There are still plenty of people who believe that the U.S. economy remains on life support and is likely to grind to a halt at any time. Yet the data is simply not supporting that point of view.
Last week I heard from analyst Philippa Dunne of the Liscio Report, who took a close look at all the components of the March leading index published by the Conference Board. She said it is “firing on all cylinders but one,” which is the money supply. A few months ago, the expectations components were far outperforming other components and, although expectations remain in the lead the real-world indicators of production and the labor market are now joining in. In plainer English, she’s saying that we’re not just seeing a “stock market effect.”
The individual components of the Conference Board’s index are manufacturers’ new orders; new orders for nondefense capital goods; housing permits; average weekly hours in manufacturing; supplier deliveries; stocks (S&P 500 performance); yield spread (10-year Treasury less Fed Funds); consumer expectations; M2 money supply; initial claims for unemployment insurance.
Dunne then divides the components into subgroups: production (the two new orders series and housing permits); adaptation (hours and deliveries); expectations (stocks, the yield spread, and consumer expectations); the prime mover (money supply); and the labor market (claims). She then aggregate those subgroups into sub-indexes, using weights similar to those used in the construction of the overall index.
The charts above show how these sub-indexes are performing vs. their historical averages out of GDP lows. Dunne notes that you can see that three of the subindexes — production, adaptation, and the labor market — are running in tandem with their historical averages. One, expectations, is running comfortably ahead, thanks to stocks and the steepness of the yield curve. The money supply is lagging badly. Within production, new orders are weak, but housing permits are strong. Weekly hours and supplier deliveries are also contributing nicely.
Dunne concludes, and I concur, that the evidence shows the recovery continues apace. What we’re seeing is very normal, regardless of any special level of government spending. Bottom line: It is encouraging to see real-world components of the LEI improving.
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