Leading Indicators Rose in August but Point to Tepid GDP Growth

August's better-than-expected, 0.3% increase in the Leading Economic Index can be interpreted two ways, depending on whether you view the glass as-half-empty or half-full.

The pessimist would say it provides further evidence that the U.S. economy is growing too slowly, and the expansion is barely alive. The optimist would argue it shows an economy that continues to grow, despite a 9.6% national unemployment rate and a pervasive "frugal consumer" attitude.

The Conference Board's LEI rose to 110.2 in August. A Bloomberg survey had expected a 0.1% increase, after a 0.1% gain in July and an 0.2% decline in June.

Sub-Par GDP Growth Seen

Ken Goldstein, economist for the Conference Board, said the latest figures point to neither a double-dip recession, nor adequate GDP growth for the world's largest economy.

"While the recession officially ended in June 2009, the recent pace of growth has been disappointingly slow, fueling concern that the economic recovery could fade and the U.S. could slide back into recession," Goldstein said in a statement. "However, latest data from the U.S. LEI suggest little change in economic conditions over the next few months. Expect more of the same -- a weak economy with little forward momentum through 2010 and early 2011."

Further, the six-month change in the index continued to moderate through August, with the index slowing to a 2.0% increase, according to the Board's methodology. That's down from the 4.8% increase for the previous six months through February 2010 -- a drop that's indicative of the lower U.S. GDP growth recorded in the second quarter.

Most Index Components Rise

Seven of the 10 index components increased in August: interest rate spread, real money supply, average weekly manufacturing hours, building permits, stock prices, index of consumer expectations, and manufacturers' new orders for non-defense capital goods.

One of the negative components -- average weekly initial jobless claims -- also boosted the LEI, since a decline in jobless claims supports economic growth.

Sponsored Links

The LEI 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.

The recent LEI trend confirms an economy that's growing, but at a slow pace, and one that's likely to expand haltingly in the immediate quarters ahead. Most of the U.S. economy's fundamentals are improving, but the employment, average weekly manufacturing hours, and new orders components will have to register even greater improvement to drive the index higher and demonstrate that the recovery is capable of sustaining itself without fiscal stimulus.