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Daily Global Commentary

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Leading Index Points to Further Weakening of Economy

Thu, Nov 20 2008, 22:20 GMT
by Northern Trust Economic Research Department

Northern Trust

Leading Index Points to Further Weakening of Economy

The Conference Board’s Index of Leading Economic Indicators (LEI) dropped 0.8% in October after a revised 0.1% increase in September. The LEI has dropped in four of the last six months. On a year-to-year basis, the LEI has dropped 3.5%, the largest monthly decline for the current cycle. A marginally weaker situation was reported in April 2001 when the LEI dropped 3.6%. The fourth-quarter average of the LEI (using the October level as the proxy) has moved down 3.18% from a year ago. With the exception of the third quarter reading of -3.20%, this is the largest decline since the fourth quarter of 1990 (see chart 1) when the LEI had dropped 3.3%. Given projections of weak economic conditions in the months ahead, the fourth quarter average of the LEI should be weaker when the December data are published, which is most likely to translate into a year-to-year change in the LEI that compares with the recessions of the 1980s.

The LEI has sent a reliable warning of weakening economic conditions for all recessions since 1960, with the exception of the 1967 dip (the economy was weak in this period but it was not a recession). In addition to chart 1 showing that the LEI advanced one quarter is a convincing indicator of future growth of GDP, table 1 lists the precise quarterly lead of the LEI. On average, the year-to-year change in the LEI has bottomed out two quarters prior to the trough of a business cycle. This information will be handy to identify the onset of a recovery.

Deterioration of Labor Market Conditions is Significant

Initial jobless claims rose 27,000 to 542,000 during the week ended November 15. This is the highest level of initial claims since the 1981-82 recession (see chart 2). The one time gain seen in 2001 was following the September 11 attacks (517,000 initial jobless claims) and the large increase in July 1992 was a GM strike-related event when initial jobless claims rose to 564,000. The latest initial jobless data are for the survey period of the November payroll survey, which implies that November estimates of payroll employment could be worse than the 240,000 loss in payroll jobs reported for October.

Continuing claims, which lag initial claims by one week, advanced 109,000 to 4.012 million. The level of continuing claims is the highest in nearly 26 years! (See chart 3). The insured unemployment rate increased to 3.0% from 2.9% in the prior week.

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Published on  Thu, Nov 20 2008, 22:32 GMT