Joseph LaVorgna believes that fears of a U.S. slow-down are overblown, and mostly due to the fact that leading economic indicators tend to be volatile. While some economic indicators have fallen from peak expansion levels, he thinks investors should look at their overall trend during 2010, which continues to indicate healthy economic expansion.
Investors have cited various leading indicators of the economy which to varying degrees have slowed from their peak growth rate. In some cases, the slowdown has been quite substantial. The series which we have consistently relied upon for guidance is the index of leading indicators (LEI), and this index suggests economic activity will accelerate in the second half of this year.
Over the past four quarters, the LEI index is up a sturdy 9.4%. While this is down from a cyclical peak of 10.2% in Q1 2010, the last two quarters represent the strongest back to back gains since Q1 1984.
In contrast, our forecast of 4.6% current quarter real GDP growth and 3.9% Q4 real GDP growth is extremely conservative relative to what the LEI is implying. For example, the last time there was a large spread between the LEI and GDP was in 2004. Then, the LEI topped out at a bit under 9% and real GDP barely topped 4% on a year-over-year basis. If we apply a similar five point spread to the current growth in the LEI, it would also point to 4% year-over- year growth in Q4 2010. However, our forecast amounts to growth of just 3.5%; so as a result, we wonder whether we are being too pessimistic on growth.
U.S. leading economic indicators still imply a healthy GDP growth rate for the second half of 2010, even if they have eased back from their highs most recently.
(Deutsche Bank, Is out second half growth forecast too low?, Joseph LaVorgna, 23 July 2010)