Summary: Conference Board leading index down 0.4% in July, in line with expectations; outlook remains highly uncertain, currently in favourable growth environment; regression analysis implies 1.8% contraction in year to October.
The Conference Board Leading Economic Index (LEI) is a composite index composed of ten sub-indices which are thought to be sensitive to changes in the US economy. The Conference Board describes it as an index which attempts to signal growth peaks and troughs; turning points in the index have historically occurred prior to changes in aggregate economic activity. Readings from March and April of 2020 signalled “a deep US recession” while subsequent readings indicated the US economy would recover rapidly. More recent readings have implied US GDP growth rates will turn negative sometime in 2023.
The latest reading of the LEI indicates it decreased by 0.4% in July. The result was in line with expectations but greater than June’s -0.7%.
“The US LEI, which tracks where the economy is heading, fell for the sixteenth consecutive month in July, signalling the outlook remains highly uncertain,” said Justyna Zabinska-La Monica of The Conference Board. However, she also noted The Conference Board’s coincident index “has continued to grow slowly but inconsistently…signalling that we are currently still in a favourable growth environment.”
Short-term US Treasury bond yields fell on the day while longer-term yields rose. By the close of business, the 2-year Treasury yield had lost 3bps to 4.93% while 10-year and 30-year yield both finished 3bps higher at 4.28% and 4.39% respectively.
In terms of US Fed policy, expectations of a lower federal funds rate in the first half of 2024 firmed. At the close of business, contracts implied the effective federal funds rate would average 5.34% in September, slightly above the current spot rate, and then average 5.36% in October. December futures contracts implied a 5.425% average effective federal funds rate while August 2024 contracts implied 4.785%, 54bps less than the current rate.
Regression analysis suggests the latest reading implies a -1.8% year-on-year growth rate in October, up from the -1.9% implied by the previous month’s LEI.
