Still Struggling

• Print
• E-Mail

Regular Pay Me Weekly readers know that the Conference Board's Index of US Leading Economic Indicators (LEI) is one of my favorite quick measures of US economic prospects. I offered a detailed rundown of the LEI and all of its components in the Jan. 30, 2009 issue, Follow the Economy's Lead, and then updated that analysis in the Feb. 20, 2009 issue, It's Still the Economy.

The fate of the US economy and the duration of the current downturn remain key to the performance of global stock markets; I've made an analysis of LEI a monthly feature of this e-zine. Since the latest reading was released Thursday, Mar. 19, 2009, it's high time we took another look.

First up, here's a chart of the year-over-year change in the US LEI.

Source: Bloomberg

I don't seek to overcomplicate this indicator. My basic rule remains: When the LEI year-over-year change is negative the US is or will soon be in recession, and when it regains positive territory the US is likely seeing a recovery.

The indicator has been in negative territory since late 2007, and at -3.6 percent is trading at a level consistent with a severe recession. This is behind my call that the current downturn will be the worst for the US since the early 1980s. This isn't a quick, V-shaped pullback such as we saw in the early '90s and again in 2001.

The current level for the LEI is 98.50, and at the end of January it was at 98.90. The LEI fell by 0.4 in February, slightly less than analysts' consensus expectations. That said, the gain in LEI for the month of January was revised from up 0.4 to up just 0.1 percent; overall the report was just about in-line with expectations.

Let's start with the bright side: Six of the ten LEI components were positive in February. That said, only four of those were just barely positive to neutral. Leading the upside was the interest rate spread indicator--check out my chart below for a closer look.

Source: Bloomberg

As I explained in Follow the Economy's Lead, this measures the different between the yield on a 10-Year US Treasury bond and the current federal funds rate. This is essentially a measure of the steepness of the yield curve.

In February, the yield on the 10-year government bond rallied somewhat from extremely depressed levels that prevailed at the end of January while the fed funds rate remained ultra-low. This indicates that monetary policy in the US is extremely loose and accommodative; for reasons I explained at depth in the Feb. 27, 2009 issue, The Money Super-Accelerator, monetary policy isn't as effective as it normally would be thanks to the ongoing deflationary impact of the credit bubble and bust.

It's also worth noting that the Federal Reserve now intends to pursue a policy of quantitative easing--buying US Treasury bonds directly with what amounts to printed money. When that policy was announced earlier this week, the yield on the 10-year government bond plummeted from about 3 percent to below 2.6 percent.

Assuming this move largely holds, which I suspect it will, the Fed's effort will totally take back the gains in the interest rate indicator for March. In other words, the biggest tailwind for the LEI in February is almost certain to become a significant headwind in March.

The second most supportive indicator within LEI last month was vendor performance; see my chart below for a closer look.

Source: Bloomberg

This index shows the speed at which companies receive deliveries from their suppliers. When delivery speed slows, this index rises.

If you're a company producing a product and it takes longer for you to get supplies, it likely means your suppliers are struggling to meet demand and are experiencing delays. They may even be running up backlogs of unfilled orders as they attempt to find ways to boost production.