LEI Confirms Worst Of Economy Collapse Likely Over

The Index Of Leading Economic Indicators (LEI) showed a year-over-year improvement in April.  The turn adds further evidence that the worst of the decline is probably over.  In past recessions, the LEI has “troughed” 1 to 4 quarters before economy began growing again.

Asha Bangalore of Northern Trust explains:

The Conference Board’s Index of Leading Economic Indicators (LEI) moved up 1.0% after a
string of monthly declines between October 2008 and March 2009.  The increase of the index in
April reflects a widespread improvement as seen in the 70% diffusion index for April. 

On a year-to-year basis, the LEI fell 3.0% in April, after a 4.0% drop in the November-December months of 2008.  The year-to-year change in LEI on a quarterly basis dropped 3.6% in the second quarter (based on April data).  It is the second consecutive decline which is smaller than the 3.9% drop of the fourth quarter of 2008. 

Chart 1 illustrates that the year-to-year change in LEI bottoms out well ahead of the end of a recession.  Table 1 lists the details related to this observation.  Based on the history of the LEI, the 3.9% drop in the fourth quarter could be the bottom for the current cycle; we will need additional monthly data to confirm this assessment.  At the present time, we can temporarily conclude that the worst of the decline in economic activity is part of history.  The number of quarters, deduced from the history of the LEI, before recovery commences after the year-to-year change of the LEI has recorded a bottom for the cycle varies between one and four quarters (see table 1).

Here are Asha’s charts.  It seems worth noting that the shape of the current turn is shallower than any previous turn (all of which were truly “V-shaped.”  Don’t want to read too much into that, but, again, it seems worth noting.

And here’s Asha’s table on the lag between the LEI turn and the economic recovery.

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