Leading Indicator Index Edges Up

MBA (6/20/2008 ) Velz, Orawin
The Conference Board index of leading indicators, a gauge of future business activity three to six months ahead, rose by 0.1 percent in May following the same increase in April and a flat reading in March. The back-to-back increase was the first since September and October of 2006. According to The Conference Board, the index indicated that the economy has not contracted and may even strengthen early in 2009.
The Conference Board’s index of leading indicators is designed to forecast economic activity and turning points in the business cycle based on 10 economic components. Four of these components increased in May. These included stock prices and Treasury yields. The Conference Board’s index is not an official measure used in determining recessions and expansions; the arbiter of the business cycle is the National Bureau of Economic Research, another private organization. Its Business Cycle Dating Committee uses a different set of variables to decide when the economy slips into a recession. Overall, the index of leading indicators supported other recent economic reports and Federal Reserve Chairman Ben Bernanke’s speech on June 9 that the risk that the economy has entered into a significant downturn has declined.

A separate report from the Philadelphia Federal Reserve showed that the area’s manufacturing sector continued to struggle, as activity declined again in June at an accelerated pace. The general business index was down 1.5 points to a minus 17.1 in June (readings below zero indicate contraction). Manufacturing in the Philadelphia region contracted for seven consecutive months. The index averaged minus 19.2 in the second quarter, compared with minus 20.8 in the first quarter.

The Philly Fed survey is the second regional Fed manufacturing survey for June. On Monday, the New York Fed released the Empire State manufacturing survey, which also showed that manufacturing activity in the New York Fed’s District contracted in June at an accelerated pace.

Long-term yields rose in response to an unexpected increase in the index of leading indicators. The yield on the 10-year Treasury note stayed around 4.21 percent on Thursday, eight basis points higher than the rate on Wednesday.