Leading Economic Indicators Rise, but Point to Sluggish Growth

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The index of leading economic indicators rose an expected 0.3% in September to 110.4 -- its third straight monthly rise -- but the slow pace points to lackluster U.S. economic growth through early 2011.

A Bloomberg survey of economists had anticipated the 0.3% gain in The Conference Board's report, but the August increase was revised lower, to an 0.1% increase, down from the initially estimated 0.3% gain. The index rose 0.2% in July and was unchanged in June.

The six-month change deteriorated in September, with the tally plunging to an 0.8% increase, according to The Conference Board's methodology. That's down sharply from the 5.1% increase for the previous six months through March 2010 -- a decrease that's indicative of the lower GDP growth recorded in the second quarter -- and a trend that likely continued in the third quarter.

"No Forward Momentum"

Ken Goldstein, economist for The Conference Board, said the latest figures point to a U.S. economy that's barely growing, and one that's not likely to gain momentum before the new year. "More than a year after the recession officially ended, the economy is slow and has no forward momentum," Goldstein said in a statement. "The LEI suggests little change in economic conditions through the holidays or the early months of 2011."

In September, five of the index's 10 components increased, down from seven in August: interest rate spread, average weekly initial jobless claims (inverted), real money supply, stock prices and manufacturers new orders for consumer goods/materials.

However, this is qualified by one positive contributor -- average weekly initial jobless claims -- which actually subtracted from the LEI because an increase in jobless claims reduces economic growth.

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The LEI index is designed to forecast likely economic conditions six to nine months out, although economists caution that the it's a general, multivariable 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 September LEI report provides additional evidence of a trend confirmed by other key economic data, including manufacturing growth. Namely, that the U.S. expansion slowed considerably in the second quarter and that the slow-growth condition is likely to continue in the immediate quarters ahead.

The nation's core industrial sector continues to expand at a crawl, and exports are rising. But weakness in business investment, housing, and consumer spending are keeping GDP growth at a minimum. Until businesses commit to new projects and start hiring employees, the housing sector stabilizes and consumer spending accelerates, the U.S. economy is unlikely to attain an adequate GDP growth rate of at least 2.7% to 3%.