Leading economic indicators rise again, point to slow recovery

The green shoots continue to sprout, perhaps soaking up that strong July sunshine.

The Index of Leading Economic Indicators rose 0.7 percent in June -- its third straight monthly increase -- the Conference Board announced Monday. The Board added that composite indexes suggest that the U.S. recession "will continue to ease and the economy may begin to recover in the near term."

Economists surveyed by Bloomberg News had expected the index to rise 0.5 percent in June. The index rose 1.2 in May and 1.1 percent in April. The LEI index now stands at 100.9. (Base year, 2004 =100.) During the six-month span through June, the leading economic index increased 2.0 percent, with five out of ten components advancing.
Seven of the ten indicators that comprise the LEI increased in June: interest rate spread, building permits, stock prices, weekly initial claims (inverted), average weekly manufacturing hours, index of supplier deliveries (vendor performance), and manufacturers' new orders for consumer goods and materials. Three declined: were real money supply, manufacturers' new orders for non-defense capital goods, and index of consumer expectations.

Bears may have second thoughts

Dean Gulis, who helps manage $2.5 billion for Loomis Sayles & Co. in Bloomfield Hills, Michigan, says the slam-dunk, 'Sell in May and go away' bears may start to re-evaluate their decisions.

"Given the general weakness of the economy and concerns over corporate profitability going into the second quarter, reports to date have been a pleasant surprise," Gulis told Bloomberg News Monday. "This week it's going to continue to rally. The worm has turned a little bit. People are feeling better about the economy."

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: Another mildly positive data point regarding the June LEI -- 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, and at minimum, at this juncture it's hard to argue the recession is not bottoming. Two qualifiers are pertinent for investors, however: 1) the recovery could be weak, and 2) there have enormous cutbacks in manufacturing, housing, financial services, and the auto sector, as well as large lay-offs. Hence, we need a long, strong expansion to make up for the losses to output, earnings, and jobs.

Bottom Line: The three-month LEI trend is a positive for the economy, but there are no illusions here: an incredible amount of work remains to be done, for policy makers and business executives alike.
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