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Daily Global Commentary

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Leading Index Points to Continued Weak Economic Conditions

Fri, Aug 22 2008, 00:27 GMT
by Asha Bangalore

Northern Trust

Leading Index Points to Continued Weak Economic Conditions

The Conference Board’s Index of Leading Economic Indicators (LEI) fell 0.7% in July, following a steady reading in June. The July decline is partly exaggerated because of a large drop in building permits related to the change in building code in New York and higher initial jobless claims due to an extension of unemployment benefits. To reduce the influence of these distortions, the June-July average of the LEI is the preferred route. This average is down 0.3% from the May reading. Following the same reasoning, the June-July average fell 2.6% from the average LEI during June-July 2007. This is the largest year-to-year decline since April 2001 when the economy was in a recession. The report noted that “risks of further weakening remain elevated.” As they say, chart 1 is worth many words.

Of the ten components of the index, interest rate spread, index of consumer expectations, and manufacturers' new orders for nondefense capital goods made positive contributions. The negative contributions were from building permits, stock prices, average weekly initial claims for unemployment insurance, real money supply, and manufacturers' new orders for consumer goods and materials. Average weekly manufacturing hours and the index of supplier deliveries (vendor performance) held steady in July. Forecast for orders of durable goods (consumer and capital goods) and real money supply are used in this estimate.

Watch Out for Future Jobless Claims Reports

Initial jobless claims declined 13,000 to 432,000 during the week ended August 16. Initial jobless claims have risen 109,000 between July 5 and August 2, with the large jump attributed to the fact that extended unemployment benefits were available under a federal program. In the past two weeks, only a part of this gain has been reversed (-25,000). We will need to watch how much of the temporary gain will be reversed in the weeks ahead. Continuing claims, which lag initial claims by one week, fell 17,000 to 3.36 million. Both of these numbers reflect the impact of the federal program. We should get a better sense of the underlying trend in a few weeks. But, the fact remains that the upward trend of jobless claims underscores the significant weakness of labor market conditions.

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Published on  Fri, Aug 22 2008, 00:30 GMT