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The Composite Index of Leading Indicators is released on a monthly basis by the Conference Board composed up of 10 economic components in attempts to project economic changes in the upcoming period of time from 6 to 9 months.
Those ten leading economic indicators that cover a wide spectrum of the economy include:
â€¢ Average weekly hours worked by manufacturing workers
â€¢ Average number of initial applications for unemployment insurance
â€¢ The number of new building permits for residential buildings
â€¢ The S&P 500 stock index
â€¢ Inflation-adjusted monetary supply (M2)
â€¢ The spread between long and short interest rates
â€¢ Consumer sentiment
â€¢ New orders for manufacturers of consumer goods that have been adjusted for inflation
â€¢ Vendors' performance
â€¢ The amount of new orders for capital goods unrelated to defense adjusted for inflation
Using those indicators, the Index is to predict the economic performance in the coming months based on a diffusion index (DI). The DI number is the percentage of indicators change since the previous calculation. Usually known a figure greater than 50 indicates an expanding economy and the opposite is applicable as well.
The index is vital for investors to foresee the economies headings in the near future and in light of that provided information they can be able to build up their business and investment decisions.
Why is it useful?
Leading indicators indicate what the aggregate economy is likely to do, business-cycle-wise, 3 to 12 months down the road. When leading indicators rise today, then the rest of the economy is likely to rise in the coming year; when the leading indicators decline, then the economy is likely to decline in 3 to 12 months.
The effect is the same on both currencies and indices, as they react positively to optimistic outlook expectations, which is when the index rises, and by that provide a stronger currency and rising stocks; nevertheless, the index varies in weight on markets as it is a good but occasional market mover and for that its somehow discarded slightly sometimes in markets.
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