The Conference Board yesterday reported that its closely watched index of leading economic indicators (LEI) was up 1.1% in December. The LEI for the U.S. “increased sharply in December, and has risen steadily for nine consecutive months,” Ataman Ozyildirim, economist at The Conference Board, said in an accompanying press release.
That’s good news for the forces of revival and recovery—assuming you’re inclined to believe that LEI is reliable as a measure of forward-looking economic activity. Skeptical? You’re not alone.
For what it’s worth, our own measure of leading indicators, which is published monthly in The Beta Investment Report, is similarly upbeat in its recent performance. Ditto for the OECD’s globally focused measures of future economic activity. Does this mean that all’s well and that a recovery worthy of the name is imminent? No, not necessarily, although the hands of growth are at least trying to grab the bull by the horns, or so these benchmarks suggest.
But we should be aware of the limitations of trying to measure the unmeasurable, educational though the effort may be. Much of what shows up as an upturn in so-called leading indicator indices these days is simply a reflection of low interest rates and a bounce in some–not all–of the other measures of what are thought of as forward-looking economic metrics, such as the stock market, new permits for housing construction and initial jobless claims. Is it a silver bullet? No, but nothing else is either. Sometimes leading indicators are misleading indicators, but not always. The problem is distinguishing one from the other in real time.
Definitive answers, as always, arrive after the fact. Does that mean it’s time to ignore leading indicators? No, although maintaining a healthy skepticism is advisable, particularly these days, when the Fed is manipulating interest rates in more than a casual manner. Meantime, we’ll consider the embedded forecast. We’ll also look at lots of other data too, thank you very much.
Decoding the business cycle still suffers from the standard problem of attempting to figure out what’s coming by looking at yesterday’s numbers. It’s an awful way to run a railroad. Unfortunately, it’s the only game in town.