What is the leading economic index telling us now?
How is the economy doing? Let’s look at the latest leading economic index report.
Leading Economic Index Still Points To Recession
The Conference Board’s US Leading Economic Index (LEI) fell 0.1% in July to 98.7 after falling 0.3% in June. This resulted in a 2.7% decline in the LEI over the past two months, much faster than the –1.0% decline in the prior six months. It has fallen in 38 of the past 41 months and is now at its lowest level in 11 years, as shown below. Relative to the Coincident Economic Index (CEI), the LEI is at its lowest level since the Great Recession.
This next chart shows that the six month growth rate of the LEI is so weak that it has triggered The Conference Board’s recession signal for the fourth consecutive month. That is not encouraging with the full negative impact of tariffs on inflation and economic activity still to come. Maybe that is why Jay “Transitory Inflation” Powell is hinting at cutting rates next month.
Most of the 10 LEI components have been weak, except for the S&P 500, Leading Credit Index and Average Weekly Initial Claims, as this table shows.
Despite this, The Conference Board is still not predicting a recession. Why?
Justyna Zabinska-La Monica, Senior Manager of Business Cycle Indicators at The Conference Board, discusses this (but does not explain) for The Conference Board here:
“The leading economic index for the US decreased just slightly in July. Pessimistic consumer expectations for business conditions and weak new orders continued to weigh down the index. Meanwhile, stock prices remained a key positive support of the LEI. Initial claims for unemployment insurance were much lower in July than in June and were the second most positive component of the LEI, after contributing negatively to the index over the previous three months. While the LEI’s six-month growth rate remains negative, it improved slightly in July—but not enough to avoid triggering the recession signal again. Despite that, The Conference Board does not currently project a recession, though we do expect the economy to weaken in H2 2025, as the negative impacts from tariffs become more visible. Overall, real GDP is projected to grow by 1.6% year-over-year in 2025, before slowing in 2026 to 1.3%.””
Stocks Are At The Top Of A Century-Long Trend Line
The chart below shows the S&P 500 since the late 1920s. The S&P 500 is currently at the top trend line that has been in place for nearly a century -- and it is in a bearish rising wedge pattern. It has only been at the top trend line three times before:
- 1929 peak
- 2000 peak
- 2021 peak
Investment Implications
Will this be the fourth peak touching that top trend line in the past century. Since the LEI is pointing to a recession and valuations are at all-time highs, that is a high probability.
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