Leading Economic Indicators rise in May, pointing to slow recovery

It looks like the green shoots are showing signs of soaking up that strong, late spring sunshine. The Index of Leading Economic Indicators rose 1.2 percent in May, the Conference Board announced Thursday -- the index's second straight monthly increase -- with the board adding that it expects a slow recovery to begin by the end of the year.

Economists surveyed by Bloomberg News had expected the index to decline 1.0 percent in May. The index rose 1.1 percent in April and declined 0.3 percent in March. The LEI index now stands at 100.2. (Base year, 2004 =100).

Seven of the ten indicators that comprise the LEI increased in May: index of supplier deliveries (vendor performance), interest rate spread, stock prices, real money supply, index of consumer expectations, building permits, and manufacturers' new orders for non-defense capital goods.

Three fell: average weekly manufacturing hours, average weekly initial claims for unemployment insurance (inverted), and manufacturers' new orders for consumer goods and materials. (Note: the inverted designation means the fall in unemployment insurance claims is a positive development for the U.S. economy.)

Honeywell sees 'ray of light' in manufacturing

Further, while this recession most likely will be remembered for its record home foreclosures, mortgage-backed securities defaults, and for a large contraction in the U.S. manufacturing sector, Honeywell International (HON) CEO David Cote said there are signs of a turnaround and U.S. high-end, tech-intensive manufacturing is one.

"If we're looking for 'green shoots,' there are some out there," Cote told Bloomberg News Thursday. Cote added that Honeywell, the world's No. 1 maker of airplane controls, detects signs of a recovery in some aerospace markets.

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.

Economic Analysis: A pleasant surprise regarding the May LEI -- an increase -- and one that further supports the 'green shoots' thesis. If the LEI metric continues to rise and does not suffer a prolonged setback, that would mean a recovery is underway.

Two qualifiers are pertinent for investors, however: 1) the recovery could be weak, and 2) there have been enormous cutbacks in manufacturing, housing, financial services, and in the auto sector -- with large lay-offs -- hence, we need a long, strong expansion to make up for the losses.

Further, automaker bankruptcies and reorganizations will likely add more job losses, both directly in the auto sector and in supporting sectors.

Bottom Line: The May LEI increase is a positive for the economy, but there are no illusions here: an incredible amount of economic work remains, for policy makers and business executives alike.

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