LEI Report Suggests Worst May Be Over

The Conference Board's latest summary of leading economic indicators (LEI) suggests that the U.S. economy isn't likely to get much weaker in the months ahead, but that it's going to be a long road back to a period of solid growth like that experienced during the late 1990s.

The composite LEI—a measure of 10 widely varied economic indicators that has shown to have been a reliable indicator of changes in overall economic activity for a period six to nine months ahead—rose by a modest 0.3% between March and April 2001, following declines during both February and March. That was welcome news, given the almost unbroken string of very bad economic reports issued early this spring.

However, only three of the 10 indicators comprising the April LEI rose during that month. All of the positive contributors were related to the Fed's aggressive move to lower short-term interest rates: the spread between short- and long-term interest rates, money supply levels, and stock prices. Still, the improvement in April's LEI provided confirmation that in the short term, Fed policy does make a difference. It's meaningful news in the medium and long terms only if there's a broadening and deepening of positive economic signs via solid growth in manufacturers' new orders, a decline in the number of unemployment claims filed, and improvement in consumer confidence. Only when a majority of LEI components turns positive for a couple of months in a row can we be confident that the economy has turned the corner.

Consequently, the negative contributors to the April index continued to be a major source of concern. Most significantly, they included the level of initial claims for unemployment insurance, the level of building permits, the index of consumer expectations, and new orders for capital goods. Only when a majority of LEI components turns positive for a couple months in a row can we truly be confident that the economy has turned the corner.