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Index of Leading Economic Indicators takes a breather in August

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Nov. 20 2020, Updated 5:29 p.m. ET

Index of Leading Economic Indicators

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

The Index of Leading Economic Indicators (or 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. The Index can be volatile. Analysts usually identify three-month trends as an indication that the economy is moving into another part of the business cycle.

The Index increases in August

July was revised upward from 0.9 to 1.1. August slipped to 0.2. Overall, the Index shows that the economy is growing. Asset prices and interest rates were positive. They were offset by weakness in consumers’ expectations about the economy.

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“The leading indicators point to an economy that is continuing to gain traction, but most likely won’t repeat its stellar second quarter performance in the second half,” said Ken Goldstein, Economist at The Conference Board. “Meanwhile, the CEI, a measure of current economic activity, continued to expand through August, amid improving personal income, employment and retail sales. However, industrial production registered a slight decrease for the first time in seven months.”

It’s important to note that we saw a decrease in the industrial production numbers earlier this week. This was mainly due to volatile auto sales. The Institute for Supply Management (or ISM) data has continued to be strong.

Implications for homebuilders

Overall, the report shows that the economy is still expanding moderately. The labor market should start improving. Sentiment is generally improving. However, the overall economy is growing slowly. This is worrisome for increasing employment.

Jobs are the most important economic statistic for homebuilders. 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 PulteGroup (PHM). Housing starts have been low for so long that there’s some real pent-up demand that will unleash as the economy improves. The shortage of skilled workers can negatively affect margins as business expands.

Homebuilder earnings have been good. This 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).

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