Summary: Conference Board leading index down 0.4% in May, in line with expectations; suggests weaker economic activity in near term; implies 2.7% US GDP growth to August.
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 decreased by 0.4% in May. The result was in line with expectations as well as April’s revised figure after it was revised down from -0.3%.
“The index is still near a historic high but the US LEI suggests weaker economic activity is likely in the near term and tighter monetary policy is poised to dampen economic growth even further,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. He put the result down to lower share prices, less housing construction and less optimistic consumers.
US Treasury bond yields moved considerably higher, especially at the short end. By the close of business, the 2-year Treasury yield had jumped 9bps to 3.19% while 10-year and 30-year yields both finished 3bps higher at 3.23% and 3.28% respectively.
In terms of US Fed policy, expectations of a higher federal funds range over the next 12 months softened slightly. July contracts implied an effective federal funds rate of 1.685%, 10bps higher than the current spot rate. September contracts implied a rate of 2.47% while June 2023 futures contracts implied an effective federal funds rate of 3.735%, 215bps above the spot rate. Regression analysis suggests the latest reading implies a 2.7% year-on-year growth rate in August, down from July’s revised figure of 3.4%.
