Summary: US leading index up 0.8% in December, in line with expectations; on rising trajectory, US economy to expand well into northern spring; “headwinds” may moderate economic growth; Conference Board forecasts 0.5% growth for March quarter.
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.
The latest reading of the LEI indicates it rose by 0.8% in December. The result was in line with the consensus forecast slightly above the 0.8% increase and slightly larger than November’s revised figure of 0.7%. On an annual basis, the LEI growth rate accelerated from 8.7% to 9.2%.
“The US LEI ended 2021 on a rising trajectory, suggesting the economy will continue to expand well into the spring,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board.
US Treasury bond yields fell on the day as US equity markets were sold off and investors moved into lower-risk assets. By the close of business, the 2-year yield had lost 2bps to 1.01%, the 10-year Treasury yield had shed 5bps to 1.76 while the 30-year yield finished 4bps lower at 2.08%.
In terms of US Fed policy, expectations for the federal funds range over the next 12 months remained largely intact. April contracts implied an effective federal funds rate of 0.335%, 25bps higher than the current spot rate while June contracts implied 0.55%. February 2023 futures contracts implied an effective federal funds rate of 1.13%, 105bps above the spot rate.
While the LEI’s reading pointed to robust growth in the short-term, Ozyildirim noted some ongoing impediments. “For the first quarter, headwinds from the omicron variant, labour shortages and inflationary pressures, as well as the Federal Reserve’s expected interest rate hikes, may moderate economic growth.”
The Conference Board currently forecasts an expansion of around 0.5% in the March quarter, or 2.2% annualised and 3.5% for calendar year 2022. Regression analysis suggests the latest reading implies a 4.7% year-on-year growth rate in March, up from February’s 4.5%.
