Tuesday, July 28, 2009
LEI deconstructed -- update
from my previous analysis:
of the real economy leaders, i've already discussed the tenuous optimism of weekly claims. what of the others?
- new orders in durable goods through march;
- nondefense capital goods new orders excluding aircraft through march;
- manufacturing average weekly hours -- here's a chart of all three;
- speed of delivery as measured by the ISM index of supplier deliveries in april (see the ISM report on business page) -- speeds have been faster for seven consecutive months, indicating no significant order pickup;
- building permits as measured by the census bureau for april -- permits are near all-time lows and still being revised down in subsequent months.
so how are these elements faring three months later? as can be seen in taking up the component contributions, there was a definite improvement in the "real" economic activity indicators beginning with april's report even if not so pronounced as suggested by the credit- and stock-related metrics i unpacked. the effect of m2 is now notably diminished -- money supply has, perhaps ominously been a negative contribution in two of the last three months as the fed shrinks its balance sheet and credit extended by banks declines.
nevertheless, whereas the reported LEI level has recovered to its pre-crash levels of july 2008, the unpacked measure net of credit inputs (red line) is back only to december levels -- and further net of stock prices and closely-correlated consumer expectations (yellow line), the LEI level has retraced only to january.
it might be interesting to see how this set of unpacked indexes moves through the recovery. one might hope as an investor to get a point where the "real" components LEI is outperforming the measure which includes monetary and market sentiment contributions -- such a condition could be thought to constitute a "stealth" economy recovery beneath a veneer of pessimism and credit headwinds. one might interpret february's blip in exactly that fashion. i'm not at all sure that such a condition will reliably arise, but it will be worth monitoring.