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LEADING ECONOMIC INDICATORS

p-preliminary
Note: ¯ indicator for unemployment claims means claims went down:, and indicator for vendor performance means the % of slower deliveries went up. For historical information, go to:
http://www.tcb-indicators.org/

Source: Conference Board

Analysis for the Housing Market
By:Ken Lee

The leading index increased slightly to a reading of 109.8 in July which is a 0.10 point increase from June levels. The index is up 2.20 points from its levels six months ago when it stood at 107.6 in January. Flatter readings in the leading index over the past few months suggests that economic growth will be slowing. Declines in building permits, stock prices, money supply, and the index for consumer expectations dragged on the leading index in July.

Six out of the ten components showed month-over-month increases from June levels. The positive contributors were a drop in initial unemployment claims and increases in average workweek hours, manufacturers' orders for consumer and capital goods, vendor performance, and the interest rate spread remaining positive. A 10.7% drop in the index for consumer expectations along with a 3.1% decline in building permits from June levels were the biggest drags on leading indicators over the past month.

Compared to six months ago, only five out of the ten indicators posted increases. The positive contributors was a decline in initial unemployment claims (-4.6%) and increases in manufacturers' orders for capital goods (+7.5%), money supply (+1.2%), average workweek hours (+0.5%) and the interest rate spread remaining positive. The index for consumer expectations (-11.1%) and building permits (-10.2%) were the two biggest drags on the leading index compared to their levels six months ago.

Definitions and Importance for the Housing Market
By:Ken Lee

The Leading Economic Indicator Index provides a summary of the economy, and is comprised of 10 economic components: 1) the average hours worked per week by production workers in manufacturing industries; 2) the average number of weekly new claims filed for unemployment insurance; 3) manufacturers' new orders for consumer goods; 4) the relative speed at which vendors can deliver orders to industrial companies, as measured by the National Association of Purchasing Managers index; 5) new orders received by manufacturers in non-defense capital goods; 6) the number of residential building permits issued; 7) the change in the stock market, as measured by the price of stocks in Standard & Poor's 500 index; 8) the M2 money supply (adjusted for inflation); 9) the yield curve, which is the spread or difference between long term interest rates (10 year Treasury) and short term interest rates (the Fed funds rate); and 10) the index of consumer expectations.

The leading economic indicator index has successfully predicted each of the last eight recessions. However, economists differ on the degree of downturn needed to predict a recession, and how far in advance the indicator predicts a recession (varies from 3 to 18 months). We believe that housing market businesses should be concerned if the index drops by 1.5% from its peak over a six month period, and at least five of the ten indicators have also dropped during that time.

The coincident index is comprised of 4 economic components: 1) employees on nonagricultural payrolls; 2) personal income less transfer payments; 3)industrial production; and 4) manufacturing and trade sales. The lagging indicator index is comprised of 7 economic components: 1) average duration of unemployment; 2) inventories to sales ratio, manufacturing and trade; 3) labor cost per unit of output, manufacturing; 4) average prime rate; 5) commercial and industrial loans; 6) consumer installment credit to personal income ratio; and 7) consumer price index for services.

Historically, the cyclical turning points in the leading index have occurred before those in aggregate economic activity, cyclical turning points in the coincident index have occurred at about the same time as those in aggregate economic activity, and cyclical turning points in the lagging index generally have occurred after those in aggregate economic activity.

The effect of weekly initial claims for unemployment insurance has an inverse to the direction in which it moves. Thus, gains in that category is seen as negative, while decreases are seen as positive. The direction of interest rate spread is no longer determined based on month to month comparisons. It is now determined based on whether yields on long rates exceed yields on short rates. Just as long as the yield curve is not inverted, interest rate spread remains positive, regardless of the month to month fluctuations.
For more information on the Leading Economic Indicators, go to: http://www.tcb-indicators.org/