LEI - Revisions Show Slower Growth
The Conference Board released the LEI index with a full set of backward revisions which showed that LEI has been growing slower than estimated since end of the last financial crisis.
There have been plenty of seasonal distortions, as well as from Hurricane Sandy, which have made for a bumpy ride in the LEI in recent months. However, as always, the month to month data points have little to do with the direction and trend of the overall economy. However, not surprisingly, the index was up 0.5% to 93.9 from November's stagnant reading of 93.4. This was primarily due to the increase in the stock market, the sharp fall in jobless claims, due to several distortions in the data, and building permits.
The reading on consumer expectations, however, is the largest negative in the current report and is likely to remain a drag on the index in the next month as consumer sentiment remains under pressure. New orders from a variety of regional surveys continue to show a slowdown in activity which has also led to an unwanted increase in inventories. The LEI's coincident-to-lagging ratio is like a book-to-bill ratio for the economy. Despite many optimistic outlooks for the economy in the months ahead by many analysts - this ratio is clearly showing a weakening environment currently as it dropped to 89.3 in December from 89.7 previously. Historically, when this ratio has plunged below 91 the economy was recessionary.
The annual rate of change in the LEI has also turned lower in the most recent report. The annual growth in the LEI peaked in April of 2010 along with the majority of all the economic indicators we track. Historically, when the annual growth rate of the LEI falls below 0% growth that has normally been consistent with the peak of a market and a stock market correction has followed. The depth of the corrections have been larger during secular bear markets and shallower during secular bull markets. Currently, the annual percentage change resides at 1.84% down from 2.42% in September. The April 2010 peak was 10.74% for some context.
Currently, the consensus expectation is that 2013 will show surprisingly good results both economically and in the markets. As stated previously, with the Fed injecting $85 billion a month, things can remain elevated for far longer than most expect. However, what the LEI, and many other indicators, currently show is that the overall environment remains weak and while many of the past risks have been boxed in - there is little room to absorb an unexpected system shock in the future.
The biggest drivers of the LEI index in the coming months will have to come from a continued recovery in housing, a pickup in new orders and stronger capital investment. These also happen to be the areas that have the biggest risk at the moment to an economic slowdown and policy uncertainty. In the end it appears the Chuck Schumer was right when he said that the Fed is the "...only game in town."