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Economic Outlook 2015, Part 3: The Leading Indicators Suggest Growth Will Continue into 2015

December 10, 2014

This is Part 3 of my 3-part review of The Conference Board’s economic indicators. Monday I reviewed the lagging indicators, confirming that 2014 has been the best year for economic growth since the financial crisis, although sluggish wage growth and rising consumer debt (aided by artificially low interest rates) presented some concerns. Yesterday I reviewed the coincident indicators and found that the U.S. economy is growing and adding jobs, although the mix of jobs is still too tilted toward part-time positions, and consumer spending is benefiting from an unsustainable rise in transfer payments. This article will cover The Conference Board’s leading economic indicators. Overall, the analysis indicates that momentum in the U.S. economy should extend into early 2015, but conditions will likely slow by mid-year as the Fed gradually removes the Quantitative Easing training wheels.

The leading indicators are depicted in the table below, along with my -1, 0 or +1 rankings and the weights assigned by The Conference Board. The equally- and Conference Board-weighted diffusion index scores of +40% and +44%, respectively (based on a possible range of -100% to +100%), show that the U.S. economy will most likely sustain its recent momentum into the first half of 2015. A detailed review of each leading indicator follows below.


The most heavily-weighted component is the Average Length of the Manufacturing Workweek (weight = 27.8%), shown below with the Average Length of the Construction Workweek. The manufacturing workweek has exceeded 42 hours for the first time in many years. The gradual rise in the series is mirrored in the length of the construction workweek. On the surface, these would appear to be purely positive developments . . .


. . . except, as shown below, the U.S. economy has shed an astounding 5 million manufacturing jobs and almost 2 million construction jobs in the last 10-15 years. Ouch! Given that context, I can only rank this indicator zero.


The second leading indicator is the ISM’s New Manufacturing Orders Index, weight = 16.5%. (Does it strike anyone else as strange that The Conference Board weights their leading indicators with a 44% focus on manufacturing, which is anything but a leading industry in the U.S. any more?) The index has recently reversed its post-recession downtrend, bouncing strongly off its recent low of 50 in 2012 (suggesting economic contraction — notice how previous recessions have been preceded by similar downtrends). But the 2-year uptrend causes me to rate this indicator +1.


The University of Michigan’s Consumer Sentiment Index (weight = 15.5%) has also been in a slow, steady uptrend, which merits a score of +1. Notice how the indicator collapsed in late summer of 2011 before Bernanke went to Jackson Hole and vowed to leave the QE spigot on full blast for “as long as it takes.”


Interest Rate Spread Between the 10-year T-Note and the Fed Funds Rate (weight = 10.7%). This indicator is really a proxy for the slope of the yield curve. A steeply sloped yield curve indicates economic expansion, while a flat or inverted yield curve indicates slowdown or contraction. The curve has recently flattened as longer-term rates have slumped, despite the Fed’s threats to raise rates (some day, perhaps even in our lifetimes). The 2% spread is typical for the middle of an economic expansion, but with the Fed’s central planners maniacally pinning the short end of the yield curve at zero, I have to score this indicator zero.


Manufacturers’ New Orders for Consumer Goods (weight = 8.1%). Nominal and real Durable Goods Orders (deflated by the Personal Consumption Expenditure Index, or  PCE) are shown below. The indicator rebounds sharply following the last recession, with Durable Goods Orders displaying slow, steady growth back to their levels preceding each of the last 2 recessions. Although the indicator is positive on its own, the underlying support that consumer spending is receiving from zero interest rates and transfer payments leads me to assign it a score of zero.


The Conference Board’s proprietary Leading Credit Index is replaced by The Chicago Fed’s National Financial Conditions Index (weight = 7.9%). Lower levels indicate “looser” borrowing conditions. Access to credit remains easy, especially for this stage of an economic expansion, so I’ll rate this indicator +1.


Level of the S&P 500 (weight = 3.8%). The S&P 500 has, with the voodoo elixir of Quantitative Easing, broken out of its secular bear phase. As stock prices are supposed to lead economic conditions by 3-9 months, I will rate this indicator a cautious +1.


Manufacturers’ New Orders for Capital Goods (weight = 3.6%). Unlike the pattern observed in Durable Goods, the inflation-adjusted Capital Goods Orders index has yet to match its level from prior expansions. The trend is up, however, so I’ll rate this indicator zero.


Initial Unemployment Claims (weight = 3.3%). Unemployment claims continue trending lower. This indicator therefore rates a score of +1.


Building Permits for New Private Housing Units (weight = 2.7%). This indicator continues advancing, but only to levels associated with the depths of the 1982 and 1991 recessions. I will therefore rate the indicator zero.


The individual scores for each leading indicator and their weighted and unweighted averages were shown at the beginning of this article, resulting in equally- and Conference Board-weighted scores of +40% and +44%, respectively (possible range = -100% to +100%). Although still positive, these scores are far below the +70% I assigned to the leading indicators in January 2014. Overall I expect economic momentum to continue through early 2015, but conditions are likely to cool off a bit as the economy gradually loses the support of its Quantitative Easing training wheels.

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  1. January 17, 2015 at 8:01 pm
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