LEI points to continued expansion despite supply chain constraints

Summary

The Leading Economic Index (LEI) rose another 1.3% in May after reaching its first post-COVID high in the prior month. The strength was broad-based, with seven out of 10 components positively contributing on the month, led by a 0.89 contribution from initial jobless claims. The Leading Index could be even stronger were it not for continued supply constraints.

Parts and Labor are Both in Short Supply

The Leading Economic Index continued to advance in May, rising 1.3% to 114.5. Similar to April's gain, the index's strength was broad-based with seven out of 10 components advancing on the month. The demand outlook remains promising, with ISM new orders and consumer expectations continuing to improve. The interest rate spread and the leading credit index also positively contributed on the month. Financing conditions have been rather favorable over the past year and should remain so, as credit quality continues to improve with the ongoing expansion.

In keeping with the theme of the past few months, May's increase could have been stronger had it not been for supply constraints holding up activity. Manufacturing hours worked, consumer and capital goods were all flat or marginally negative on the month. Producers are having trouble getting their hands on the parts and labor necessary to increase production. While these headwinds should fade over the course of the year as supply chains adjust and more workers are able and willing to return to work, we would not be surprised to see these supply chain and labor constraints still holding back the LEI next month.

Source: The Conference Board and Wells Fargo Securities

Download the full report