Leading Economic Indicators Weaken: Time to Worry?

Lackluster hiring, gas prices, and economic uncertainty appear to be weighing on the recovery. In April, for just the second time in two years, the Conference Board's Leading Economic Index, declined. The decrease was small at 0.3%, but it was the first time we've seen it move down since June 2010. At best, this indicates that the recovery is slowing.

Here's the chart from the Conference Board's press release:

lei 2011-04.png

You can see that really steady climb since March 2009. This index is one of the few that projects the future path of the economy, rather than looking back. That's why there's reason to be concerned when it declines.

What went wrong in April? In fact, a lot did, looking at the index components. Of the 10, six pushed the index down and four indicated growth. But really, five components were responsible for most of the movement. The other five components were virtually flat.

Starting with the good news, the interest rate spread between 10-year Treasuries and the federal funds rate continues to make lending attractive. This has been a constant source of positive momentum for the index. Consumer sentiment also rose a bit in April.

The bad news, however, was more plentiful. One component that really hurt was rising unemployment insurance claims. They neutralized the gain from the interest rate spread. Supplier deliveries also declined, which indicates that demand weakened. Home building permits also fell, which brought down the index.

We'll have to wait to see how the trajectory of this index changes over the next few months. If it continues to decline, then the recovery could be in trouble. But if the factors pushing it down, like rising unemployment and weakening demand, all soften a bit, then the recovery will continue at the relatively sluggish pace we've seen over the past year.