Leading economic indicators rose in January despite poor weather

The Conference Board Leading Economic Index is a forward-looking index mainly used to identify turning points in the economy

The index of Leading Economic Indicators (LEI) is a business cycle indicator. It’s based on 11 different economic statistics: average workweek, initial jobless claims, new orders, building permits, unfilled durable goods, commodity prices, consumer expectations, stock prices, and money supply. Since it’s a combination of previously released indices, it isn’t really a market-moving release. This index can be volatile, so analysts tend to identify three-month trends as an indication that the economy is moving into another part of the business cycle.

Leading Economic IndicatorsEnlarge Graph

The Index of Leading Economic Indicators moderates in December

After a flat December, the Index of Leading Economic Indicators rose by 0.3 to end at +0.3. Overall, the index indicates an economy that’s accelerating. Asset prices and interest rates were positive, offset by weakness in consumer expectations about the economy.

“The increase in the Leading Economic Index reflects an economy that is expanding moderately, although the pace is somewhat held back by persistent and severe inclement weather in most parts of the country,” said economist Ken Goldstein. “If the economy is going to move on to a faster track in 2014 compared to last year, consumer demand and especially investment will need to pick up significantly from their current trends.

Implications for homebuilders

Overall, the report shows the economy is still expanding moderately, and that the labor market should start improving. While sentiment is generally improving, the overall economy is one of slow growth, which is worrisome for increasing employment. Jobs are the most important economic statistic for homebuilders, and they need to see an increase in job growth to get some activity from the first-time homebuyer.

Overall increases in consumer sentiment, however modest, are starting to drive more business for homebuilders like Lennar (LEN), D.R. Horton (DHI), Toll Brothers (TOL), and PuteGroup (PHM). Housing starts have been so low for so long that there’s some real pent-up demand that will unleash as the economy improves. The shortage of skilled workers could negatively affect margins as business expands. Homebuilder fourth quarter earnings have been generally good, which supports the reading from the Conference Board. An alternate way to invest in the homebuilding sector would be through the S&P SPDR Homebuilder ETF (XHB).

To learn more about investing in homebuilder stocks, see Homebuilder outlook: Why has producer inflation remained muted?