Scant gain as LEI loses steam in September

Wells Fargo Research Team Wells Fargo

Summary

The leading economic index has gone 17 months without a decline, but the 0.2% gain in September is the smallest in seven months. This is consistent with our forecast for a soft patch in domestic demand in the third quarter as supply chain constraints hold back growth.

The usual suspects lead to another month of growth

Growth in the leading economic index slowed in September as the index advanced 0.2%. September's gain was smaller than in prior months, with only four components meaningfully contributing. The primary contributors–ISM new orders, the interest rate spread, jobless claims, and the leading credit index (LCI)–have been consistent drivers of the LEI in 2021, accounting for four of the five top spots in all but two months this year.

Looking ahead, these components should continue to add to the LEI, although the magnitude of their contributions may wane. Initial jobless claims have receded as expanded benefits have expired and the labor market has tightened. The decline in initial jobless claims added 0.11 points to the LEI in September, and data thus far for October has claims trending lower, hitting a fresh pandemic low at 290K this morning. ISM new orders were the largest contributor on the month boosting the headline LEI by 0.23 points. Despite some signs of slowing orders in other LEI sub-components, the ISM new orders index held at a robust 66.7 in September, indicating strong demand across a solid majority of respondents.

Among the index's financial components, the LCI and the interest-rate spread continue to reflect the availability and low cost of capital to support the ongoing expansion. While the removal of some Fed accommodation may tighten financial conditions at the margin, it will likely take some time before the Fed is ready to hike the federal funds rate. Meanwhile, consumers and businesses have been able to bolster their balance sheets in the wake of the pandemic, which should help prevent a credit crunch as monetary and fiscal stimulus fade.

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Wells Fargo Research Team

Wells Fargo

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