“Not everything that can be counted counts, and not everything that counts can be counted.” This quote, often attributed to Albert Einstein, means that not everything that one can measure has value and not everything valuable can be measured. This concept applies to various aspects of life, including economic indicators.
The most accessible and popular barometer of prospective economic well-being is the equity market, for which the S&P 500 is a proxy. The index represents the market value for about 70% of all U.S. public companies. The S&P 500, along with the storied AI-driven NASDAQ composite, have surged in 2023 and are within shouting distance of their all-time highs. Nearly $5 trillion has been added to the value of companies in the Nasdaq 100 since the start of the year, with the tech-heavy gauge soaring almost 40%.
The surge in the “Big Seven”—Apple, Microsoft, Alphabet, Amazon, Meta, Nvidia, and Tesla (which comprise 26% of the S&P 500)—has helped push the index up 16% in 2023. If we base our assessment solely on this metric, the economic situation seems highly positive.
The S&P 500 index, however, is just one of 10 equally weighted indicators used by the Conference Board to calculate its monthly Leading Economic Index (LEI). The other nine are less conspicuous. Counting them all provides a historically weightier crystal ball.
The diverse indicators composing the LEI are not as widely available as metrics regularly cited in media reports. GDP growth, unemployment rates, and inflation are the frequent guests in those analyses. In contrast, LEI uses the basket below:
1. Average weekly hours, manufacturing
2. Average weekly initial claims for unemployment insurance
3. Manufacturers’ new orders, consumer goods, and materials
4. The ISM® Index of New Orders
5. Manufacturers’ new orders, non-defense capital goods, excluding aircraft orders
6. Building permits, new private housing units
7. Stock prices, 500 common stocks
8. Leading Credit Index™
9. Interest-rate spread, 10-year Treasury bonds less federal funds
10. Average consumer expectations for business conditions
Despite this breadth, economic coverage by The Wall Street Journal and other financial news outlets leaves little doubt that the LEI’s seventh component—the S&P 500—is far preferred by the public than the composite. The latter counts, but it almost never commands Page 1 news coverage like the market index. In other words, some valuable information can and should be measured, but, paradoxically, it isn’t.[1]
Conference Board Index Leading Economic Index
Figure 1. Leading Economic Indicators
Preceding the announcement of each National Bureau of Economic Research-designated recession in the last 50 years (shaded blue), the LEI (yellow) proved an unfailing indicator of the downturns. The index is range-bound, mostly fluctuating between +10 and -10. Statistically, the standard deviation is 6. The vertical radius of the seven circles represents a ± range of 6 on the LEI. The chart speaks for itself.
The far-right half-circle is hypothetical, as is the blue-shaded rectangle signifying possible recession. The descent of the LEI since April 2021 should be elbowing its way onto Page 1. While the index’s predictive value counts, it currently isn’t generating much traffic, according to Google Trends.
Figure 2: Google Trends—the frequency with which the term “leading economic indicators” appears in the press.
Why has the frequency of this phrase flatlined since the end of the Great Financial Crisis (GFC)? Some economists argue that the long-standing, open-handed “whatever it takes” Fed policy means that recessions are passé, a thing of the past. The financial memory is indeed short. The Great Moderation is the name given to the period of decreased macroeconomic volatility experienced in the United States from the mid-1980s up to the GFC beginning in 2007. Confidence in the Fed’s capability for economic management was high heading into that crisis. Hard on the heels of the GFC was the Great Recession of 2008 to 2009, the worst economic downturn in the U.S. since the Great Depression.
While the central bank seemingly has effectively muted market volatility in the 14 years since, it has been consistently wrong on expectations around economic growth, inflation, and the future of its monetary interventions in the banking system. The LEI would indicate that a recession could catch the governors flat-footed again. The confidence they garnered since the last cycle would then be seen as foolishly given as that proffered in the lead-up to the housing collapse. A word for the wise?
The most recent Conference Board report stated on July 20, 2023:
The Conference Board Leading Economic Index® (LEI) for the U.S. declined by 0.7 percent in June 2023 to 106.1 (2016=100), following a decline of 0.6 percent in May. The LEI is down 4.2 percent over the six-month period between December 2022 and June 2023—a steeper rate of decline than its 3.8 percent contraction over the previous six months (June to December 2022).
“The US LEI fell again in June, fueled by gloomier consumer expectations, weaker new orders, an increased number of initial claims for unemployment, and a reduction in housing construction,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “The Leading Index has been in decline for fifteen months—the longest streak of consecutive decreases since 2007-08, during the runup to the Great Recession. Taken together, June’s data suggests economic activity will continue to decelerate in the months ahead. We forecast that the US economy is likely to be in recession from Q3 2023 to Q1 2024. Elevated prices, tighter monetary policy, harder-to-get credit, and reduced government spending are poised to dampen economic growth further.”
In our view, confidence in the central bank is certainly not warranted by its record. We prefer history, data, and demonstrable trends. The Conference Board’s Leading Economic Index seems consigned to relative obscurity in the minds of most investors. For us, on the other hand, there’s no question that it counts and should be counted.
[1] Could it be the acronym itself? Scuba, laser, ASAP, snafu, and Bogo easily roll off our tongues and have become downright ubiquitous. ChatGPT “thought” LEI to be an acronym for “Legal Entity Identifier,” “Law Enforcement Intelligence,” or “Light Emitting Interface.” Not even on its list was “Leading Economic Index.”.
[DS1]OR: shouting (more familiar)