Leading Indicators' Dip Suggests Recovery May Slow But Won't Stop

How should investors interpret April's unexpected 0.1% dip in the Leading Economic Indicators (LEI) index -- suggesting the U.S. economic recovery may slow -- when other manufacturing and employment indicators signal otherwise?

Abide by that time-worn Washington, D.C., tactic: Don't just do something, stand there. In other words, await further economic data.

Economy Losing a Little Steam

The LEI, which is designed to forecast likely economic conditions six to nine months out, has been forging an uptrend since March, 2009, and a one-month dip -- or even a couple months of sideways action -- is not enough to conclude that an uptrend has ceased.

That said, April's dip, given Wall Street's perpetual pulse-taking, is enough to raise a caution flag regarding the recovery's pace. And Ken Goldstein, economist for The Conference Board, which compiles the LEI, said as much Thursday regarding April's reading.

"These latest results suggest a recovery that will continue through the summer, although it could lose a little steam," Goldstein said in a statement.

Conflicting Data

More pronounced and/or long-term conclusions regarding the economy based on April's LEI are best avoided, given the conflicting data in the report. For example, average weekly manufacturing hours increased, but manufacturers' new orders for consumer goods and materials decreased. Also, only four of the ten components that comprise the index rose in April, but the index still dipped just 0.1% -- hardly the stuff that's an end to economic expansion or a sudden reversal.

April's LEI reading also conflicts with both New York region and Philadelphia region manufacturing surveys that signal an ongoing recovery in the sector. The U.S. job market also appears to have turned the corner, having posted substantial employment gains in the past two months.

In sum, put April's LEI in the category of "for further discussion." The economic recovery may slow in the quarter ahead, but assuming healthy credit markets, the goal of a self-sustaining expansion is still in sight.