Ray of light: Leading Economic Indicators rise for second straight month

O.K. so it's not as important (or life-impacting) as an announcement of, for example, a breakthrough energy technology, but in this market and economy, investors will take it.

The Index of Leading Economic Indicators rose 0.4% in January -- the index's second consecutive monthly increase -- boosted by a large increase in the nation's money supply, the Conference Board announced Thursday. The LEI increased a revised 0.3% in December 2008.

Economists surveyed by Bloomberg News had expected the index to remain flat in January.

LEI: a 'rough' predictor

The index is designed to forecast likely economic conditions six to nine months out, although economists caution that the LEI is a general, multi-variable indicator, vulnerable to wide revisions. Hence, use it as a rough gauge of the overall macroeconomic trend, not as a metric that precisely pinpoints economic cycle turns.

The upside of January's data, for investors? Well, the index did not decline. Again, that doesn't sound like much but in an economy that's lost more than 3.5 million jobs since the recession started in the fall 2007 -- and an astounding 1.5 million in the last three months alone -- it's a positive data point.

The downside of January's data, for investors? Only 5 of the LEI's 10 indicators rose, and the biggest contributed on the positive side was money supply, driven by the large interventions by the U.S. Federal Reserve to maintain credit market liquidity and access to funds that are critical for commercial activity.

In other words, the January LEI showed little evidence of substantive improvement in the U.S. economy: without the money supply boost, the LEI would have declined, with jobless claims heading the list of negative data points.

Economic Analysis: Underscoring, January's LEI was not a cause for a celebration -- it's too soon to start making declarative statements about the contraction's end - but, just the same, we'll take January's upside data. Yes, the Fed's flooding the financial system with dollars skewed the data, but that's what the Fed is supposed to do and what we want to see at this juncture. The money supply is expanding, we have $787 billion in fiscal stimulus working its way into the system, President Obama has announced a mortgage refinance program, and the U.S. Treasury is expected to announce a plan to deal with toxic assets: hopefully, all of these actions will both stabilize credit markets and jump-start demand by late Q3 / early Q4 of this year, with future LEI stats reflecting that. But, no, the nation has not accomplished that feat yet. Stay tuned.
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