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Released: Thursday, July 21, 2005

Revisions in U.S. Leading Indicators

For detailed information on the July 2005 benchmark revisions to the U.S. LEI, including the treatment of the yield spread and the trend adjustment, please click here.

The July 2005 release incorporates two major revisions to the composite index of leading economic indicators (LEI): 1) a new method for calculating the contribution of the yield spread (BCI series 129) 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.

A minor procedural change is also made to the Vendor Performance (BCI series 32) and Index of Consumer Expectations (BCI series 83) components. The monthly contributions of both series will now be calculated using simple difference instead of percent change. These changes have a small effect on the new set of standardization factors, but they have little effect on the cyclical performance of the composite leading index.

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 benchmark revisions yearly, normally in January, when the histories of the composite indexes are recomputed to reflect data revisions. This month's release also incorporates benchmark revisions to the composite indexes which bring them up-to-date with revisions in the source data and update the standardization factors used in their calculation. This maintenance procedure, last performed in January 2005, is repeated in this release in order to maintain data consistency. These maintenance revisions do not change the cyclical properties of the indexes and their effects are very small, as expected.

The Conference Board announced today that the U.S. leading index increased 0.9 percent, the coincident index increased 0.2 percent and the lagging index increased 0.3 percent in June.

  • Based on the benchmarked figures announced today, the leading index increased sharply in June following no change in May. The revised leading index has increased at a 1.2 percent annual rate over the last six months, but this is down from a peak of about 10.0 percent at the end of 2003. The strengths and weaknesses among the components of the leading index have been roughly balanced in recent months.
  • The coincident index, a measure of current economic activity, increased again in June. 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 over the last two years.
  • The leading index increased rapidly through the first quarter of 2004 but this has been followed by a steady slowing of growth through the first half of 2005. The sharp pick up in June keeps the leading index on a slightly rising trend, and this behavior is consistent with the economy continuing to expand moderately in the near term, but at a slower pace than in recent quarters.

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

The leading index now stands at 137.7 (1996=100). Based on revised data, this index remained unchanged in May and increased 0.2 percent in April. During the six-month span through June, the leading index increased 0.6 percent, with five out of ten components advancing (diffusion index, six-month span equals fifty-five percent).

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

The coincident index now stands at 120.5 (1996=100). This index increased 0.1 percent in May and increased 0.3 percent in April. During the six-month period through June, the coincident index increased 0.2 percent.

Lagging Indicators.The lagging index stands at 119.7 (1996=100) in June, 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), ratio of manufacturing and trade inventories to sales*, average prime rate charged by banks, and change in labor cost per unit of output*. The negative contributors – beginning with the largest negative contributor – were commercial and industrial loans outstanding* and change in CPI for services. The ratio of consumer installment credit to personal income* held steady in June. Based on revised data, the lagging index increased 0.4 percent in May and increased 0.3 percent in April.

Details on the Major Revisions in U.S. Leading Indicators

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.

The July 2005 revision also reinstitutes an old and well-known trend adjustment procedure to the leading and lagging indexes. This procedure 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.

Further detailed descriptions and discussion of the changes are posted on The Conference Board web site at www.conference-board.org/economics/bci/

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 July 20, 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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