Why leading economic indicators point to future economic growth

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Conference Board’s Leading Economic Indicators index 

The Conference Board’s Leading Economic Indicators Index (or LEI) for September released last week. The LEI is a composite index of ten economic indicators and a forward gauge of economic activity. An increase in the LEI Index points to future economic growth. This is especially relevant as we approach the end of 2014 with international growth concerns weighing in. Observing trends in the LEI will be crucial for both stock and bond market investors in the United States.

The LEI Index surged by 0.8% in September, beating expectations of a 0.6% gain. Nine of the ten LEI components reported an increase, a big positive for the U.S. economy.

Part 5 (2)

 

Financial components are chief contributors to surging LEI

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The increase in the LEI was brought about by financial components. The spread between ten-year Treasury yields (IEF) and the Federal funds rate was the largest component accounting for most of the increase in the LEI. The spread widened to 2.44% in September due to Treasury yields rising and the federal funds rate at essentially zero levels. We’ll discuss the impact of economic data on Treasury yields in the following section.

Leading Credit Index: Higher loan demand may precede higher rates

The Leading Credit Index was the second largest contributor to the increase in the LEI. The index is a composite of six financial indicators. An improvement in this component implies higher demand for loans and improved access to credit in the economy. Increased demand for loans implies higher consumption, a critical growth driver for the economy. It also means higher loan rates in the future.

The next section will discuss other important indicators that released last week and their impact on financial markets.

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