Full Steam Ahead for the LEI, Philly Fed

The Conference Board’s Leading Economic Index (LEI) posted a 0.9 percent monthly gain in October, more solid news for the U.S. economy, as strength in the underlying components was broad-based.

Financial Indicators Mixed, but Positive Overall

With a slew of economic indicators released this morning, the 0.9 percent gain in the LEI bolsters the argument for continued growth in the U.S. economy (top chart). Last month’s data were revised slightly downward, but October’s pickup in growth comfortably beat consensus expectations. Looking at the underlying components, strength was broad-based, with 8 out of 10 indicators contributing to headline growth (middle chart).

The strongest contributor to growth, as has commonly been the case throughout the current expansion, came from the interest rate spread, adding 0.24 percentage points to headline LEI. The leading credit index added another 0.1 percentage point to the total, as we continue to see more favorable credit conditions benefit the economy. Lenders continue to ease standards and loan growth to both businesses and consumers is starting to gain steam. Turning to the third financial component, stock prices were actually the largest detractor in October, subtracting 0.11 percentage points. This comes as no surprise, as equity markets were quite volatile, with the S&P 500 experiencing price swings in excess of 5 percent. Recent indicators of the housing market have been relatively firm, with today’s release of existing home sales rising 1.5 percent, while both building permits and housing starts are growing in excess of a one-million unit annualized rate. With that, building permits contributed 0.14 percentage points to overall growth, consistent with our view of a further pickup in housing activity into 2015. Also encouraging was a gain in the ISM new orders component, contributing 0.21 percentage points, as the manufacturing sector has shown strong fundamentals amongst monthly volatility.

Weekly initial jobless claims continued to fall in October, as the monthly average reached its lowest level since 2000, which was good enough for a 0.19 percentage point contribution to the overall LEI. Since the drop last month in weekly claims, the past several weeks have seen a slight uptick, however, not nearly enough to be cause for concern.

Big Jump in Philly Fed

The Philadelphia Fed’s general business activity index soared to 40.8 in November (bottom chart). While this headline figure is not a composite of the underlying details, other components were also positive. Most notably, the new orders component reached its highest level since 1988. This is also accompanied by strong growth in the shipments component, as the amount of indicators pointing to strength in manufacturing activity continue to mount. Other regional PMIs remain firm and the ISM’s manufacturing index returned to a fresh multiyear high in its most recent reading. We continue to look for strong domestic economic activity going forward, even as other major foreign economies are currently in the doldrums.