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Thursday, October 22, 2009


LEI deconstructed, update

today the conference board released its leading economic indicators, showing a sixth straight month of increase. separately, the ECRI has been pounding the table as a bull on the back of their weekly leading series.

i last took a look at this in july -- pulling apart the various components of the LEI to distinguish between the effects of federal reserve and treasury liquidity provisioning for the financial sector -- money supply, yield curve, asset market prices and the consumer expectations that closely track them -- and the indications being provided by the 'real economy'. this is done on the principle that monetary policy in a balance sheet recession is basically broken and has little if any effect on an economy where debt reduction is now the priority of participants and loan demand is net negative.

the result largely conforms with some of the other evidence of the last few months. though the LEI as reported (blue line) is powering upward, the LEI netted of the most liquidity-sensitive components (yellow line) is decidedly underperforming. perhaps unsurprisingly, the more liquidity-sensitive elements are removed, the worse the performance of the series since march. moreover, the degree of underperformance appears to have widened again since july -- which again finds some confirmation in the talk about town, as it were. indeed the 'real economy' LEI has been barely positive in august and september, which has run the spread between the as-reported and net-of-liquidity cumulative series out to the wide of the (admittedly short) sample.

in fact it's hard to find a lot of encouragement in the slope of the curve even inclusive of liquidity-sensitive factors since april and may. just as the severity of the contraction in LEI softened from december to february, late in the cyclical recession which likely ended in the second quarter, this softening in the expansion of LEI -- along with persistently high initial claims and the continuing contraction in total loans and leases -- may rightly fuel concerns about a double dip.

of course this may simply be noise to be followed in october and november by booming new orders, sharply higher hours and more building permits as precursor to a sharp expansion. but for the time being i read this as a datapoint indicating sluggish and vulnerable economic performance.

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Using the LEI to measure economic strength is like counting your cavalry horses to determine your military preparedness in WWI. The world has changed.

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Double dip recession probability looks low.

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Last update here

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