Indicator Suggests Economic Momentum

The Conference Board has shaken up the way it calculates the Leading Economic Index (LEI). After three years of the Federal Reserve priming the pump by increasing the money supply, the Conference Board is yanking the money supply and replacing it with the “Leading Credit Index,” a combination of indicators including the yield curve, interest rate swaps and data from the Federal Reserve survey of bank lending. This should fix some of the over-exuberance of the LEI in recent years. We have remarked in this space before how the inclusion of the money supply was overstating the strength of the actual recovery.

There are other changes as well. Vendor performance is out; replaced by the new orders component of the ISM survey. After years of using Michigan’s consumer confidence data, the Conference Board is adding their own confidence measure in addition to the University of Michigan’s, with each measure given a 50 percent weight in the calculation of consumer sentiment.

Finally, new orders for nondefense capital goods will be replaced by nondefense capital goods orders, ex-aircraft. This is a better way to gauge actual business spending for several reasons. The first is that when the BEA wants to measure business spending, it looks at shipments of non-defense capital goods orders, ex-aircraft; so on that basis, this change should be a better predictor of GDP growth. Other justifications include the fact that the size of aircraft orders can distort the numbers in the short run, and the fact that in some cases it takes several years for aircrafts to be built. Due to this extended duration, aircraft manufacturing operates—to some extent—outside of traditional business cycles. Considered in this context, the ex-aircraft series makes more intuitive sense for a business cycle indicator.

Each of the changes has a justification, but every time they meddle with this index, they run the risk of losing credibility.

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