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Sunday, June 21, 2009


rosenberg on LEI

via pragmatic capitalist -- david rosenberg reflecting some of my concerns about the state of leading economic indicators.

[W]hat is really interesting is that the actual economic variables have not contributed one iota to this two-month very exciting bulge in the leading index. In fact, if you did a composite of the five economic components — building permits, hours worked, real core capital goods orders, real consumer goods orders, and jobless claims, they collectively were -0.05% last month. Go figure.

So what we have is an LEI that is being fuelled by a stock market rebound from egregious oversold lows (which may now be over now), a narrowing in credit spreads from Armageddon levels, and survey data/diffusion indices. It is tough to believe that the recession is indeed over at a time when hours worked, which feeds directly into GDP, is still making new lows.

When recessions do end, what’s normal is for the financial and survey segments of the LEI to be joined by the hard economic components in the ‘plus’ column. In fact, as we saw in November 2001 at the trough, usually the sum of the contribution from the economic segments comes to 40bps, not -5bps as was the case today.

Not only that, but it would help the cause of the growth bulls if the index of coincident indicators was to make a bottom, but alas, it fell 0.2% MoM in May. Of course, this is far off the much larger negative readings earlier this year when the U.S. economy was in freefall, but back in 2001 the worst number we ever saw (excluding 9/11) was -0.2% and the range in the early 1990s downturn was -0.1% to -0.4%, so to say that the recession has somehow come to a close when the coincident indicator is declining 0.2% seems a little off base. As for what it will take to no longer take the LEI with a grain of salt, we have to see the diffusion index of strength do a lot better than 70% and we have to see the economic components do much better.

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