August Index of Leading Economic Indicators

After a sharp increase in July, the Conference Board’s Leading Economic Index decelerated in August.  The monthly increase of 0.2 percent followed an upwardly revised increase of 1.1 percent (originally 0.9 percent) in the prior period.  America’s economy will most likely continue growing for the rest of the year according to this forward looking indicator.

Positive contributions to the indicator were limited.  Just 3 out of the 10 components improved in the period.  Beginning with the largest positive contribution, the segments adding to the index were the interest rate spread, new manufacturing orders from the Institute for Supply Management (ISM), and the Conference Board’s proprietary Leading Credit Index.  Because the interest rate banks pay to borrow money overnight from other banks is being held at zero by the Federal Reserve, the yield curve remains positive despite the slight flattening it experienced in August as the yield on the 10-year Treasury bond fell in the period.  Atlas finds more comfort in the momentum gained by new orders from the manufacturing ISM tally, a sign of real economic activity versus the central bank engineering demonstrated in interest rates.

Four of the remaining seven components negatively impacted the indicator for the month.  Building permits slipped in the period and initial unemployment claims rose.  Fewer firms put in orders for capital goods in August and the stock market subtracted from the LEI as well.  However, these latter two components were close to making no impact on the indicator.  The final three elements were unchanged in the period.

July’s LEI reading had the strongest increase on a percentage basis since October 2013, so August’s deceleration does not alarm Atlas.  Many measures of economic activity remain favorable, the LEI is positive, and inflation measures are tame.  In the absence of unusual price pressures, the central bank will likely keep its accommodative policies in place as the Federal Reserve supports the economy in a way that it feels is best.            (by C. Cox)