The One Economic Indicator That’s Still Dodging Bullets

Ellen Zentner

[credit provider=”Bloomberg”]

As we keep talking about, much of the data has been coming in on the weak side lately.The double-dip talk is back.

Ellen Beeson Zentner of Mitsubishi Financial points to one index that, as she puts it is still “successfully dodging bullets,” and that’s the Conference Board’s Leading Economic Indicators index, which came out yesterday (for March).

The leading indicator we are referring to is the Conference Board’s Index of Leading Economic Indicators
(LEI), which was released on Thursday, April 21.  The LEI increased +0.4 per cent in March, while February’s jump was revised even higher to +1.0 per cent from the originally reported +0.8 per cent.  On a six-month smoothed annual rate basis (our preferred measure for trend growth), the leading indicator increased +6.6 per cent in March and was up +5.1 per cent year-over-year.  The index predicts U.S. economic activity in the next three to six months and suggests the economy will maintain a trend rate of growth in the first half of 2011.

All that being said, there’s something of a catch. The LEI is made up of 10 components, and there’s one component that’s wildly more bullish than the rest. That’s the yield curve which, due to its steepness, is still extremely bullish.

Other components have contributed far less to the LEI:


[credit provider=”Mitsubishi Financial”]

For an eye opening chart, here’s a look at the LEI vs. the LEI if the yield curve were stripped out:


[credit provider=”Mitsubishi Financial”]

So keep watching the long bond, which has generally had a bullish bias to it. If it keeps rising (and the short end rises), that will wipe out the one big leading indicator holding the whole thing up.