This morning’s update of the Conference Board’s leading economic indicator (LEI) shows a modest gain last month. But let’s be clear: The increase is neither unexpected nor a sign that economic growth is imminent.
As we discussed last week, monetary stimulus these days is in overdrive, and to an extraordinary degree. In turn, that boosts the upside bias of most statistical measures designed to anticipate future economic activity, including the Conference board’s LEI as well as our own gauge of the future. Normally, this boost would offer strong reason to think that a rebound is near in the economy. But given the depth of the economic challenges, even unusually potent levels of monetary stimulus aren’t delivering the usual punch.
The Conference Board’s leading economic indicator “rose modestly in December, mainly due to the continued and very large positive contribution from real money supply,” the organization’s press release explains. “The yield spread also contributed positively to the index, helping offset the continued declines in building permits, the average workweek, supplier deliveries, and initial unemployment claims.”
Looking at the longer-term trend gives a better picture of what’s unfolding. Indeed, LEI is off by 5% in December compared to July 2007, the most recent peak. “And, it would have been weaker without the very large expansion in inflation-adjusted money supply in the last four months,” the Conference Board notes.
The Board’s LEI is composed of 10 factors, of which only four posted gains last month. The two biggest increases came via a surge in inflation-adjusted money supply and lower interest rates. The only other two positive LEI contributors in December: new orders for consumer goods/materials, and manufacturers’ new orders for nondefense capital goods. Everything else in LEI—60% of the index—suffered varying rates of decline last month. Even so, the monetary stimulus overwhelmed the real economic activity measures, leaving a superficial impression that economic recovery is just around the corner.
That’s possible, of course, but by our reckoning such thinking remains premature. For the immediate future, and quite possibly through the first half of this year, the best hope for thinking that economic stabilization is near comes by playing the optimist for expectations of a new round of fiscal stimulus from the U.S. government, currently expected to be $825 billion.
Meanwhile, there’s the news today that existing home sales for December rose by 6.5%, although that was tempered by the simultaneous 15% drop in housing prices. Nonetheless, one can speculate that a bottom in the economic cycle is near. That doesn’t mean that growth is near, but the first priority these days is stopping the bleeding.
What we can say for sure is that the monetary stimulus effort is running at full throttle and, over time, will go a long way toward fending off deflation and economic contraction. No one knows for sure if it’ll be successful, but it’s clear that an effort to win this war is gaining momentum. But this will be no quick fix, and so the next few months may not change all that much, at least from a monetary policy perspective alone. Perhaps the pending fiscal stimulus currently in design by the Obama administration will change the dynamic for the better.
Yes, there’s reason for cautious optimism, albeit only for expecting that the deepest part of the economic pain may end later this year. Forecasting anything much more than that is, for the moment, more of an exercise in hope rather than economic forecasting. Nonetheless, the forces aligned with stabilizing the economic troubles are gaining a head of steam. With a bit of luck, the pump priming will show some traction. But not yet.