Summary: Conference Board leading index up 0.3% in February; in line with expectations; does not include “full impact” of Ukraine invasion; US faces headwinds from “soaring” prices, rising interest rates, labour shortages, high inflation”; forecasts 3.0% US GDP growth for calendar 2022.
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 increased by 0.3% in February. The result was in line with the consensus forecast but it contrasted with January’s revised figure of -0.5%. On an annual basis, the LEI growth rate accelerated from 8.4% after revisions to 8.8%.
Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board, said the result did not include “the full impact of the Russian invasion of Ukraine, which could lower the trajectory for the US LEI and signal slower-than anticipated economic growth in the first half of the year.”
US Treasury bond yields rose modestly at the front of the curve but declined further out on the day. By the close of business, the 2-year yield had added 2bps to 1.94% while the 10-year yield had shed 2bps to 2.15% and the 30-year yield had lost 3bps to 2.43%.
In terms of US Fed policy, expectations for the federal funds range over the next 12 months firmed moderately. May contracts implied an effective federal funds rate of 0.665%, 34bps higher than the current spot rate. June contracts implied a rate of 0.895% while March 2023 futures contracts implied an effective federal funds rate of 2.245%, 192bps above the spot rate.
Ozyildirim pointed to the war’s global economic impact on supply chains, noting “soaring energy, food and metals prices, coupled with rising interest rates, existing labour shortages and high inflation…” He said these “all pose headwinds to US economic growth.”
The Conference Board revised its calendar-year 2022 GDP growth forecast down from 3.5% to 3.0% but noted this is “still well above the pre-pandemic growth rate, which averaged around 2%.” Regression analysis suggests the latest reading implies a 4.7% year-on-year growth rate in May, up from April’s 4.5%.
