We live in the world of big data. Some of it is very useful. Some of it not so much. In that world, into which category would you guess the Index of Leading Economic Indicators might fall?
The composite index of Leading Economic Indicators (LEI) is a monthly index that uses ten economic components to predict future economic movements. It has been published by The Conference Board since 1995, when the private think tank took over the task of tracking the business cycle indicators that had previously been reported by the U.S. Bureau of Economic Analysis going back to the 1930s.
The LEI is designed to provide a broad-based look at the health of the economy and to predict turning points in the business cycle based on its ten components, which include:
- Average weekly hours, manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders, consumer goods and materials
- ISM® Index of New Orders
- Manufacturers’ new orders, nondefense capital goods excluding aircraft orders
- Building permits, new private housing units
- Stock prices, 500 common stocks
- Leading Credit Index™
- Interest rate spread, 10-year Treasury bonds less federal funds
- Average consumer expectations for business conditions.
The composite index combines all these factors into a single value aimed at analysts who need to make informed forecasts and decisions based on how it changes from one month to the next. The Conference Board claims it is a good indicator of what’s going to happen in the economy and can be correlated with business cycles and economic conditions. On paper, it sounds great.
But is it really as good as it's cracked up to be?
Back in 2010, Justin Fox asked a number of analysts what they thought were the most overrated economic datapoints. The Index of Leading Economic Indicators was the most commonly cited example they identified.
For example, here's how Goldman Sachs' Jan Hatzius responsded when asked Fox' broad question:
"My entry is the index of leading indicators, because it consists entirely of already-released information and the Conference Board’s forecasts, without adding new hard information."
The Economic Outlook Group's Bernard Baumohl took the criticism of the Conference Board's LEI to the next level:
"I would nominate the Index of Leading Economic Indicators by the Conference Board as one that most induces narcolepsy when it is released. This measure is merely a composite of other hi-frequency indicators that have already been published weeks earlier. So there’s nothing inherently new in the LEI—and thus the least useful in my opinion."
But that didn't hold a candle to the fire Lakshman Achuthan directed at the index as he faulted its then-recent performance:
Conference Board LEI because, even though its whole purpose is to predict recessions and recoveries, it has consistently failed to do so in real time. Case in point was April 2009, when its latest release showed a big drop—and without a single monthly uptick since June 2008, the Conference Board spokesman declared, “There’s no reason to think that this recession is going to end any time this spring or this summer”—when ECRI was predicting that the recession would indeed end by last summer.
All these observations date from 2010. Has the Index of Leading Economic Indicators proven itself to be useful in the thirteen years since?
Not according to John Authers, who unloaded on the LEI in a Bloomberg opinion piece in January 2023. Because that article is behind a paywall, we asked ChatGPT to summarize Authers' observations of what's wrong with the Index of Leading Economic Indicators using five bullet points.
- The leading economic indicators are not leading indicators but concurrent ones.
- They drop more or less exactly in line with a fall in the economy.
- So it’s not as though these are much use in showing the way.
- Not only that, but at the point of publication, they’re actually lagging information.
- There is nothing in the Leading Index that tells you something you already don’t know. So they’re not leading, they’re lagging, and they’re not indicating anything very much — except perhaps that human inattention is a constant.
Perhaps when the composite index was first presented in 1938, it represented a more timely means of compiling a picture of developing trends in the national economy from very different data streams. Ninety years later, it appears the world of big data has pretty much passed it by, where it no longer provides the value it once did.
Previously on Political Calculations
- Less Than Useful Data in the World of Big Data
- Less Than Useful Data: Consumer Confidence
- Less Than Useful Data: FHFA House Price Index
- Less Than Useful Data: Index of Leading Economic Indicators
Image credit: Useless information by Patrick Mackie/Geograph Britain and Ireland via Wikimedia Commons. Creative Commons. Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0).