- J. J. Wenrich CFP®
Leading Indicators Signal Potential For Reacceleration
Leading economic indicators are providing early signs that we may be exiting a recent soft patch and the economic recovery could be poised for a reacceleration.
On Monday, February 22, the Conference Board released its January 2021 report detailing the latest reading for its Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we like the LEI, as it has a forward looking tilt to it. The index grew for the ninth month in a row, up 0.5% month over month in January, a slight increase from December’s 0.4% pace.
Incredibly, its nominal value now sits just 1.5% below its all-time peak from July 2019.
Seven of the ten components grew in January, while the other three declined. Building permits, average weekly manufacturing hours, and the Institute for Supply Management (ISM) New Orders Index led the way among positive contributors. Average weekly initial claims for unemployment insurance, average consumer expectations for business conditions, and manufacturers’ new orders for nondefense capital goods excluding aircraft all detracted from the composite’s growth in January. This report exhibited strong positive breadth among component series, but highlights that the labor market continues to weigh on the recovery.
As seen in the chart below, the monthly change in the index was slightly higher than in December, which has the potential to represent a break from the general downtrend seen since May 2020. While the monthly change has been positive since May 2020, the index has been increasing at a decreasing rate, as COVID-19 cases have risen and mitigation measures have hit the recovery. But, the good news is that could be changing.
“Vaccination progress is the be-all and end-all for the durability of this recovery,” said LPL Financial Chief Investment Officer Burt White. “Stimulus has done an effective job of bridging gaps in the economy, but we need widespread vaccine distribution for the economy to stand on its own two feet. And we believe that point is not too far off.”
After some initial rollout sputters, vaccines have largely been distributed to those most at-risk. Attention is now turning to the next phases of the population in line to be vaccinated: Those who tend to be more mobile and account for a greater share of economic activity. At present, we have two vaccines approved for emergency use authorization, and potential for a third in the coming weeks. Furthermore, we received data this week that at least one of the vaccines appears to not only be effective at preventing symptoms, but also at preventing transmission, a previously debated matter. This point will be key for getting people back to work. When paired with improving data in some parts of the economy and warmer weather on the horizon, we are hopeful that January is the start of the second wind in this economic recovery.
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All index and market data from FactSet and MarketWatch.
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