US: Broad Support for the LEI in December

The Leading Economic Index slightly outpaced consensus expectations in December, growing 0.5 percent, as eight out of ten components contributed to growth. Building permits detracted from the headline

Financial Indicators Fuel Growth in LEI

The Conference Board’s Leading Economic Index (LEI) slightly outpaced expectations in December, up 0.5 percent. With this report, the LEI posted positive rates of growth in 10 of 12 months in 2014, resulting in an average monthly growth rate of 0.5 percent for the year. This is consistent with the pickup in economic momentum that we have seen from recent GDP readings going into next week’s release of Q4 GDP.

Eight out of the ten underlying components contributed to growth in the headline figure. The interest rate spread led the way, contributing 0.23 percentage points to the headline, as we have grown accustomed to in this economic expansion. Financial indicators were strong as a whole in December, as the leading credit index contributed 0.14 percentage point to the headline and stock prices were also a modest help. Growing consumer confidence as a result of a firming labor market and lower gasoline prices is beginning to show through in monthly credit figures. With consumers on more solid financial footing and confidence in economic prospects continuing to firm, it seems they are more comfortable taking out loans to finance spending, which should help bolster consumer spending going forward.

Employment indicators were more neutral on the month, but the general trend from the labor market has continued to be strong. Job gains have been robust, averaging 289,000 in Q4-2014. The unemployment rate has continued to come down, reaching 5.6 percent in December. While this is positive news, it comes as the labor force participation rate also continues to fall. Average weekly hours have remained steady, but we have yet to see a material pick up in wages. We continue to look for broad strength going forward, but the employment components of the LEI hint at the somewhat mixed message we see when looking at a wide array of indicators from the labor market.

The orders components of the LEI were among the weak links, which is consistent with what we have seen from monthly figures from the durable goods and factory orders reports. This was not enough to see a negative contribution from any of the new orders components, however, as we still see a positive overall trend in the manufacturing sector.

Building permits was the only component to detract from headline growth, taking away just 0.06 percentage points. Permits have been volatile in 2014, but the recent strengthening trend seems to have flattened out a bit. The NAHB housing market index dropped slightly to 57 in January, but remains elevated. Builder confidence remains relatively elevated at a time when consumer confidence has gained steam. Low interest rates should help fuel activity in the housing market, at least through the first half of 2015, prior to Fed rate hikes. Today’s LEI reading is consistent with the growing momentum we have seen in the U.S. economy in recent months.