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November 18, 2011

Is Today’s Fundamental (LEI) Fundamentally Flawed?

November 18, 2011

Is Today’s Fundamental (LEI) Fundamentally Flawed?

The Conference Board’s index of Leading Economic Indicators for October was +0.9%, September was +0.1% and August was +0.3%. Nine of the 10 indicators (listed below) increased in October. LEI is a monthly mathematical rehash of other data. It is supposed to indicate economic growth in the next few months.

Leading Economic Index Factor
-Average weekly hours, manufacturing 0.2737
-Average weekly initial claims for unemployment insurance 0.0322
-Manufacturers’ new orders, consumer goods and materials 0.0817
-Index of supplier deliveries – vendor performance 0.0717
-Manufacturers’ new orders, nondefense capital goods 0.0195
-Building permits, new private housing units 0.0264
-Stock prices, 500 common stocks 0.0370
-Money supply, (M2) 0.3230
-Interest rate spread, 10-year Treasury bonds less federal funds 0.1052
-Index of consumer expectations 0.0296

My view is that LEI has two flaws: (1) it puts too much emphasis on monetary policy, and (2) it puts too much emphasis on manufacturing hours.

The problem with Money Supply is that the supply is there but too little is being done with it. People are not spending more and banks are not lending more. As for Manufacturing Hours, our economy is no longer manufacturing based.