What Financial Markets Predict for the US Economy
Understanding the Leading Credit Index
The Conference Board Leading Credit Index (or LCI), which tracks lending conditions in the economy, is reported monthly.
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The index has six constituents:
- 2-Year Swap Spread (SHY) (real time)
- LIBOR1 3-month (SCHO) less 3-month Treasury-bill (VGSH) yield spread (real time)
- debit balances in margin accounts at broker dealers (monthly)
- AAII 2 Investor Sentiment Survey, bullish (%) less bearish (%) (weekly)
- Senior Loan Officers C&I 3 opinion survey, with banks tightening credit to large (SPY) and medium (IWM) companies (quarterly)
- security repurchases (GOVT) (quarterly) from the Total Finance-Liabilities section of the Federal Reserve’s flow of funds report
All the above are forward indicators.
Performance of the LCI
The LCI is the inverse of the Conference Board Leading Economic Index (or LEI). A positive reading on the LCI will have a negative effect on the LEI. The LCI reading for July was -1.1, and it had a net contribution of 0.09 points, or 9%, to the LEI.
Why we need to monitor the LCI
The LCI, which reflects the economy’s credit climate in the economy, is similar to the M2 money supply adjusted for inflation (TIP). An increase in this index reading is a sign of economic slowdown, and a decrease indicates further expansion.