Friday, February 17, 2012

Leading Economic Index Points to Ongoing Growth

The Conference Board reported today that its Leading Economic Index (LEI) increased in January for the fourth consecutive month, reaching and index level of 94.9, the highest level since July of 2008, three and-a-half years ago (see chart above).  The 0.4% increase in January followed a 0.5% increase in December. 

From the report, Ataman Ozyildirim, economist at The Conference Board commented: 

“This fourth consecutive gain in the LEI reflected fairly widespread strength among its components, pointing to somewhat more positive economic conditions in early 2012. The LEI’s increase in January was led not only by improving financial and credit indicators, but also rising average workweek in manufacturing. These both offset consumers’ outlook about the economy, which remained pessimistic, though slightly less so. Meanwhile, the Coincident Economic Index rose again in January as employment, income, and sales data all point to improving current economic conditions despite a lack of contribution from industrial production.”


At 2/17/2012 11:44 AM, Blogger Jon Murphy said...

Well this certainly is fantastic news! Given the usual relationship to the economy, this is suggesting ongoing growth through the end of the year!

At 2/17/2012 11:52 AM, Blogger morganovich said...


perhaps not as great as you think.

20 of the 30 bp increase came from bond yield spread, which given the behavior of the fed and treasury is not a particularly valid indicator right now.

rather than reflecting market conditions, it reflects market manipulation.

assuming that makes it a valid input to an index is cargo cult thinking.

At 2/17/2012 11:59 AM, Blogger morganovich said...

oh, and another 17 came from equity prices.

consumer expectations for business conditions was actually down.

this increase is more consistent with inflation and fed market manipulation that economic growth, though average workweek looked good. that was, however, the only real economic indicator that looked good.

both new orders components, and permits looked stagnant.

check the technical data on p8.

you whippersnappers need to start checking the underlying sources, not just the headlines...


At 2/17/2012 12:07 PM, Blogger Jon Murphy said...


You are just determined to be pessimistic, aren't you? :-P

Consumer expectations are notoriously unreliable.

New Orders registered 57.6. That's a great sign

Permits, I grant you, are flat, but no surprise there. At least they're not declining.

Unemployment claims are down.

Coupled with the PMI from the beginning of the month, things are looking up.

One of these days, man, I am going to get you to smile. You can't be a crotchety old man all your life. :-P

At 2/17/2012 12:16 PM, Blogger Benjamin Cole said...

Closing in on 13k on the DJIA.

Die shorts, die, die, die!!!!!

At 2/17/2012 12:18 PM, Blogger Benjamin Cole said...

Morgan has been short since at least 8,000 on the DJIA.

If you listened to Morgan, you missed one of the great run-ups on the DJIA in recent history.

Morgan should go back to listening to his Liberace records and keeping his telescope focused on Area 51.

At 2/17/2012 12:22 PM, Blogger morganovich said...


i think you are misreading new orders.

that is not an index where 50 indicates expansion, it's just an absolute number.

ISM was up .04

nodefense cap goods was DOWN .02

combine that, and it looks like stagnation.

consumer expectations for biz have been negative for 6 straight months.

the entire upmove and then some for the last 6 months has been from rate spreads.

do the math yourself.

i don't get paid to be optimistic or pessimistic, i get paid to be right.

i'd LOVE for the economy to be booming.

but it's not.

this index is just one factor at this point: rate spreads and those are being heavily manipulated.

the index was 94.4 in july.

it was 94.9 in jan.

that's a .5 increase.

the contribution to that of rate spreads?


that means that the sum of all the other indicators has been -0.53 during that time.

this indicator is worthless during QE, twist, ZIRP, and the massive buying of levered govvies driven by freddy and fannie taking over the mortgage market.


i smile all the time. i live at a ski resort and do not need a good economy to make money, just an accurate view.

At 2/17/2012 12:24 PM, Blogger Jon Murphy said...

Hey now, that's not fair.

Morganovich is one of the most insightful people I have ever had the pleasure of conversing with. We may disagree on details, but his head is always on straight.

That being said, I am declaring today to be Positive Attitude Day. Anyone who is a Negative Nancy, a Pessimistic Patty or a Frowny Francine will be burned at the stake.

At 2/17/2012 12:27 PM, Blogger morganovich said...


once more you make an idiot statement.

we lost no money in 2008.

how did you do?

we were up well over 50% in 2009.

how about you?

there are great longs bad economies and always opportunities somewhere.

making up nonsense about my being short since 8000 is just your desperation showing.

we're up 17% year to date.

how you doing?

why tell such absurd lies?

go back to sniffing vanish oh bigmouth of the bar stools.

At 2/17/2012 12:30 PM, Blogger morganovich said...


how about "realistic roger"?

or "accurate alan"?

that's the guy you want to follow.

"positive paul" has a tendency to get dragged over the falls.

i'll be the first to admit i am a cynical bastard. but given what i see every day, i keep thinking "not cynical enough".

At 2/17/2012 1:31 PM, Blogger juandos said...

Is the Conference Board disconnected from reality?

At 2/17/2012 1:50 PM, Blogger Jon Murphy said...

i think you are misreading new orders.

that is not an index where 50 indicates expansion, it's just an absolute number.

I must respectfully disagree; I'm not sure I am misreading the number. It's from the ISM Purchasing Managers Index and is a difussion number where anything over 50.0 indicates expansion. From the ISM: "A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars)." New Orders has been above this point for 30 consecutive months.

At 2/17/2012 1:52 PM, Blogger Jon Murphy said...

Sorry, I only posted half the paragraph. Here's the whole thing:

ISM's New Orders Index registered 57.6 percent in January, which is an increase of 2.8 percentage points when compared to the seasonally adjusted December reading of 54.8 percent, and represents a continuation of growth for the 33rd consecutive month. (Due to ISM's seasonal adjustments, this index now demonstrates growth for the past 33 consecutive months.) A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars).

At 2/17/2012 2:23 PM, Blogger morganovich said...



you are correct.

however, worth noting is that it's a % based, not a revenue based survey.

CAT can say down and bob's buttons can say up, and they offset.

i'm not saying that is happening, just pointing out methodology.

also, i think it's a nominal, not a real figure that firms report on (sales, not units) so it cannot nesc tell inflation from unit growth.

i'm not 100% on that, but this:

"A New Orders Index above 52.3 percent, over time, is generally consistent with an increase in the Census Bureau's series on manufacturing orders (in constant 2000 dollars)."

makes me think so. that looks like an inflation adjustment.

still, this does not change the fact that 200% of the increase in LEI over the last 6 months has been rate spread.

it's also an odd disconnect.

ISM has been consistently expanding but expectations around business conditions have been persistently poor.

that seems an odd dichotomy.

not quite sure what to make of that.

At 2/17/2012 2:28 PM, Anonymous Anonymous said...

Speaking of leading indicators of one sort or another, this was interesting:

Someone Deep In The Auto Industry Explains Why Demand Will Be 'Gangbusters' For Months On End

At 2/17/2012 2:38 PM, Blogger Jon Murphy said...

I rather agree with you Morganovich,

It is a little odd that much of the increase has been in financials (stock market and g-bonds) both of which we know to be...manipulated.

In regards to the ISM, I think it is important to note how it is calculated. As you rightly note, the survey basically asks "Are new orders up or down from last month?" It makes no distinction to how much or size (although the respondents in the survey are roughly the same size. The sampling isn't entirely ransom).

Also, I'm not a fan of the whole "consumer expectations" bit. It asks consumers how they think businesses are faring, which is a little skewed. Consumer expectations are also heavily influenced by the media. I mean, let's take for example, you and I. Assume we are the only two reporters in the country. My viewers will see the economy in, perhaps, a more rosy light than is necessary. Your viewers may see it, perhaps, in a more dire view than is necessary.

Here's another weird dichotomy:

Consumer expectations are low, but retail sales (adjusted for inflation and excluding auto sales) are at record levels. Check that shit out.

At 2/17/2012 3:10 PM, Blogger morganovich said...


you are incorrect about retail sales.

real retail sales were 176436 in jan 2012.

they were 179187 in jan 2007

they were 180040 in jan 2006

thus, they are still about 2.25% below pre recession levels.

if you do not have the FRED plug-in for excel, you should get it.

mark turned me onto it.

it's astonishingly useful.

free download there.

drops fed data right into excel and lets you play with it.

biggest time saver i have found in years.

At 2/17/2012 3:10 PM, Blogger sethstorm said...

Now does this growth result in people getting their jobs back, or being swept under the rug in the name of business?

At 2/17/2012 3:16 PM, Blogger Jon Murphy said...


Sorry about that. I was looking at the non-deflated number, not the deflated number.

I should also probably mention I am looking at 12 month moving totals (it helps smooth out seasonality and helps adjust for random, 1 off monthly jumps/shocks).

By my calculations, the 12 month moving total in 2011 is just 0.4% below the 12 month moving total in November 2007, when it peaked.

Sorry about the confusion!

By the way, I know about the FRED app (it's rather useful), but my company also has a database with all the same series in it, but unadjusted. I like my company's stuff better (mainly because it's always right at hand).

At 2/17/2012 3:27 PM, Blogger Benjamin Cole said...


We are 40 points from 13k on the DJIA.

Die shorts, die, die, die!!!!

At 2/17/2012 3:30 PM, Blogger morganovich said...


i am getting a different result from a 12 month average of the real series.

i get 174116 now, and 179184 at peak in 11/07.

from that, it looks like '07 was 2.9% higher, not 0.4%.

data series rrsfs.

At 2/17/2012 3:36 PM, Blogger Jon Murphy said...

I think I see the disconnect:

Your numbers come from FRB St. Louis. My numbers come from the Census. There must be a difference in the way they report because my 12 month moving total is reading $2.106 trillion through Jan 2012 and the peak was in November 2007 of $2.116 trillion.

That's a rather significant difference.

Also, I think your numbers are seasonally adjusted. Mine are not.

At 2/17/2012 3:40 PM, Blogger morganovich said...

oh lord.

jon, fwiw, benji has historically been a fantastic contrary indicator.

when he begins bellowing about stock market prices, get ready for a correction.


if you don't mind my asking, for whom do you work that you get such good access to data? (no need to name the firm, just an industry and a role would be plenty.)

for symmetry:

i founded and run 3 hedge funds with my partner. we focus on microcap equities. i've started a number of technology companies, 2 of which even worked and do a fair bit of angel investing.

i'm actually quite an optimist in general. but the economy is like the weather, you need to know what it is so you know how to dress and what activities are likely to be rewarding.

one can be optimistic about investments and suspect of the economy at the same time. you just need to pick them correctly.

At 2/17/2012 3:45 PM, Blogger Jon Murphy said...

if you don't mind my asking, for whom do you work that you get such good access to data? (no need to name the firm, just an industry and a role would be plenty.)

I work as an economist for an economic research and consulting company in New Hampshire. What you and I are discussing now is exactly what I do to pay the bills. If you were a hedge fund manager, you may have heard our chief economics speak!

And I never doubt you're an optimist. I just like giving you a hard time.

At 2/17/2012 3:45 PM, Blogger morganovich said...

well, the difference in absolute values is just a function of scaling.

that fed series is using 1982 dollars.

i suspect the census is using current dollars.

so we can ignore most of that.

what's the deflator?

fed series is using CPI all urban.

seasonal adjustment is always treacherous, no question, but that is an awfully large divergence.

At 2/17/2012 3:50 PM, Blogger Jon Murphy said...

The Census uses current dollars which we then deflate with the CPI of all items (including food and energy).

At 2/17/2012 4:03 PM, Blogger morganovich said...

how has all items been running relative to all urban?

that may be the difference.

of course, if you believe, as i do, that CPI significantly understates inflation, then this comparison gets a lot less rosy.

new hampshire huh? you a dartmouth guy? how did you wind up up there?

(i grew up in connecticut)

oh, and not "were" a HF manger. i still am.

i've just reached a point where i can live where i want. i'm in park city. (after 15 years in SF) my partner is in boston.

At 2/17/2012 4:16 PM, Blogger Bill said...


Do you publish a newsletter with your recommendations for investments that the general public can buy or do only work for the really rich guys? Thanks.

At 2/17/2012 4:21 PM, Blogger Jon Murphy said...

how has all items been running relative to all urban?

that may be the difference.

It looks like it is, or at least most of it. All Items has been running a few percentage points lower than Urban.

new hampshire huh? you a dartmouth guy? how did you wind up up there?

I'm not a Dartmouth guy. I went to a real school :-P I'm actually from Massachusetts, but I got this job up here when I graduated from Framingham State University and the rest is history.

At 2/17/2012 4:27 PM, Blogger Jon Murphy said...

I do want to say, Morganovich, that, in my dealings with you both here and on Cafe Hayek, I have developed an enormous respect for you. We may quibble about details or interpretations, but I think we are largely on the same page. I always respect your opinion and I always learn whenever you post.

At 2/17/2012 5:06 PM, Blogger morganovich said...


i run a hedge fund.

by law i can only accept money from accredited investors (those with over $1 million in liquid assets other than their home).

it's the price we pay for being lightly regulated.

i am also forbidden to advertise and a newsletter would definitely come under that heading as well as possibly running afoul of stock manipulation rules.

"get long and get loud" is not looked upon fondly by the SEC.

At 2/17/2012 5:11 PM, Blogger morganovich said...


well, as i work with a bunch of them, i shall refrain from the masshole jokes and instead share a lament on the results of the superbowl.


fwiw, i'm actually not that much older than you are. i'm still in my 30's (for 3 more glorious weeks). i get the sense you have this mental picture of me as a crotchety oldster. i aspire to be one day, but not there yet..

i have enjoyed these discussions with you as well.

there are some folks on this board that are consistently interesting and insightful.

it's the internet, so it's never going to be all of them, but there are certainly enough to make it worthwhile and it helps me a ton to think out loud and you actual interest in and knowledge of how data works is much appreciated by me.

i am not on facebook, so CH is now unavailable to me for comments, but i still tend to read it.

don's letter today about the ex/im banks was fantastic.

when he nails one, he nails one.

At 2/18/2012 9:00 PM, Blogger Ron H. said...

morganovich: "ron-

you are incorrect about retail sales.

I can't be wrong, as I haven't commented on them.

Did you mean to address Jon?

I know we look a lot alike, but he's the whippersnapper, and I'm the old fart.

At 2/19/2012 11:58 AM, Blogger morganovich said...


yes, i did.

it was a typo.



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