Economic indicators this week: The market's momentum continues

Part 5
Economic indicators this week: The market's momentum continues (Part 5 of 10)

The Conference Board’s leading indicators and their implications

The Leading Indicators Index

The Conference Board’s Leading Indicators Index (or LEI) report for the month of March, will be released on Monday, April 21.

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About the Conference Board’s Leading Indicator Index

The Conference Board’s three indices of leading, coincident, and lagging indicators give an estimate of the peaks and troughs of business cycles. Each of the three indices are based on indicators that are categorized as leading, lagging or coincident. These indices are designed to summarize and indicate key turning points in business cycles. An increase in the LEI would mean that economic activity is likely to accelerate in the coming months, while a decrease in the LEI would indicate the opposite.

What are leading, lagging and coincident indicators?

A leading indicator is one that is generally thought to precede changes in economic activity, while a lagging indicator usually follows changes in economic activity. A coincident indicator is one that usually accompanies changes in economic activity. The Leading Economic Index (or LEI) is based on readings from 10 leading economic indicators, while the Coincident Economic Index (or CEI) is based on readings from four coincident economic indicators. The use of numerous indicators in constructing indices would smooth out some of the volatility of individual indicators, were they taken in isolation.

Highlights from February’s release

  • Out of the three economic indices that the Conference Board reports, the Leading Economic Index (or LEI) increased the most to 99.8 in February from 99.3 in January.
  • The Coincident Economic Index (or CEI) increased by 0.2% to 108.2 in February. The lagging economic index increased to 122.1 in February, up 0.3% from January’s reading.
  • The increase in the LEI was attributed mainly to increasing interest rate spreads between the Fed funds rate and 10-year Treasuries and increases in housing permits which are important leading indicators, regarding the future direction of the economy.
  • The Conference Board’s report has also indicated that consumer demand and wage growth has been “challenging” in January and February which would impact economic growth going forward.

A stronger than expected retail sales report for the month of March, will help mitigate some of the concerns expressed in the LEI report. The US Census Bureau reported a month-on-month increase of 1.1% in retail sales in the month of March, 2014, powered by a 3.1% increase in auto sales (CARZ). Furniture companies, home improvement retailers and food and beverage companies, were some of the segments due to which retail sales outperformed.

Major home improvement retailers include Lowe’s (LOW) and Home Depot (HD). These retailers are expected to benefit further once the spring and summer seasons get underway as these seasons are traditionally the strongest for residential construction and sales. One way of investing in Lowe’s (LOW) and Home Depot (HD) is through the iShares U.S. Home Construction ETF (ITB), which tracks the performance of the Dow Jones U.S. Select Home Construction Index. Top ten holdings in ITB include both Lowe’s (LOW) and Home Depot (HD).

Increasing interest rates, as represented by increasing spreads between the Fed funds rate and 10-year Treasuries, would lower prices of fixed income securities. However, investors can benefit from rising rates by investing in the Market Vectors Investment Grade Floating Rate ETF (FLTR) and the iShares Floating Rate Bond (FLOT), where interest rates are not fixed but determined based on prevailing market rates.

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