Leading economic indicators continue to rise

The Index of Leading Economic Indicators rose 0.6 percent in August, the Conference Board announced Monday -- the fifth straight monthly increase -- providing yet another signal that the U.S. economy is approaching the recovery stage.

The board added that the rising LEI index and the coincident economic index, taken together, "suggest that the recession is bottoming out. These numbers are consistent with the view that after a very severe downturn, a recovery is very near. But, the intensity and pattern of that recovery is more uncertain."

Economists surveyed by Bloomberg News had expected the LEI index to rise 0.7 in August. The index rose a revised 0.9 in July and rose 0.8 percent in June. The LEI index now stands at 102.5. (Base year, 2004 =100.)

Further, during the six-month span through August, the leading economic index increased 4.4 percent, according to the board's methodology. That's up sharply from the 2.4 percent decline for the previous six months -- an increase that's indicative of an upturn in economic activity.

Five of the ten indicators that comprise the LEI increased in August: index of supplier deliveries (vendor performance), the interest rate spread, stock prices, building permits, and the index of consumer expectations. Three declined: real money supply, average weekly initial claims for unemployment insurance (inverted), and manufacturers' new orders for non-defense capital goods. Two remained the same: average weekly manufacturing hours and manufacturers' new orders for consumer goods and materials.

However, while the LEI uptrend is encouraging, Kemal Dervis, vice president and director, global economy and development, for the Brookings Institution, argues this not a time for major economies to think in terms of withdrawing stimulus. In a G-20 summit preview, Dervis wrote it's too early to withdraw fiscal stimulus and monetary easing, and added that the G-20 should focus on coordinating the composition and timing of their policies so that the world economy progressively gains strength.

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. Investors should use it as a rough gauge of overall macroeconomic trends, not as a metric that precisely pinpoints economic cycle turns.

Economic Analysis: With the LEI rising for five straight months, economists and sector analysts will now pay close attention to the hard-hit manufacturing sector. Given a reduction in manufacturing output and trimmed inventories during the long recession, revived demand should spark a nice increase in manufacturing, as factories replenish inventories. If this occurs, it will further boost U.S. GDP.
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