LEI: Seventh Consecutive Monthly Gain

The Leading Economic Index rose 0.2 percent in August, while previous month’s data were revised higher. This was a weaker-than-expected reading, as only 3 out of 10 components supported the overall increase.

Mixed Underlying Details

August marked the seventh consecutive month of gains for the Leading Economic Index (LEI), but the 0.2 percent increase marks a slowdown relative to growth in recent months. Nearly all of the growth this past month came from two components: the interest rate spread and ISM new orders. As the Fed funds target rate remains at the 0 to 25 bps range, the interest rate spread continues to be the perennial workhorse for the LEI, providing a 0.26 percentage point boost. Following this week’s monetary policy announcement, our view continues to be that the first change to the target rate will come at the June 2015 meeting, as there was no material change in language from the most recent announcement. 

ISM new orders contributed 0.23 percentage points to the headline index. Although this component is based on the ISM manufacturing new orders component, both ISM surveys have risen markedly in recent months with new orders at or near multiyear highs. Strength in the new orders component is encouraging as it signals future activity in both the manufacturing and service sectors.

The leading credit index was the only other positive contributor in the month, boosting the headline 0.1 percentage points as credit conditions continue to improve. The average workweek, manufacturer’s new orders for consumer goods and consumer expectations components all registered flat readings in August. Initial claims exerted a drag despite remaining near cycle-lows, and more recent data remain supportive of future improvement in the labor market. 

Housing starts and building permits released earlier this week were disappointing, as they fell 14.4 percent and 5.6 percent (month-over-month), respectively. Therefore, it comes as no surprise that the building  permits component subtracted 0.18 percentage points from overall LEI. The housing recovery continues to press on, although monthly data in starts and sales have been volatile. Following the difficult start to the year, the housing recovery has been somewhat constrained during the spring/summer buying season, but we look for a pickup in the coming quarters.

Philly Fed Index Remained Strong in September

Despite pulling back a bit, the Philly Fed Index remained strong at 22.5 in September. Underlying details were encouraging, as the number of employees component jumped to 21.2 from 9.1 and both the new orders and shipments components rose nicely. The prices paid and received components also picked up a bit, even as we have seen a recent cooling in other inflation measures. The New York Fed’s Empire Manufacturing Index also posted a solid reading for September, as the majority of regional Fed surveys are falling in line with the strong readings from the national PMIs.