April 2015 Leading Economic Index

According to the Conference Board’s Leading Economic Index (LEI), our economy should continue to grow in the near-term.  This 10-component index increased 0.7 percent in the period, accelerating from March’s upwardly revised improvement of 0.4 percent (originally 0.2 percent).  In the six months ending April 2015, the LEI increased 2.0 percent (roughly 4.0 percent on an annualized basis); unfortunately, this is slower than the 3.5 percent growth in the previous six months.

This most recent increase was led by an outsized jump in building permits but had other positives as well.  Firms appear to be gearing up to accelerate their pace of construction, causing permits to rise.  Interest rates also made a considerable contribution to the indicator, as the difference between the overnight interest rate set by the Federal Reserve and the rate paid on a 10-year treasury bond remains relatively wide; prior to March, this had been the largest contributor to the index for many consecutive months.  Credit availability and jobless claims also pushed the index higher in April.   The only negative contribution came from the Institute for Supply Managements New Orders tally.

Our economic expansion appears to have life left.  However, this latest acceleration in the LEI was rather unbalanced and could prove unsustainable for that reason.  Anytime something takes an unusual jump, as was the case with building permits in April, it is reasonable to expect the component to revert to its mean in the near-term.  Because of this reversion to the mean phenomenon, it will not surprise Atlas to see weaker growth in the LEI soon unless other areas of the economy begin to increase at a faster rate.       (by C. Cox)