Investors with a passing interest in economics will be well aware of the plethora of statistics which are released on a daily basis. Individual statistics say little on their own, however, taken together they can be used to provide valuable information about the performance of the economy.
The Conference Board is a global, independent research organisation which calculates different Leading Economic Indices (LEI’s) for a range of G20 economies including the UK. These indices consist of a blend of economic statistics. They are regarded as leading in the sense that they are correlated with future trends in economic activity. As a composite, they are designed to predict inflection points in the business cycle. Theoretically they can provide investors with advance knowledge of the beginning or end of a recession and help them to position their portfolios accordingly.
It may surprise readers to learn that the composition of the LEI’s is not consistent across economies. In fact there is a significant difference from country to country. The Conference Board uses different statistics for each country in order to achieve the appropriate blend which has the greatest level of predictive power.
There are eight factors in the UK Leading Economic Index1. On the other hand, the US index is composed of ten factors whilst South Korea has only six. Month to month changes are adjusted by standardization factors and then summed to calculate the overall index growth rate. For the UK the majority of the components are positively correlated to the index. Therefore if the underlying statistics improve, the index will increase. Data are sourced from organisations such as the Office for National Statistics (ONS), Bank of England and Confederation of British Industry (CBI).
Detailed charts for each country covered are available on the Conference Board webpage. These are updated on a monthly basis. Currently, Brazil, China, Mexico, the Euro Area and the US are all displaying strong momentum with the LEI’s predicting continued growth. Australia, India and South Korea also display growth characteristics, although at a slower rate. Contrary to recent economic performance, Japan is showing stagnation with no real movement in the index either way since 2016. Lastly, the UK is something of an outlier with the index in a notable downturn since 2017. The individual factors weighing on the UK index are weak consumer and housing sales expectations (Interesting).
An obvious shortcoming is that there is a lag between the time the data is calculated and published. Once the index has started to fall, in some cases it may be too late to take action. Additionally, every downturn in the index does not always mean a recession is inevitable. However, when a recession is underway, the LEI is better at predicting the start of a new recovery. Despite these limitations, we believe that the LEI’s still have a role to play and are a valuable resource for investors as a simple reference point which they can use to compare the relative prospects of different regions.
1 Unemployment Claimant Count, Weekly Working Hours, Consumer Expectations of General Economic Situation over next 12 months, Stock Prices (UK All Share), Yield Spread (10 years minus bank rate), Productivity, Total Gross Operating Surplus of Corporations and Housing Sales Expectation for next 3 months.