Knowldge Base
Economic Framework
In navigating the complexities of modern economies, a robust and forward-looking framework is essential. While the Conference Board’s Leading, Coincident, and Lagging Economic Indicators (LEIs, CEIs, and LAGs) provide a valuable foundation for understanding current and historical economic trends, we’ve developed an enhanced model designed to anticipate shifts with greater precision. Our framework builds upon the established strengths of the Conference Board’s methodology, but introduces a critical layer: Anticipatory Economic Indicators (AEIs).
These AEIs are designed to precede the Conference Board’s LEIs, offering an earlier signal of potential economic changes. By identifying key precursors and drivers of economic activity, we aim to provide a more proactive and nuanced perspective. Furthermore, we’ve refined the Conference Board’s indicator composition, notably shifting the yield curve analysis to our AEI category, and augmenting the CEIs with additional metrics to capture a more comprehensive real-time view. This integrated approach allows for a more dynamic and responsive economic analysis, enabling us to better anticipate and adapt to the ever-evolving economic landscape.
The Confrence Board’s Economic Framework
Currently, the gold standard for business cycle analysis is currently the The Conference Board’s Business Cycle Analysis Framework1. It offers a structured approach to understanding and forecasting economic fluctuations. By analyzing a composite of leading, coincident, and lagging economic indicators, this framework provides valuable insights into the current and future state of the economy. These indicators are carefully selected based on their historical relationship with the business cycle and their ability to provide timely signals of economic turning points.
Leading Economic Indicators (LEIs)
- Initial Claims
- Orders Non-defense Cap Goods Ex Air
- ISM New Orders
- Building Permits
- S&P 500 Index
- Leading Credit Index
- Consumer Expectations
- Consumer Goods Orders
- Manufacturing Weekly Hours
- Interest Rate Spread
Investors: Often focus on thse because they correlate with financial markets.
Coincident Economic Indicators (CEIs)
- Employee Payrolls
- Industrial Production
- Personal Income Less Transfer Payments
- Manufacturing & Trade Sales
Economists: Typically emphasize these because they correlate with GDP growth.
Lagging Economic indicators (LAGs)
- Duration of Unemployment
- Inventories to Sales
- Service Inflation
- Labor Costs
- Commercial & Industrial Loans
- Consumer Credit to Personal income
- Average Prime Rate
Policy makers: Use these as some are key inputs or influence the Fed’s reaction function.
The Leading Economic Index (LEI) is designed to anticipate economic shifts, incorporating data points like average weekly hours in manufacturing, building permits, and consumer expectations 2. The Coincident Economic Index (CEI) reflects current economic activity, including measures like employment, industrial production, and personal income. Finally, the Lagging Economic Index (LAG) confirms past trends with indicators such as unemployment duration and labor costs.
So other LEIs correlate to the market, they do not lead the market.
This framework, is a powerful tool for businesses, policymakers, seeking to navigate the complexities of the business cycle and make informed decisions about the economy. But what about investors?
A issue occurs when investors use LEIs to forecast the market because the market it self is a LEI. While other LEIs correlate to the market (see ?@fig-leicor), they do not lead the market. This creates a challenge for investors who rely on these indicators to anticipate market turns. By the time the LEI flashes a signal, the market may have already priced it in, diminishing its predictive value for investors. This highlights the need for more dynamic and market-sensitive tools in an investor’s arsenal.