Leading economic indicators rise again in July, point to slow recovery

The green shoots are growing stronger, benefiting from that strong summer sunshine.

The Index of Leading Economic Indicators rose 0.6 percent in July -- its fourth straight monthly increase, the Conference Board announced Thursday. The Board reported that composite indexes suggest the U.S. recession "is bottoming out and that economic activity will likely begin to recover soon."
Economists surveyed by Bloomberg News had expected the index to rise 0.7 percent in July. The index rose 0.7 percent in June, 1.2 percent in May and 1.1 percent in April. The LEI index now stands at 101.6, using 2004 as the base year at 100. During the six-month span through July, the leading economic index increased 3.0 percent -- a 6.2 percent annual rate, according to the Board.

What's more, comparing the 3.0 percent gain in the most recent six months to a decline of 2.8 percent in the previous six months suggests an increase in economic activity.

LEI uptrend is clear

In July, three indicators -- interest-rate spread, initial unemployment claims, and the average workweek -- made large, positive contributions to the index, more than offsetting the negative contributions from three other indicators: consumer expectations, real money supply, and building permits.

Three other indicators of the 10 comprising the LEI increased in July: index of supplier deliveries (vendor performance), stock prices, and manufacturers' new orders for non-defense capital goods. The 10th indicator, manufacturers' new orders for consumer goods and materials, held steady.

The LEI Index forecasts likely economic conditions six to nine months ahead; economists caution that it's a general, multivariable indicator, vulnerable to revisions. Investors should use it as a rough gauge of overall macroeconomic trends, not as a metric that precisely pinpoints economic cycle turns.

Economic Analysis

Four months in a row: yet another mildly positive data point regarding the July LEI, and one that supports the "green shoots" recovery thesis. If the LEI metric continues to rise and does not suffer a prolonged setback, then a recovery is underway; it's at least hard to argue the recession is not bottoming.

Bottom Line

The four-month LEI trend is a positive for the economy, but investors -- particularly those investing in U.S. stocks -- should maintain perspective. There have been enormous cutbacks in manufacturing, housing, financial services, and the auto sector, with large layoffs. The nation needs a long, strong expansion to make up for the losses to output, earnings, and jobs.

An incredible amount of economic work remains for policymakers and business executives alike. Chief among them: identifying and creating new engines of economic growth and job growth to compensate for the millions of manufacturing and related jobs lost due to globalization.
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