Conference Board Leading Index Trading Strategy – A Bottom Picker For Stocks?
The Conference Board Leading Economic Index (LEI) is a predictive variable that anticipates turning points in the business cycle.
It is designed to signal peaks and troughs in the economy, typically by around 7 months for the U.S. and 3 months for global indicators.
For example, the LEI for the U.S. fell in November 2023, suggesting a short and shallow recession in the first half of 2024.
The index is composed of ten components, including average weekly hours in manufacturing, average weekly initial claims for unemployment insurance, and others. We provide a full list of all components further down in the article.
The Conference Board Coincident Economic Index (CEI) provides an indication of the current state of the economy and, for example, rose by 0.2 percent in November 2023 for the U.S.
The Conference Board also publishes leading, coincident, and lagging indexes for major economies, with the LEI being a key tool for predicting recessions and economic contractions.
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Conference Board Leading Index Trading Strategy
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How is the conference board leading index calculated
The Conference Board Leading Economic Index (LEI) is calculated by The Conference Board, a non-governmental organization, which determines the value of the index from the values of ten key variables.
These variables have historically turned downward before a recession and upward before an expansion.
The LEI anticipates turning points in the business cycle, typically by around 7 months for the U.S. and 3 months for global indicators, according to their own website.
How accurate is the conference board leading index in predicting recessions
It is designed to signal peaks and troughs in the economy, presumably by around 7 months for the U.S. and 3 months for global indicators. However, we have yet to see a complete quantified verification of this, so take these numbers with a pinch of salt.
What are some criticisms of the conference board leading index in predicting recessions?
The Conference Board Leading Economic Index (LEI) has been criticized for its reliance on a limited number of components and its potential to be influenced by financial market volatility.
Some studies we have looked at have suggested that indexes combining several macroeconomic measures have historically outperformed the LEI in signaling recessions and expansions.
Additionally, while the LEI has been effective in signaling downturns, it is not infallible, of course, and has made incorrect forecasts in the past.
Critics also point out that the LEI’s reliance on a specific set of indicators may not always capture the full complexity of the economy.
Despite these criticisms, the LEI remains a widely recognized and closely monitored indicator for predicting recessions due to its historical accuracy and strong predictive power.
What are some alternative leading indicators for predicting recessions?
Some alternative leading indicators for predicting recessions include:
1. Long-term Treasury yield spread: The long-term Treasury yield spread (i.e., ten-year minus three-month Treasury yields) has been found to be the best predictor of recessions, especially far in advance of an economic downturn.
2. Interest rate spreads: Various interest rate spreads, such as the spread between long-term government bonds and short-term bonds, have been used as leading indicators of recessions.
3. Stock prices: Stock prices and stock market indices, like the S&P 500, have been studied as potential leading indicators of recessions.
4. Business cycle indexes: Composite indexes of a variety of economic indicators, such as the Conference Board Coincident Economic Index (CEI) and the US Leading Credit Index (LCI), can signal if an economy is in a recession or poised to enter one.
5. Alternative financial market measures: Some studies have suggested that financial market measures, such as the slope of the Treasury yield curve, have been effective in predicting recessions. We have previously covered this in our take on inverted yield curve trading strategy.
While these alternative leading indicators have shown promise in predicting recessions, the Conference Board Leading Economic Index (LEI) remains a widely recognized and closely monitored indicator due to its historical accuracy and strong predictive power.
What are the ten key variables used to calculate the conference board leading index?
- Average weekly hours in manufacturing
- Average weekly initial claims for unemployment insurance
- Manufacturers’ new orders for consumer goods and materials
- ISM Index of New Orders
- Manufacturers’ new orders for nondefense capital goods excluding aircraft orders
- Building permits for new private housing units
- S&P 500 Index of Stock Prices
- Leading Credit Index
- Interest rate spread (10-year Treasury bonds less federal funds rate)
- Average consumer expectations for business conditions
Correlation of the Conference Board Leading Index with Real Gross Domestic Product (GDP)
The LEI has been shown to have a strong correlation with real gross domestic product (GDP), the most widely used measure of economic activity. This is from many widely recognized sources.
The correlation coefficient between the LEI and real GDP is approximately 0.6, according to the Conference Board’s own website. This means that there is a strong positive relationship between the two variables, but there is also some variability. In other words, the LEI is not a perfect predictor of real GDP, but it does provide a useful signal of future economic conditions.
The LEI has been shown to anticipate turning points in the business cycle by an average of 7 months, as indicated in the Conference Board’s own research. This means that the LEI can provide an early warning signal of potential economic slowdowns or expansions. For example, the LEI began to decline in early 2008, several months before the official start of the Great Recession.
The LEI is used by economists, policymakers, and businesses to assess the current state of the economy and to predict future economic conditions. It is also used by financial analysts to make investment decisions.
The Conference Board publishes the LEI monthly for over 60 countries around the world. The LEI is a valuable tool for tracking economic activity and making informed decisions about the economy.
