Index of Leading Economic Indicators

What It Means

The Index of Leading Economic Indicators is a system of analysis that evaluates economic data in order to try to forecast future economic trends. An economic indicator, or business indicator, is a statistic expressing the performance level of a specific sector of the economy. By studying economic indicators, economists, business experts, and government officials are able to make informed predictions about whether the economy will be strong or weak in the foreseeable future.

Those indicators that tend to change before the overall economy does are called leading economic indicators, or LEI. Leading indicators are considered the most vital for predicting future economic tendencies. For example, when the average manufacturing workweek (which measures the number of hours per week that the average worker in the manufacturing industry spends at his or her job) goes down, economists can forecast an impending downturn in the manufacturing industry and possibly in the overall economy.

There are 10 principal categories of leading economic indicators. In making determinations about general economic trends, economists study shifts in all 10 categories and then analyze the composite data (that is, the data as a whole). For example, if the average workweek goes down slightly, but all other indicators rise, analysts will conclude that the economy is growing stronger.

The Index of Leading Economic Indicators was created by the Conference Board, a private nonprofit research group based in New York City. It began publishing the index in 1996. The index is announced once a month; it describes shifts in the 10 leading indicators in terms of percentage points, quantities, and dollar amounts, depending on the category. These factors are then combined (using complex statistical methods) into a single composite figure. The way this figure changes from month to month is intended to reflect whether the economy is strengthening or declining.

When Did It Begin

By the mid-1990s commerce officials under President Bill Clinton had begun to search for more accurate measures by which to gauge future economic trends. In 1995 the Bureau of Economic Analysis (BEA), a government agency that releases data about the overall status of the U.S. economy, decided to hire a private firm to oversee the monthly publication and distribution of economic indicators.

After reviewing proposals from a range of private companies, the BEA selected the Conference Board, a research firm based in New York, to assume responsibility for collecting, analyzing, and publishing data concerning various economic indicators.

Between October and December 1995 the monthly reports on economic indicators were released as a joint publication of the Conference Board and the BEA. On January 17, 1996, the Conference Board independently released the Index of Leading Economic Indicators for the first time.

More Detailed Information

The Index of Leading Economic Indicators tracks changes in 10 categories of economic activity:

• The “average manufacturing workweek” indicator measures the average weekly work hours of employees in the manufacturing industry over the course of a given month. This indicator reflects the overall productivity of the manufacturing industry.
• The indicator for the “average number of weekly initial claims for unemployment insurance” tracks how many people file for unemployment insurance (the system by which money and benefits are paid to qualified unemployed individuals) over the course of a given month. By analyzing these statistics, experts can determine the overall direction of the job market. For example, a rise in the average weekly initial claims for unemployment insurance will likely reflect an increase in layoffs, a slowdown in hiring, or both.
• “Manufacturers’ new orders for consumer goods and materials” is an indicator that refers specifically to products used by consumers, such as motor vehicles, electronics, clothing, and groceries. It gauges whether wholesalers and retailers are ordering more or less of such goods than in the preceding month. This indicator reflects increases and decreases in demand for consumer goods.
• Another leading indicator tracks manufacturers’ new orders for nondefense capital goods, which are products used by manufacturers in the production of consumer goods. (“Nondefense” refers to the fact that goods produced for military use are not included.) When businesses spend money to improve their operations, it is a sign of a strong economy.
• The indicator called “vendor performance—slower deliveries diffusion” monitors the speed at which companies receive supplies necessary to manufacture their products. A slowdown in delivery times typically means that there has been an increase in demand for supplies, which in turn reflects an increase in demand for products. In other words, a slowdown in deliveries is a sign of a growing economy.
• The building permits indicator reflects the number of residential building permits (permits obtained in order to begin the construction of homes) issued. This statistic measures overall activity in the residential-construction sector, and it usually changes before the other leading indicators do.
• Another indicator measures the stock prices of 500 common stocks. Common stocks are those shares in a company or corporation most commonly owned by investors. By measuring the amount of money that people are investing in a range of common stocks, this indicator reflects the attitudes of investors toward the overall economy. It can also reflect changes in interest rates, which are fees that borrowers are charged for loans (the rate is a percentage of the loan amount). When interest rates rise, borrowing decreases, and fewer people invest in stocks.
• The money supply, or M2 (designated as such because it is just one of various ways to define the money supply), indicator measures the amount of money available within an economy at a given time. Increases in the money supply result in decreases in interest rates, which tend to encourage consumer spending.
• Another indicator, the “interest-rate spread between 10-year Treasury bonds and federal funds,” gauges investor confidence in the long-term health of the economy by comparing the relative sizes of long- and short-term interest rates. A large discrepancy between these rates generally indicates that long-term economic growth will be difficult to achieve, while a narrower discrepancy suggests that the economy will become stronger.
• The index of consumer expectations measures the attitudes of consumers toward future economic conditions. These statistics are measured by surveys through which analysts ask consumers for their opinions on both personal financial prospects and the prospects of the business community in general. For example, if a large number of consumers respond that they expect to see an improvement in both their financial situation and the overall business climate over the coming year, the index of consumer expectations will be high.

Recent Trends

In 1996, the first year the Index of Leading Economic Indicators was used, the index was listed as 100. This number rose steadily over the latter half of the 1990s, reaching 139 by May 2000. In the summer of 2000, however, the index began to stagnate. The figure remained at 139 through October 2000, and it subsequently began to fall considerably, descending to 111 by May 2003. After 2004, however, the index began to rise again, achieving a level of 138 by December 2006.