December's Leading Indicators Point to Stronger Recovery

After showing significant improvement in November, the Conference Board's Leading Economic Index (LEI) continued to rise at a similar pace in December. The index has now increased for six months straight, and at a faster pace over the past two months than was seen last fall. The components responsible for the index's rise in December also provide some reason for optimism.

First, here's the chart from the Conference Board:

lei 2010-12.png

It's pretty easy to see how much more steeply the LEI (blue line) has been rising over the past couple of months. This implies that the recovery will be much stronger going into 2011 than it was through much of 2010. The index increased by 1.0% in December, after a 1.1% gain in November.

Some important components of this index also contributed to its strong performance last month. The biggest contribution was from additional housing permits, which implies that the home building activity could be improving. This is a little surprising, as permits were one of the few components to decline in November. The second biggest contributor to December's improvement was interest rates, which continue to remain conducive to expansion. There were also significant contributions due to fewer unemployment claims and strong stock market performance.

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Yet not all of the components of the index are rising. Supplier deliveries actually declined in December, which hurt the index slightly. That's after vendor performance was the biggest factor for the LEI's increase in November. Manufacturing orders for consumer goods were also down a tiny bit. But those were the only of the index's 10 components that hurt it. Others like consumer expectations and manufacturer orders for capital goods also implied expansion.

It is a little discouraging that we're not seeing across-the-board improvement and all components improving consistently, however. Still, the index is rising very regularly at this time. So the Conference Board index continues to suggest that the recovery will strengthen in coming months.