April Leading Economic Index

Growth in the Conference Board’s Leading Economic Index (LEI) fell in April after March’s tally was revised higher.  Improving for the third consecutive month, the 0.5 percent increase follows upticks of 0.4 percent and 1.0 percent in February and March respectively.  Upticks suggest the economy should improve in the months ahead.

Continued growth is also being suggested by the 12-month trend in the leading index.  With the exception of the prior period, the year-over-year improvement in this indicator is the best since February 2011.  While it fell to 6.6 percent from 7.2 percent in March, the 12-month look back still points to a healthy underlying trend in output.  Taken by itself, the recent strength in this index suggests the weakness experienced in the first quarter of 2014 should be short lived because the LEI has moved past its own stall speed growth that it experienced in November 2013 through January 2014.

Here is the rub.  The uptick in the overall indicator was primarily caused by just two underlying components.  First, interest rate spreads added 0.29 to the overall uptick.  Atlas has been concerned about the artificial gap between the 10-year treasury yield and the overnight Federal Funds rate because so much of the chasm is being created by the central bank’s zero interest rate policy instead of real bond market pricing, thus making the value of the gap unclear.  More positively, building permits provided 0.24 to the headline number.  If these permits result in structures, real economic activity will be improved.  This is particularly interesting because business investment was such a drag on the economy in the first quarter.  If consumers can continue to improve their portion of output, greater business investment will lead to better gross domestic product readings in the quarters ahead.

Atlas views this release as constructive.  Even after removing the central bank influenced yield curve, the other components were a net positive.  The negative components of the indicator were either barely below zero in the period or followed very strong readings in March which were tough to beat.  It appears the current expansion will continue even after the economy’s weakness during the first three months of 2014.      (by C. Cox)