March 2022. Historically, negative year-over-year growth in the LEI has been a warning signal of a recession, and we remain far off from that number.

View enlarged chart.

Eight of the ten component of the index rose in October. The only exceptions were weekly manufacturing hours and consumer expectations for business conditions. Improving weekly unemployment claims, the yield curve, and building permits were the top positive contributors to the index.

The improvement in the LEI is likely an early signal that the negative impact of the summer surge in COVID-19 may be winding down. This is likely primarily from further demand in the most COVID-sensitive segments of the economy, but may also reflect some relief from supply chain disruptions, although we think that supply chain problems will still take some time to resolve.

Looking out into 2022, we anticipate healthy consumer balance sheets and strong wage growth will buoy the U.S. consumer, while businesses will likely invest more heavily in productivity-enhancing capital expenditures to meet that strong demand, potentially leading to above-average economic growth next year.

Much more on our economic outlook for next year is coming soon in our Outlook 2022 publication (ETA early December).

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All index and market data from FactSet and MarketWatch.

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