Analysis of the US Leading Economic Indicators (LEI) State

The US LEI is currently at -3.6% over a 6 month period, and it is clear that there is a divergence between the financial components and the non-financial components of the US LEI. Let’s start with the financial components that include: The leading credit index (-0.54), The S&P 500 (0.05), and the Interest rate spread (10-year Treasury bonds less federal funds rate) (0.15). The overall financial components are at -0.30%. The leading credit index has the largest impact on this figure, mostly due to it taking into account Interest Rates, Yield Curve, Corporate Bond Spreads, Loan Delinquencies, Consumer Confidence, and Economic Growth. All of these in conjunction are at a net negative, showing bearish sentiment from a wide array of economic strength metrics. Now, let’s look at the non-financial components of the US LEI: Avg. Consumer Expectations for Business Conditions, ISM Index of New Orders, Building Permits (Private Housing), Average Weekly Hours(manufacturing), Manufacturer’s New Orders (Nondefense Capital Goods), Manufacturer’s New Orders (Consumer Goods and Materials), and Average Weekly Initial Claims for Unemployment Insurance. These non-financial components contribute a whopping -2.9% to the US LEI, almost ten times more impactful than the financial components.This shows a clear divergence between impact of the financial and non-financial components of the US LEI. It is possible that this data shows there is a more fundamental problem with the current health of the economy. The non-financial components Avg. Consumer Expectations for Business Conditions, ISM Index of New Orders, and Building Permits (Private Housing) are perhaps the most clear examples of this. The net -3.21% change of these components show a few things; consumer sentiment of business conditions are very low, less and less manufacturing orders are being received which shows possible bearish conditions for employment, and less homes are being built which shows a potential lack of individual savings which is backed up by the Personal Savings Rate being at 4.7% which is historically very low. This negative sentiment raises the question, why hasn’t the market reacted to this more? The S&P 500 has fallen 15.48% since the beginning of 2022, but that was when the US LEI was hovering around 5%. The US LEI is now at -3.6% and with the market up around 6% since 2023 began, it seems that these gains are not consistent with the US LEI. According to the conference board of leading economic indicators, “The trajectory of the US LEI continues to signal a recession over the next 12 months.” According to this data, it is clear that we are set to experience extended stock market losses. Sources: https://www.conference-board.org/topics/us-leading-indicators https://fred.stlouisfed.org/series/ICSA https://fred.stlouisfed.org/series/ACDGNO https://tradingeconomics.com/united-states/ism-manufacturing-new-orders https://fred.stlouisfed.org/series/NEWORDER https://fred.stlouisfed.org/series/PERMIT