July Leading Economic Index

Economic activity will continue to grow according to the Conference Board’s Leading Economic Index (LEI).  This forward looking indicator jumped 0.9 percent to 103.3 after two consecutive monthly upticks of 0.6 percent in May and June.  On a year-over-year basis, July’s LEI reading is the best since August 2010 when the rate of change equaled the current increase of 7.7 percent.   Furthermore, in the six months ending in July, this index has increased by an annualized 8.2 percent, suggesting the economy is strengthening.

July’s uptick is the sixth consecutive monthly improvement, and many components added to the gain.  One contributor, the yield curve, has been a persistent benefactor to the index because of the Federal Reserve’s interest rate policies.  As the short end of the yield curve is held at virtually zero, it makes it easier for longer-term rates to be higher than shorter term yields.  Building permits grew in the period, and new orders from the Institute for Supply Management moved higher as well.  Initial claims for unemployment fell, a positive for the index.  Impressively, seven out of ten indicators increased in July.

Overall, this is a strong month for the LEI.  It suggests the economy’s foundation will continue to strengthen and that any recession is beyond the “seeable” horizon.  As the calendar year changes, the Federal Reserve is expected to move away from its zero interest rate policy after concluding Quantitative Easing later this year.  The central bank’s move away from their experimental monetary policy could prove to be an important test of the economy’s fortitude.  This change in policy may also indicate how well these masters understand their universe.      (by C. Cox)