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Released: Monday, June 20, 2005

Revisions in U.S. Leading Indicators

For more detailed information on the forthcoming revisions to the U.S. LEI, including the treatment of the yield spread and the trend adjustment, please click here.

The July 2005 release will incorporate two major revisions to the composite index of economic indicators (LEI): 1) a new method for calculating the contribution of the yield spread in the LEI and 2) a trend adjustment to the LEI. The new measure of the yield spread improves the performance of the LEI by better reflecting the way the yield spread anticipates cyclical economic turning points. The trend adjustment facilitates interpretation and use of the LEI.

The new measure of the yield spread, one of the current components of the LEI, uses the same interest rate spread (10-year Treasury note minus federal funds rate) in the calculations. The revision involves a shift from using the yield spread in the LEI to using the cumulative sum of the yield spread. The primary effect of this revision is to change the way the contribution of the yield spread is calculated.

The LEI has ten components and the monthly contribution calculation is based on monthly changes in each component. With the revision, the contribution of the yield spread will be calculated from the value of the yield spread in a given month instead of its change over the previous month. Currently, the yield spread contributes negatively – i.e., reduces the growth rate of the index – to the LEI whenever the spread is declining and this happens before recessions, but at many other times as well. The new measure will contribute negatively to the LEI only when the spread inverts; that is, when the long rate is less than the short rate. The cumulative measure of the yield spread provides a less “noisy” leading indicator, one that better reflects the effect of the yield spread on future economic activity.

Next month’s revision also reinstitutes an old and well-known trend adjustment procedure to the leading and lagging indexes. This procedure does not affect the cyclical properties of the LEI, but it offers two advantages.

  • The long-term trend in the LEI will be “fixed” as the procedure equates the trend in the LEI to the trend that is measured by the average growth rate in the coincident index (CEI). This means that the trend of the LEI will not vary with changes in the composition of the index or set of indicators used to calculate it. This facilitates the interpretation of the indexes as cyclical measures and provides a more consistent framework for their use.
  • The trend adjustment makes the growth of the leading and lagging composite indexes more similar to that of the coincident index. In turn, the levels of these indexes are more meaningful since the coincident index is a measure of current economic activity. While the composite indexes are mainly used to indicate directional changes in aggregate economic activity, many users also regard them as measures of the level of economic activity. The trend adjustment facilitates this use.

These changes are the result of research at The Conference Board (TCB) and regular consultations with its Business Cycle Indicators Advisory Panel and other experts. The Conference Board continuously monitors the behavior and performance of the composite indexes and their components and makes changes from time to time (See BCI Handbook, 2001, for a description of the previous comprehensive revision that The Conference Board undertook in 1996.) This revision is consistent with long-standing TCB policy to make changes to the indexes when research indicates substantial improvements are possible. The Conference Board also undertakes maintenance revisions yearly, normally in January, when the histories of the composite indexes are benchmarked to reflect data revisions.

Detailed descriptions and discussion of the changes will be posted on our web site by Friday June 24, 2005. Please visit our web site at www.conference-board.org/economics/bci/.

The Conference Board announced today that the U.S. leading index decreased 0.5 percent, the coincident index increased 0.2 percent and the lagging index increased 0.3 percent in May.

  • The leading index declined in May, following a revised no change in April. The leading index has now declined at a 2.2 percent annual rate over the last six months, and has declined by 1.9 percent over the last twelve months. In addition, there have been more weaknesses than strengths among the components in recent months.
  • The coincident index, an index of current economic activity, increased again in May. The coincident index has been increasing at a relatively steady 2.5 percent annual rate since April 2003, and the strength continues to be widespread. At the same time, the growth rate of real GDP has been fluctuating around a 4.0 percent annual rate in the last year or two.
  • About half of the decline in the leading index over the past year has been due to the flattening of the interest rate spread. The other half of the decline is the result of the drop in vendor performance, while the other leading indicators have been approximately flat.

Leading Indicators.One of the ten indicators that make up the leading index increased in May. The positive contributor was stock prices. The negative contributors – beginning with the largest negative contributor – were interest rate spread, average weekly initial claims for unemployment insurance (inverted), building permits, vendor performance, average weekly manufacturing hours, index of consumer expectations, manufacturers’ new orders for nondefense capital goods*, real money supply*, and manufacturers’ new orders for consumer goods and materials*.

The leading index now stands at 114.1 (1996=100). Based on revised data, this index remained unchanged in April and decreased 0.6 percent in March. During the six-month span through May, the leading index decreased 1.1 percent, with one out of ten components advancing (diffusion index, six-month span equals ten percent).

Coincident Indicators.All four indicators that make up the coincident index increased in May. The positive contributors to the index – beginning with the largest positive contributor – were industrial production, personal income less transfer payments*, employees on nonagricultural payrolls, and manufacturing and trade sales*.

The coincident index now stands at 119.7 (1996=100). This index increased 0.2 percent in April and remained unchanged in March. During the six-month period through May, the coincident index increased 1.1 percent.

Lagging Indicators.. The lagging index stands at 99.8 (1996=100) in May, with four of the seven components advancing. The positive contributors to the index – beginning with the largest positive contributor – were average duration of unemployment (inverted), commercial and industrial loans outstanding*, average prime rate charged by banks, and ratio of manufacturing and trade inventories to sales*. The negative contributor was change in CPI for services. The change in labor cost per unit of output* and ratio of consumer installment credit to personal income** held steady. Based on revised data, the lagging index increased 0.1 percent in April and decreased 0.2 percent in March.

Data Availability And Notes. The data series used by The Conference Board to compute the three composite indexes and reported in the tables in this release are those available “as of” 12 Noon on June 17, 2005. Some series are estimated as noted below.

* Series in the leading index that are based on The Conference Board estimates are manufacturers’ new orders for consumer goods and materials, manufacturers’ new orders for nondefense capital goods, and the personal consumption expenditure used to deflate the money supply. Series in the coincident index that are based on The Conference Board estimates are personal income less transfer payments and manufacturing and trade sales. Series in the lagging index that are based on The Conference Board estimates are inventories to sales ratio, consumer installment credit to income ratio, change in labor cost per unit of output, the consumer price index, and the personal consumption expenditure used to deflate commercial and industrial loans outstanding.

The procedure used to estimate the current month’s personal consumption expenditure deflator (used in the calculation of real money supply and commercial and industrial loans outstanding) now incorporates the current month’s consumer price index when it is available before the release of the U.S. Leading Economic Indicators.

Effective with the September 18, 2003 release, the method for calculating manufacturers’ new orders for consumer goods and materials (A0M008) and manufacturers’ new orders for nondefense capital goods (A0M027) has been revised. Both series are now constructed by deflating nominal aggregate new orders data instead of aggregating deflated industry level new orders data. Both the new and the old methods utilize appropriate producer price indices. This simplification remedies several issues raised by the recent conversion of industry data to the North American Classification System (NAICS), as well as several other issues, e.g. the treatment of semiconductor orders. While this simplification caused a slight shift in the levels of both new orders series, the growth rates were essentially the same. As a result, this simplification had no significant effect on the leading index.

Effective with the January 22, 2004 release a programming error in the calculation of the leading index -- in place since January 2002 -- has been corrected. The cyclical behavior of the leading index was not affected by either the calculation error or its correction, but the level of the index in the 1959-1996 period is slightly higher.

THESE DATA ARE FOR ANALYSIS PURPOSES ONLY. NOT FOR REDISTRIBUTION, PUBLISHING, DATABASING, OR PUBLIC POSTING WITHOUT EXPRESS WRITTEN PERMISSION.

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