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Leading Economic Indicators (LEI) Definition
The Conference Board publishes the Leading Economic Indicators also known as Composite Index of Leading Indicators to predict any shifts in the global economy. How is this possible? Well, the index is comprised of 10 economic indicators, which change even before any change in the global economy is felt.
A Little More on What is Leading Economic Indicators
There are many reasons why economists and even businesses use this index. For example, many economists will assess the leading economic indicators if they wish to understand or even predict the movement of the economy. Investors and businesses, on the other hand, can correlate the index with cycles in business and the current economic conditions to know the future economic environment. Here are the 10 components of Leading Economic Indicators:
- Mean weekly hours worked by manufacturing employees
- Mean number of original unemployment insurance applicants
- Amount of new orders that manufacturers make for consumer goods
- Time it takes to deliver new merchandise from suppliers to vendors
- The number of new permits for residential buildings
- New orders for capital goods i.e. those unrelated to defense
- The S&P 500 stock index
- Inflation-adjusted monetary supply in the economy
- Consumer sentiments
- The spread between short and long interest rates
As at 2018, using 2016 as the base year, the USA had an LEI of 108.1, China had an LEI 123.9, Australia had an LEI of 104.6, Brazil also had a high LEI of 116.5, Japan had an LEI of 99.8, South Korea had an LEI of 103.5, Mexico had an LEI of 104.7, Spain had an LEI of 101.5, Germany had an LEI of 102.6 and the United Kingdom had an LEI of 98.1.
Established in 1916, the Conference Board is an independent research institute that comprises of a board of chairmen, trustees and other voting members. It is a non-profit organization where membership is only offered to high ranking executives. The association offers both economic and financial data to its member organization.
References for Lead Economic Indicators
Academic Research on Leading Economic Indicators (LEI)
New indexes of coincident and leading economic indicators, Stock, J. H., & Watson, M. W. (1989). NBER macroeconomics annual, 4, 351-394. The Leading and Coincident Economic indicators were developed as part of the NBER research program over more than fifty years ago. This system is now maintained by the United States department of commerce. This paper takes a fresh new look at the system by integrating the recent developments in econometric methodology and computing technology. It proposes three experimental indexes. The first index is constructed by a dynamic factor model and is similar to the current index of coincident indicators. The other two include an alternative index of leading indicators that can help predict the growth of the DOC index by up to 6 months. Lastly, a recession index that predicts when an economy will be in a recession, six months prior to the event. Only two of the seven series are used bu the DOC to build their index.
The composite index of leading economic indicators: how to make it more timely, McGuckin, R. H., Ozyildirim, A., & Zarnowitz, V. (2001). (No. w8430). National Bureau of Economic Research. One major problem that the leading index in US faces is that it does not use the most updated information for stock prices and other yield spreads. The current index methodology being used ignores the real time data for time favored indicators. One alternative proposed in the paper is to update the lagging publications using forecasts and to even develop an index that has the most recent components. This research adopts the use of ex-ante predictability of the leading index to assess the gains that an be accrued by this new procedure of statistical imputation. It finds that the new approach presents a number of improvements across the different simple forecasting methods analysed.
Business cycles in the euro area defined with coincident economic indicators and predicted with leading economic indicators, Ozyildirim, A., Schaitkin, B., & Zarnowitz, V. (2010). Journal of Forecasting, 29(1‐2), 6-28. Cycles that show as turning points in the coincident indicators can help to point out recessions and recoveries in Euro area over the past decades. The USA and other countries, for example, use composite indexes of coincident indicators to denote business cycle turning points. Leading economic indicators indexes are also useful when predicting the turning points. The paper assesses a selection of monthly and quarterly coincident and leading indicators in the euro area. From the data, composite indexes are built using analogous method to those that the conference board publishes. The result is then compared with how well they compare with the other indicators to predict the current economic status and fluctuations of the euro area.
A note on the forecasting effectiveness of the US leading economic indicators, Guerard, J. B. (2001). Indian Economic Review, 251-268. The study estimates a transfer function to test its hypothesis of whether the US composite index and leading economic indicators is a useful input in predicting the real Gross Domestic Product of the United States. It finds that the leading indicators are a quite significant input in the GDP over the 1970 to 2000 period.
• The index of leading economic indicators as a source of expectational shocks, Oh, S., & Waldman, M. (2005). Eastern Economic Journal, 31(1), 75-95. The importance of expectational shocks has been a recurrent theme in the literature surrounding economic cycle fluctuations. It has changed the belief concerning the future of aggregate activity but it never reflects real shifts in the fundamentals. This journal report uses the ASA-NBER Survey of Forecasts by Economic Statisticians to determine whether the errors in initial announcements of the LEI indexes are a source of the aformentioned expectational shocks. The evaluation asserts that errors are a statistically and economically significant source of expectational shocks.
New tools for analyzing the Mexican economy: indexes of coincident and leading economic indicators, Phillips, K. R., Vargas, L., & Zarnowitz, V. (1996). Economic Review-Federal Reserve Bank of Dallas, 2. The indexes presented in this paper may be useful in assessing the mexican economy. Three economists adopt a similar approach to that created by the National Bureau of Economic Research to develop the composite indexes of economic activuty in the US. These economists classify the different cycles as peaks and troughs in the mexican financial cycle since 1980. Using the cycles, the authors evaluate the indicators that turned down before recessions and those that rose up during expansions. It uses 8 of the best performing indicators to create a composite index of LEI.
Impact of leading economic indicators on commercial property performance, Higgins, D., & Newell, G. (1996). Valuer and Land Economist, 34(2), 138. This article explores some of the leading economic indicators in the commercial property industry. It also assesses how these LEIs have been performing for a defined period.
Corporate reporting of nonfinancial leading indicators of economic performance and sustainability, Cohen, J. R., Holder-Webb, L. L., Nath, L., & Wood, D. (2012). Accounting Horizons, 26(1), 65-90. The need for disclosure of non-financial information has grown due to the fact that financial statements often omit crucial data about a company. This study explores non-financial disclosure literature of governance and corporate social responsibility information. It also assesses the voluntary disclosure of various LEIs of performance and sustainability of earninfs for 50 public companies across 5 industries. It finds that the still remains the lack of disclosure of such information and that there is variance in disclosyre practices depending on size and industry of companies. It proposes that these forms of non-financial disclosure should be encouraged to offer clients some assurances.
The composite index of leading economic indicators: A comparison of approaches, Phillips, K. R. (1998). Journal of Economic and Social Measurement, 25(3, 4), 141-162. Phillips compares the recession predicting performance of the Conference Board Leading index, the yield curve and the Stock and Watson Leading Index since 1988. This is first done by calculating the conference board leading index by the use of a non-linear regime-switching model and the real-time probability of recession for the yield curve. These are then compared with the estimates that were provided by Stock and Watson. The results found that the Conference Board Leading Index offered the strongest signal of a recession while the Stock and Watsob leading index failed to give recession signals in the first half of 1990.
Monetary policy, composite leading economic indicators and predicting the 2001 recession, Mostaghimi, M. (2004). Journal of Forecasting, 23(7), 463-477. The author of this paper looks at some of the onetary policies and leading economic indicators that help to predict recessions in an economy. He uses these indicators to assess whether they could successfully predict the 2001 recession.
Developing Industry Leading Economic Indicators, Niemira, M. P. (1982). Business Economics, 5-16. This paper highlights the amount of work that has been done over the recent years to develop sets of economic indicators based on their cyclical timings. The report uses the chemical industry as the main industry to develop indicators. It documents the methodology used and the preliminary results.