The Dow Sinks as the Leading Economic Index Hits Home Depot, Caterpillar
The Dow Jones Industrials had fallen a modest 26 points as of 12:30 p.m. EDT. Investors have struggled to sift through backward-looking economic data in order to get a clear picture of what the future will bring for the Dow and the economy in general. This morning's release of the Conference Board's Leading Economic Index shed some light on the direction of the economy, and some of its factors have significant implications for Caterpillar and Home Depot .
Will the U.S. economy keep growing?
The Conference Board reported this morning that the index rose 0.5% in May, marking its fourth-straight month of gains and bringing its spike over the past six months to 2.3%. Although that pace of growth doesn't match the 3.5% gain from the previous six months, it nevertheless suggests that economic growth should continue at least for the remainder of the year.
A look at the 10 indicators that the Conference Board includes within the Leading Economic Index adds more color to the analysis. Seven indicators rose, with high interest rate spreads and falling average weekly initial claims for unemployment benefits contributing the most to the positive reading for the month. A healthy stock market also helped lift economic prospects for the future.
But the weaker factors of the index affected the specific business areas of Home Depot and Caterpillar. For Home Depot, the large drop in building permits, which was the only indicator that weighed the LEI down in May, points to the potential for less building activity in the future. The Dow home-improvement retailer has endured downturns before, with a strategy that involves paying greater attention to efficiency and relationship-building. But the retail giant still feels pressure when its substantial business with building contractors comes under attack.
Caterpillar suffers somewhat from weaker housing activity, but it also relies on orders from a broader range of customers, and the LEI reading on new orders for capital goods outside the defense sector other than aircraft only held steady in May. Caterpillar has relied on strength in the U.S. economy to help it overcome weakness elsewhere around the world, particularly in the Asia-Pacific region. If U.S. growth in construction flags, then Caterpillar will need more growth from emerging markets in order to keep its share price climbing.
Even as the Dow Jones Industrials go through what could be a slow summer, it's smart for investors to look beyond the here and now to anticipate future conditions. The Leading Economic Index suggests that growth could continue, but keep an eye on some of the weaker areas to make sure they don't lag behind too badly.
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The article The Dow Sinks as the Leading Economic Index Hits Home Depot, Caterpillar originally appeared on Fool.com.Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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