Headlines and media reports recently have sounded a dim drum-beat. In contrast to this negative sentiment, we note that today the Conference Board published their Leading Economic Index (LEI) results for July. The LEI is their measure of business activity, which rose 0.5% for the month. This report followed two consecutive months of negative results. We would call that mildly—though not definitively—encouraging.
This rise for the month of July is important because the Conference Board finds that three consecutive months of negative change in direction of the LEI correlates closely with the direction of the overall economy. Three months of negative consecutive readings has predicted a weaker economy 88% of the time. The Board has not recorded three consecutive months of downward results since the recovery began in 2009. July would have been that third consecutive month, but a positive direction was observed, instead.
Housing permits, unemployment claims, stock prices and credit quality helped to drive the index higher in July, but the Conference Board also noted that the manufacturing sector continues to exhibit signs of weakness. As a result, they expect the economy to continue expanding in the second half of the year, but at a more moderate pace.
Given the increased predictions of recession in recent weeks, the results were reassuring and offer another example of why analysis is best served when driven by data…not by emotion.