Leading Indicators

The Lehmann Letter (SM)

Yesterday The Conference Board announced that its Leading Economic Index ® increased by a strong 1.4% in March. This index of leading economic indicators, as is often called, has now increased steadily for a year. It's a good sign of economic recovery.

The index's upward march also fuels the controversy over whether or not the recession is over. That is a matter of definition. It is customary to speak of the end of recession once the downturn is over. By that standard there can be little doubt: The recession is over and recovery has begun.

But that does not speak to the recovery's strength, nor does it mean that economic improvement has been uniform. The leading indicators are a select group of statistics that reveal the economy's direction. They are not the most important signs of the economy's health.

Two key problems remain. The first, unemployment, is the most important. The unemployment rate is stuck at just below 10%. If one defines recovery as full employment, full recovery is probably years in the future.

Real estate and residential construction are the second problem. Housing remains weak; perhaps vulnerable to a second dip. The foreclosure crisis is not over and it contributes to the overhang of excess housing inventory that depresses home prices and retards building's recovery.

Those problems are key, but others remain. For instance, business expenditures on plant and equipment are depressed. The economy can't move strongly forward without them, and business capital expenditures will remain weak as long as business is not more fully using its existing capacity.

Even if we agree that the recession is over, that does not mean the recovery is close to complete.

© 2010 Michael B. Lehmann