Leading indicators point to recession through summer

Fed Chairman Ben Bernanke has talked about seeing "green shoots," in the U.S. economy. Well, those green shoots may end up not sprouting until late summer, if a key economic barometer is accurate.

The Index of Leading Economic Indicators fell 0.3 percent in March, The Conference Board announced Monday, as negatives in building permits, stock prices and supplier deliveries offset continued positive contributions from real money supply and the yield spread. The LEI also fell a revised -0.2 percent in February, a slight improvement from the previously-released -0.4 percent.

Economists surveyed by Bloomberg News had expected the index to decline 0.3 percent in March. The LEI index now stands at 98.1 (base year, 2004 = 100).

An approaching bottom?

Still, LEI Economist Ken Goldstein said he sees a U.S. economic decline that's easing. "The recession may continue through the summer, but the intensity will ease," Goldstein said in a statement (pdf). "There have been some intermittent signs of improvement in the economy in April, but the leading economic index and most of its components are still pointing down."

What's more, the LEI has fallen 2.5 percent in the previous six months, a faster rate of decline than the 1.4 percent recorded for the six months prior to that -- a deterioration that reflects the slowdown in the U.S. economy that nearly all sectors have experienced in the Q4 2008-Q1 2009 period. The LEI has basically trended down since July 2007 -- roughly five months before the U.S. recession started in December 2007, although it has decreased at a slightly slower pace in recent months.

Not enough stimulus?

Chris Rupkey, financial economist for Bank of Tokyo-Mitsubishi, said even given the U.S.'s record fiscal and monetary stimulus, those expressing concern about a suddenly surging economy with runaway inflation are stretching the point, to say the least.

"There is just no pickup in general economic conditions despite all the gas being given it from monetary and economic stimulus," Rupkey told Bloomberg News Monday.

The LEI 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 revisions. Hence, investors should use it as a rough gauge of overall macroeconomic trends - - not as a metric that precisely pinpoints economic cycle turns.

In March, three of the 10 indicators that comprised the LEI increased: real money supply, interest rate spread and the index of consumer expectations. Six indicators decreased: building permits, stock prices, index of supplier deliveries (vendor performance), average weekly manufacturing hours, average weekly initial claims for unemployment insurance (inverted) and manufacturers' new orders for non-defense capital goods. Manufacturers' new orders for consumer goods and materials remained the same in March.

Economic Analysis: The upside of March's LEI data, for investors? Well, it could have been worse. The downside? Only three of the LEI's indicators rose. In other words, the March LEI showed only scant evidence of substantive improvement in the U.S. economy. Not much, but given the economic events of the past year, we'll take it. True, the March LEI is not a cause for celebration, but here is the bullish case: the money supply continues to expand, we have $787 billion in fiscal stimulus working its way into the system, President Obama has announced a mortgage refinance program and U.S. Treasury's toxic asset removal program is ridding the financial system of problematic assets, Fed actions are re-liquefying credit markets, and so far this Q1 earnings season has produced no "just dreadful" reports from large-cap companies.

The above is ample evidence to support Fed Chair Bernanke's "green shoots" analysis, but there are no illusions here: An incredible amount of economic work remains, particularly on the job creation front.
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